Japan’s tax system plays a crucial role in its economic framework. As the third-largest economy in the world, Japan uses its complex tax system to generate government revenue and support public spending. This article provides a detailed analysis of Japan’s tax system, covering the main types of taxes and their legal bases, offering valuable information for businesses and individuals looking to operate in Japan.

Overview of Japan’s Tax System and Structure

Japan’s tax system is divided into two main categories: national taxes and local taxes. National taxes are collected and managed by the central government, primarily used for nationwide public services and infrastructure development. Local taxes, on the other hand, are collected by local governments (prefectures and municipalities) and are used to provide local public services.

The characteristics of Japan’s tax system include:

Multilayered Tax Structure: Taxes are divided into national and local taxes, further categorized into direct and indirect taxes.

Progressive Tax Rates: Personal income tax and corporate tax adopt progressive rates, where the tax rate increases with income or profit.

Complex Deductions and Exemptions: Japan’s tax system includes various deductions and exemptions aimed at promoting investment, supporting families, and encouraging charitable activities.

The main laws governing tax administration in Japan include:

• Basic Law of National Taxes
• National Tax Collection Act
• Law Against Tax Crimes
• Administrative Appeal Act
• Organizational Charter of the National Tax Tribunal
• Enforcement Order of the Basic Law of National Taxes
• Enforcement Order of the National Tax Collection Act
• Law on Procedures for Delinquent and Compulsory Enforcement
• Detailed Regulations for the Enforcement of the National Tax Collection Act

The Basic Law of National Taxes and the National Tax Collection Act are the core tax laws in Japan. More details can be found on the Ministry of Finance’s website: https://www.mof.go.jp/tax_policy/summary/index.html

Main Types of Taxes and Their Breakdown

Japan’s taxes are primarily divided into the following categories: income tax, corporate tax, consumption tax, local taxes, inheritance tax and gift tax, stamp duty, among others. The most significant taxes are corporate tax, income tax, and consumption tax.

Japan applies a territorial tax system to corporate entities. The corporate income tax in Japan includes national and local taxes. For nonprofit or low-profit entities, local governments may assess corporate income tax based on the company’s size, using a deemed taxation approach (Japanese: External Standard Taxation). Since 2014, Japan has gradually reduced the tax rate, with the nationwide average effective tax rate, including local taxes, being approximately 29.97% in 2017 (37% in 2013).

Source: Ministry of Finance Japan website

1. Corporate Tax

Corporate tax in Japan is a national tax, similar to corporate income tax in China, and is levied at a proportional rate. From April 1, 2016, Japan reduced the corporate tax rate from 23.9% to 23.4%, and from 2018, it was further reduced to 23.2%. For small corporations and public interest corporations, the preferential tax rate (for taxable income below 8 million yen per year) was reduced from 19% to 15%. More details can be found on the following webpages:

https://www.nta.go.jp/taxes/shiraberu/taxanswer/hojin/5759.htm
https://www.mof.go.jp/tax_policy/summary/corporation/c01.htm 

2. Corporate Resident Tax

This is a local tax paid to the municipality where the corporation is located, also known as Prefectural Resident Tax and Municipal Resident Tax. The corporate resident tax consists of two parts: the corporate per capita levy and the corporate income levy. The total payable corporate resident tax is the sum of these two components.

For the corporate per capita levy, a fixed tax amount is assessed based on registered capital and the number of employees; the corporate income levy is a certain percentage of the corporate tax, where Tokyo’s 23 wards levy 7% of the corporate tax, prefectures levy 1%, and municipalities levy 6%.

3. Corporate Business Tax and Special Local Corporate Tax

These are local taxes levied as a certain percentage of corporate income, with varying rates across prefectures. Corporations with a registered capital of more than 100 million yen are required to pay additional taxes based on external standards. More details can be found on the following webpage:
https://www.tax.metro.tokyo.lg.jp/kazei/houjinji.html

4. Income Tax

This tax is levied on personal income from interest, dividends, profits from the sale of real estate, donations, retirement, transfers, etc. When calculating taxable income, certain expenses may be deducted. The income tax rate is a progressive rate. For taxable income up to 1.95 million yen, the rate is 5%; for income between 1.95 million yen and 3.3 million yen, the rate is 10%; for income exceeding 3.3 million yen, the rate is 20%. More details can be found on the following webpage:
https://www.nta.go.jp/publication/pamph/koho/kurashi/html/01_1.htm

5. Consumption Tax

Japan’s tax system does not have a tax specifically named “Value Added Tax” (VAT); instead, all transactions involving goods and services are subject to a “Consumption Tax,” which is ultimately borne by the final consumer. The initial consumption tax rate in Japan was 3%. From October 1, 2019, it was increased from 8% to 10%, except for some essential goods. More details can be found on the following webpage:
https://www.nta.go.jp/taxes/shiraberu/zeimokubetsu/shohi.htm

6. Business Office Tax

This tax is levied in special wards of Tokyo, designated cities, and some other designated cities when a business has an office and a certain number of employees, and the office area exceeds a certain size. Tax rates vary by location. More details can be found on the following webpage:
https://www.tax.metro.tokyo.lg.jp/kazei/jigyo.html

7. Fixed Asset Tax

This tax is levied on individuals and corporations that own land, buildings, or other fixed assets. More details can be found on the following webpage:
https://www.tax.metro.tokyo.lg.jp/shisan/kotei_tosi.html

8. Automobile Tax

This tax is levied on automobile owners. More details can be found on the following webpage:
https://www.tax.metro.tokyo.lg.jp/kazei/car_shubetsu.html

9. Automobile Weight Tax

This tax is levied on individuals and corporations during vehicle inspections. More details can be found on the following webpage:
https://www.mlit.go.jp/jidosha/jidosha_fr1_000076.html

10. Automobile Environmental Performance Tax

When individuals or corporations purchase a car, they must pay this tax based on the vehicle’s fuel performance. The automobile acquisition tax was abolished on September 30, 2019. For new car purchases, the tax is 0%-3% of the purchase amount based on fuel performance. More details can be found on the following webpage:
https://www.tax.metro.tokyo.lg.jp/kazei/car_shutok.html

11. Stamp Duty

This tax is levied when issuing or drafting taxable documents, contracts, and invoices. More details can be found on the following webpage:
https://www.nta.go.jp/taxes/shiraberu/taxanswer/inshi/inshi301.htm

12. Real Estate Acquisition Tax

This tax is levied when acquiring land or buildings. More details can be found on the following webpage:
https://www.tax.metro.tokyo.lg.jp/shisan/fudosan.html#gaiyo_0

13. Accommodation Tax

Since January 2017, accommodation tax has been levied on guests staying in hotels and inns in Osaka, Tokyo, and Kyoto. In Osaka, the tax rate is 100 yen per night per person for stays costing 7,000 to 15,000 yen; 200 yen for stays costing 15,000 to 20,000 yen; and 300 yen for stays costing over 20,000 yen. In Tokyo, the tax rate is 100 yen per night per person for stays costing 10,000 to 15,000 yen, and 200 yen for stays costing over 15,000 yen. In Kyoto, the tax rate ranges from 200 to 1,000 yen per night per person. More details can be found on the following webpages:
https://www.tax.metro.tokyo.lg.jp/kazei/shuk.html#gaiyo_01
https://www.pref.osaka.lg.jp/toshimiryoku/syukuhakuzei/index.html

14. International Tourist Tax

Starting from January 7, 2019, Japan imposed an international tourist tax on departing passengers. This departure tax applies to both returning foreign tourists and Japanese citizens going abroad, with several exemptions available in special circumstances. More details can be found on the following webpage:
https://www.nta.go.jp/publication/pamph/kansetsu/kanko/index.htm

Special Types of Taxes

1.Digital Tax and Rates

As of now, Japan has not yet implemented a digital tax. Japan actively participates in global discussions on rules for the digital economy and advocates for international uniform rules and standards in digital taxation. In March 2019, the Japan Business Federation and the Japan Foreign Trade Council submitted opinions to the OECD, which is responsible for formulating international rules, calling for the imposition of a “digital tax” on IT giants and suggesting that the tax targets should be limited. In April 2021, the G20 Finance Ministers and Central Bank Governors issued a joint statement expressing their aim to reach a consensus on the minimum rate for digital tax by mid-2021. In June 2021, the G7 reached an agreement on a global minimum corporate income tax rate (G7 Agreement). In July 2021, 130 members of the OECD/G20 Inclusive Framework signed the BEPS 2.0 statement. In October 2021, 136 members of the OECD/G20 Inclusive Framework released a statement on a two-pillar approach to addressing tax challenges arising from the digitalization of the economy, marking a milestone in the international tax order’s entry into the BEPS 2.0 era. In the same month, the G20 Finance Ministers and Central Bank Governors’ meeting in the United States reached a final consensus on the “two-pillar” approach. On July 12, 2023, the OECD released a consolidated outcome document of the revised international tax rules multilateral treaty, including 138 countries and regions, including Japan. Going forward, countries will have the right to tax large IT companies that do not have a business presence in their domestic markets, with the aim of signing the relevant treaties by the end of 2023, to be effective in 2025. The tax targets companies with annual revenues exceeding 20 billion euros and a pre-tax profit margin exceeding 10%. For target companies, 75% of profits above the 10% threshold will be taxed under the existing methods, while 25% will be allocated as digital tax to the countries and regions where the company’s service users are located.

2.Carbon Emission Tax and Rates

On October 1, 2012, Japan began levying a tax to combat global warming, taxing fossil fuels such as oil, natural gas, and coal to promote renewable energy development, energy conservation, and the creation of a low-carbon society. After three rounds of tax increases, the fossil fuel carbon tax rate was raised to 289 yen per ton. Specific to different types of energy: the oil tax fee is 760 yen per kiloliter; natural gas is 780 yen per ton; and coal is 670 yen per ton. More details can be found on the following webpage: https://www.env.go.jp/policy/tax/about.html

Conclusion

Japan’s tax system is complex and comprehensive, covering multiple aspects of national and local taxes. For businesses and individuals interested in operating in Japan, a thorough understanding of this system is essential. Through proper tax planning and strict compliance management, businesses can optimize their tax burdens while complying with the law, laying a foundation for success in the Japanese market.

Tax issues are often one of the most challenging aspects of doing business in Japan. Therefore, it is advisable for companies to be fully prepared for tax matters before entering the Japanese market, including consulting with professional tax advisors, understanding relevant laws and regulations, and assessing potential tax risks and opportunities. Additionally, keeping abreast of changes in Japanese tax policies and timely adjusting the company’s tax strategies will help businesses maintain long-term competitiveness in the Japanese market.

By fully understanding and effectively managing Japan’s tax system, companies can ensure compliant operations while leveraging various tax incentives to create favorable conditions for sustainable growth. In today’s globalized world, understanding the tax environment of target markets has become an essential part of a company’s international strategy.