The three major Japanese taxes startups should know
“…in this world nothing can be said to be certain, except death and taxes.”
— Benjamin Franklin, 1789
Even over 230 years later, this quote still rings true. Everyone is liable for tax. Business owners are no exception. Let’s take a look at the common taxes that businesses are responsible for in Japan.
The three major taxes for startups and businesses in Japan are:
Corporate Income Tax
Income Withholding Tax
Consumption Tax
Corporate Income Tax
Corporate Income Tax is probably familiar to most people — it is the tax on a company’s profits (or “taxable income”) after removing all applicable expenses and deductions from net revenue. The higher the profit, the more taxes need to be paid.
The total effective Corporate Income Tax is a combination of a few different taxes:
Corporate tax
Local corporate tax
Enterprise tax
Local corporate special tax (or special corporate business tax)
Inhabitant’s tax
Altogether, the total effective tax rate is around 30% of taxable income. The actual amount will vary slightly based on how much the taxable income is, but 30% is a good reference number to use when estimating how much tax will need to be paid within 2 months following the end of the fiscal year. Penalties will be incurred if this payment is not made, so planning ahead to make sure the company has enough cash is recommended.
Lastly, even if the taxable income is negative (meaning that the company is booking a loss) a minimum amount of ¥70,000 in corporate tax income will still be required.
Income Withholding Tax
When employees are hired, payroll set up, and salaries are being paid, Income Withholding Tax will come into play. By law, all employers are required to withhold a percentage of the employees’ income, reserved for payment directly to the government. The amount to be withheld varies, but is based on mainly two factors:
employment status (employee vs. contractor)
amount of base salary
Startup Work has prepared an Employee Cost Calculator in the free resources page to help founders estimate the amount of withholding tax required (among other employment expenses, such as labor insurance).
There are two options for paying the Income Withholding Tax to the government:
On a monthly basis after every payroll cycle
Twice a year (in January and July) — requires submission of the Application for Approval Made in Relation to the Special Provision for Due Dates for Withheld Income Tax to the National Tax Agency
Similar to Corporate Income Tax, missing the payment deadlines with incur penalties. It is recommended to keep accurate track of how much is being withheld and will be owed, and to make sure that there is always adequate cash in the company for these payments.
Consumption Tax
Consumption Tax refers to the tax on selling and consuming goods or services. For founders, this means that all products and services sold to domestic customers (sold in Japan and to be “consumed” in Japan) will be required to have an additional tax charged on top of the sales price.
The standard rate of Consumption Tax in Japan is 10%, effective as of October 2019. Products sold to overseas or to non-residents of Japan are typically exempt from Consumption Tax.
The amount of Consumption Tax owed to the government will vary depending on a couple of factors:
exemption period — companies (usually those newly established) who have ¥10,000,000 or less in taxable sales for the full accounting period two years prior to the current accounting year are exempt from payment
this exemption does not apply to
newly established companies that have ¥10,000,000 or more capital
newly established companies that are established by a group of enterprises whose taxable sales are more than ¥500,000,000 annual and the group has more than 50% stake in the newly established company
the amount of Consumption Tax paid by the company for consuming goods and services as part of company expenses
Consumption Tax paid on taxable purchases can be deducted from Consumption Tax received on taxable sales to reduce total amount owed to the government
whether or not the goods or services sold qualify for the previous rate of 8%
examples include sales of food (excluding dine-in restaurants) or newspaper subscriptions where there is at least an issue 2x per week
The schedule for payment will also depend on the size of the Consumption Tax amount. At the highest end of the spectrum, there may be up to 4 total payments in a single year — one for each quarter of the fiscal year, with the final quarter usually being the largest payment of all.
Now that we have a good idea of what taxes we may be liable for as founders and how much cash we may need to meet these payments, it would be ideal to get a more detailed picture of how these tax liabilities are contextualized in the fiscal and calendar year.
Stay tuned for the next blog post, where we will lay out a typical fiscal and calendar year and see how these tax payments may stack up against each other.
