Monday, July 1, 2019

Corporate Effective Tax Rate( 実効税率)In Japan – How It Is Calculated

I often receive inquiries about how much the effective tax rate in Japan is. Effective tax rates, however, vary in accordance with where a company is located and how much its capital amount is.

1. Taxes Imposed On Taxable Income 


A corporation in Japan pays 6 kinds of taxes that are, directly or indirectly, imposed on its annual taxable income.

Corporation Tax                            =    %    x    Taxable Income
Local Corporation Tax                 =    %    x    Corporation Tax
Prefectural Inhabitant Tax            =    %    x    Corporation Tax
Municipal Inhabitant Tax              =    %    x    Corporation Tax
Business Tax                              =    %    x    Taxable Income
Local Corporation Special Tax   =    %    x    Business Tax(*)

(*) Although the tax base of local corporation special tax is business tax, it is, in most cases, different from the actual amount of business tax levied. Please refer to the paragraphs “5. Business Tax” and “6. Local Corporation Special Tax” for the details.


2. How Effective Tax Rate Is Calculated

 
The formula for calculating the effective tax rate is:

Effective Tax Rate = ( A x ( 1 + B + C + D ) + E + Es x F) / ( 1 + E + Es x F )
                    Es:  standard rates of business tax defined by the Local Tax Act. Please refer to the paragraphs
                                                                      “5. Business Tax” and “6. Local Corporation Special Tax” for the details.

The formula is not a simple addition of the rates, because business tax and local corporation special tax are treated as taxable expenses/incomes when they are actually paid/refunded.


3. Individual Tax Rates Are :


(1)     Corporation Tax

 A% is 23.2%. No revision is scheduled currently.
For a small and medium-sized corporation that fulfills certain conditions set by the tax laws, A% is 15% for the taxable income up to 8 million yen and 23.2 % for the taxable income over 8 million yen.

(2)     Local Corporation Tax

 B% is 4.4%. It will be 10.3% for the fiscal year that will start on or after October 1, 2019.

(3)     Prefectural Inhabitant Tax

 Prefectural inhabitant tax is composed of two different taxes. One is per corporation tax levy and the other is per capita levy. The C% above is the one applied for the per corporation tax levy.
C% is determined by each prefecture. The Local Tax Act defines the standard rate as 3.2%, while allowing each prefecture to determine and impose higher tax rates up to 4.2% (the maximum applicable rate).
The standard rate will be 1.0% and the maximum applicable rate will be 2.0% for the fiscal year that will start on or after October 1, 2019.

(4)     Municipal Inhabitant Tax

 Municipal inhabitant tax is composed of two different taxes. One is per corporation tax levy and the other is per capita levy. The D% above is the one applied for the per corporation tax levy.
D% is determined by each Municipality. The Local Tax Act defines the standard rate as 9.7%, while allowing each municipality to determine and impose higher tax rates up to 12.1% (the maximum applicable rate).
The standard rate will be 6.0% and the maximum applicable rate will be 8.4% for the fiscal year that will start on or after October 1, 2019.

(5)     Business Tax

 Business tax is composed of two different taxes. One is per taxable income levy and the other is per size levy. The E% above is the one applied for the per taxable income levy.
E% is determined by each prefecture. The standard rates and the maximum applicable rates are defined by the Local Tax Act as below:

- for a company whose capital amount is over 100 million yen -
The standard rates are 0.3%(0.4%) for the taxable income up to first 4 million yen, 0.5%(0.7%) for the income over 4 million yen and up to 8 million yen, and 0.7%(1.0%) for the income over 8 million yen. The Act allows each prefecture to determine and impose higher tax rates up to 2.0(1.7) times as much as the standard rates.

  - for a company whose capital amount is 100 million yen or less -
 The standard rates are 3.4%(3.5%) for the taxable income up to first 4 million yen, 5.1%(5.3%) for the income over 4 million yen and up to 8 million yen, and 6.7%(7.0%) for the income over 8 million yen. The Act allows each prefecture to determine and impose higher tax rates up to 1.2(1.2) times as much as the standard rates.

              bracketed figures "()" will be applied for the fiscal year starting on or after October 1, 2019.

 The tax rates for the smaller size category is much higher than those for the larger size category. The reason behind this is that the per size levy is only imposed on the larger size category and the difference is made up by it.

(6)     Local Corporation Special Tax

 The tax base of local corporation special tax is the amount of business tax calculated with the standard rates described in the previous paragraph, that is, in most cases, different from the actual amount of business tax imposed.
 F % is 414.2% for a company whose capital amount is over 100 million yen and 43.2% for a company whose capital amount is 100 million yen or less.
 Local corporation special tax will be abolished for the fiscal year starting on or after October 1, 2019. Special business tax will be established from then. The tax base of the new tax is the amount of business tax calculated with the standard rates and the tax rates of it are 260% for a company whose capital amount is over 100 million yen and 37% for a company whose capital amount is 100 million yen or less.


 (Note: This blog is written on July 1, 2019 based on the information available then.)


written by YAMAMOTO CPA OFFICE  https://www.accounting-solutions-japan.tokyo/en-home