Quick Review

Corporate Income Tax

The government has been cutting the corporate tax rate to boost investment and wages while raising consumption tax rate. You can say the overall rate of income tax is around 30%, but details are more complicated. Corporate income tax consists of 5 different taxes, some of which vary according to the location and the size of the company. And some of which are tax deductible so you need to calculate effective tax rate.
Here is a table showing tax rates applicable for corporations whose head office is located in Tokyo.

Large Corporation

SMEs

Tax rate:   

Enterprise tax and Local corporate special tax are tax deductible. When you want to know the actual tax burden, you should look at the effective tax rate. Normally, they refer to the effective tax rate when you ask what the income tax rate is in Japan.

Effective rate = Total rate / (1 + deductible tax rate) 
33.80% = 37.04% / (1 + 6.7% + 2.89%)

Tax rate applicable for SMEs seems higher than that of large corporation. However, SEMs can be granted concession rate for the lower part of income, and can be exempted from other taxes which are imposed on factors other than income.

Corporate tax:   

Corporate tax is a federal income tax imposed by Japanese government. The current tax rate is 23.4%, which will be reduced to 23.2% from Dec 2019.
Concession rate is applicable for SMEs whose capital amount is JPY100 million or less (except for the company whose 100% parent company’s capital amount is JPY500 million or more). Standard concession rate is 19% for the first JPY8 million, which is reduced to 15% until FYE Dec 2019.

Local corporate tax:  

Unlike its name, local corporate tax is a federal income tax imposed by Japanese government. Tax amounts collected by the Japanese government are distributed to local governments with lower tax revenue.
Local corporate tax is a surtax on corporate income tax. The current tax rate is 4.4% on corporate income tax rate. The tax rate against income is 4.4% x 23.4% = 1.03%. 
The government will raise the rate to 10.3% from FYE Dec 2020, which will not have any tax impact because Inhabitant's tax will be reduced by the same rate.

Inhabitant's tax:  

Inhabitant's tax is a regional tax imposed by local governments, which means inhabitant's tax varies by location of the company’s head office. This is also a surtax on corporate income tax. Current rate in Tokyo is 16.3% and 12.9% for large corporation and SMEs respectively.

Enterprise tax:  

This is also a regional tax imposed by local governments. Current rate in Tokyo is 0.88% and 6.7% for large corporation and SMEs respectively. 
Large corporation whose paid-in capital is more than JPY100 million is also subject to another tax called Size-based enterprise tax (Gaikei Hyojun Kazei), which is not based on income tax. Factors such as the size of a corporation’s personnel costs and its capital will determine the additional amount of tax payable. Size-based enterprise enables the tax authority to collect tax from a loss-making company.

 

Local corporate special tax:  

Local corporate special tax will be abolished from FYE Dec 2020 and replaced with an increase to the enterprise tax rate. Local corporate special tax was established as a temporary federal income tax in order to level the tax revenue of local governments. Some portion of enterprise tax has been collected as local corporate special tax and distributed to local governments with lower tax revenue.

NAViSは世界155ヶ国以上に拠点を有する会計法務の国際ネットワーク IR Global の Exclusive Member です。

各国のメンバーファームと連携し、グローバル化・複雑化するクライアントのニーズにお応えします。

NAViS is exclusive member of IR Global, a worldwide professional services network that provides legal and accountancy advice to companies and individuals across 155+ jurisdictions. Our members work closely with each other to create the very best client solutions.

© 2020 by Navis Consulting Co., Ltd.