A financial statement reflects the financial status of the company’s「assets and liabilities (i.e. assets, liabilities and net worth)」,「results of operations (i.e. sales, expenses and profits」, 「changes in shareholders’ equity (investment and accumulated profits」, etc. A financial statement serves to show three (3) main concerns, particularly the company’s (i) operational performance, (ii) management of credit, and (iii) tax filings. Although commonly referred to as financial statements, under the Financial Instruments and Exchange Act, certain companies that are required to submit securities reports prepare a schedule of liabilities, while other companies prepare financial statements, which typically come in three (3) forms, namely, balance sheets (B/S9, profit and loss statements (P/L) and cash flow statements (C/F).

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A profit and loss statement is important as it is lined up together with the balance sheet and cash flow statement. A profit and loss statement is prepared in order to show the company’s profitability or losses it has incurred in a given year. It is also referred to as「P/L」as abbreviation for profit and loss statement. In the profit and loss statement, the company’s profitability is reflected in 5 items, namely, gross profit, operating profit, recurring profit, net profit before tax, and net income. Accordingly, the amount of profit from sales, vis-a-vis the purchase price, cost of labor, rental and other expenses incurred, and the resulting profit or loss generated thereby can be determined.

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The balance sheet is a financial statement that indicates the kind of property any capital raised was invested in. Reading the balance sheet will let you see what the money invested in the company has been used to purchase any property. Incidentally, since the relationship between procurement and operation is referred to as the company’s “financial status”, the balance sheet may also be called a financial statement useful in determining its financial status. The balance sheet is also referred to as B/S in its abbreviated form. Capital pertains to “debt” and “net assets” as distinguished from property, which pertains to “assets”. Since the amounts of capital and property always match, the formula for calculating capital is to add debt and net assets together. Thus, debits (represented by assets) and credits (represented by liabilities and net assets) comprise the balance sheet. In practice, it is often called by its abbreviated form i.e. B/S.

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The cash flow statement reflects what assets flowed into and out of the company during a certain accounting period, classified in terms of sales activities , investment activities, etc.

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The corporate tax is the tax levied on the profits of a company, and consists of the income tax, inhabitant tax, enterprise tax and consumption tax on incorporated entities. These taxes must be paid by the company and included in the settlement of accounts for the current period. In addition, the corporate tax may also appear in the profit and loss statement as the abbreviated term for [corporate tax, corporate inhabitant tax and corporate business tax].
The corporate tax is a national tax levied on the profits earned by the company. The corporate tax rate varies according to the type of corporation, the amount of capital and amount of income.

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The corporate inhabitant tax is a local tax paid by an incorporated entity to the local government having jurisdiction in which its business is located. It is calculated by multiplying the amount of corporate tax with two (2) tax rates, namely, the inhabitant tax rate and the per capita rate, which depends on the amount of the company’s paid-in capital.

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The corporate enterprise tax is basically a local tax levied on a percentage of the business income of a company by the local government having jurisdiction in which its business is located. Corporations with a share capital or contributed capital of more than 100 million are subject to standard tax rates using income, added value and capital as the taxable base. Only a percentage of income is included in the corporate tax, while the calculated taxes corresponding to added value and capital are in principle applied as selling, general and administrative expenses.

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<Consumption Tax Method ※ A Simple Taxation Method B Taxation Method in Principle>

Persons liable to pay the Consumption Tax
The consumption tax is fairly and widely levied on products/manufactured goods sold and services rendered and the burden to pay falls on both the consumer and the proprietor. While it is widely and fairly imposed on the sale of products or manufactured goods and services rendered, the system is designed in such a way that it will not be cumulatively imposed at every stage of production/manufacturing and distribution as to result in double or triple taxation. The consumption tax and local consumption tax levied on the price of goods is ultimately borne by the consumer and paid by the proprietor as well. The local consumption tax is also levied on transactions that are subject to consumption tax.

Transactions subject to levy
Since the consumption tax is levied on transactions of a proprietor engaged in the sale or lending of assets and/or providing services for a consideration, most transactions involving the sale, transport, advertising, etc. of goods for a consideration are subject to the same. In the case of sole proprietors, the specified period is defined as the period beginning January 1 until June 30 of the year preceding the taxable year. In the case of incorporated entities, as a matter of principle, the specified period is defined as the 6-month period starting from the first day of business operation of the year previous to the current business year. It should be noted that if the amount of consumption tax for the specified period is Ten Million Yen or less (\10,000,000), the total amount of salaries and related payments may be used instead as the base for determination in lieu of the amount of taxable sales.

Exemption from Consumption Tax
Proprietors whose taxable sales within the base period and specified period total Ten Million Yen or less (exempt proprietors) for a certain year (or fiscal year) are exempt from the obligation to pay the consumption tax. It should be noted that an exempt proprietor has the option of becoming a taxable person

Tax Rate
The standard consumption tax rate is 10%, comprising the consumption tax rate of 7.8% and local consumption tax rate of 2.2%. The reduced consumption tax rate is 8%, consisting of the consumption tax rate of 6.24% and local consumption tax rate of 1.76%.

A Taxation Method in Principle
In principle, the consumption tax to be paid is arrived at by deducting the consumption tax actually paid from the consumption tax received.

B Simple Taxation Method
The amount of consumption tax to be paid is calculated by multiplying a fixed percentage to the consumption tax received. This simplified system applies only to proprietors of small to medium scale enterprises with taxable sales of Fifty Million Yen or less during the base period. Beginning October 2023, the 「tax qualified invoice system」(invoice system) will be in force and effect.

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The blue return is a type of tax declaration used by taxpayers for declaring their income from January 1 to December 31 of every year, calculating the corresponding income tax according to a certain standard. Compared to the other type of tax declaration which is referred to as the white return, the blue return requires various documents to be attached and takes more time to prepare. However, there are many benefits to be derived from filing the same. A typical benefit is the availment of special deduction. A special deduction of up to Six Hundred Fifty Thousand Yen may be availed of in case the blue return is filed according to the prescribed procedure. Other tax saving benefits come in the form of salaries paid to family members which may be claimed as an expense, while a deficit incurred in a given year may be carried forward for 3 years. Accordingly, we recommend the filing of a blue return for individual proprietors who are filing a tax return for the first time, and even for those who have been filing a white return to date.

How to submit a blue declaration approval application?
In order to file a blue return, it is necessary to submit the "Income Tax Blue Filing Approval Application" to the tax office in your jurisdiction. The document itself is not difficult at all, just fill in the name and the type of business you do as a sole proprietor according to the items. The income tax blue filing approval application can also be downloaded and printed from the NTA website, which can also be received directly at the tax office.

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A tax treaty is a bilateral agreement between two countries that serves to avoid double taxation whereby income earned by an individual in Japan may also be subject to income tax in his country of origin. A tax treaty thus serves to avoid double taxation of income derived from international business deals and investment transactions such as dividends, interest, copyright and other forms of royalties, and is also intended to prevent tax evasion.

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A tax return is the declaration filed by an individual or an incorporated entity for the purpose of determining the amount of liability for income tax and special income tax for reconstruction of said person or entity. In the case of an individual, the tax return must reflect his total annual income beginning January 1 and ending December 31 of every year and must be filed from February 16 to March 15 of the following year by the taxpayer himself or a tax accountant or tax accounting firm acting as an agent. Aside from declaring the amount of income received, the tax return also indicates the resulting tax liability based on said income, which may be in the form of salaries, interest, dividends and such other income, as well as any income tax withheld therefrom, and likewise determines whether, all things considered, there has been an overpayment or underpayment of the actual tax due vis-a-vis the income tax withheld from such forms of income, and accordingly, the necessary tax adjustment is made. While an incorporated entity must file a tax return and pay the corporate tax within the taxable period, a taxable proprietor must also file the corresponding return for the consumption tax within the taxable period.

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Income derived from the conduct of any and all activities in the agricultural, fisheries, manufacturing, wholesale, retail, and service industries and any other business yielding income is referred to as business income. Business income may come in the form of interest income, capital gains, temporary income and miscellaneous income. When an ordinary salary earner has a sideline, any income earned from it may be classified either as miscellaneous income or business income. However, subject to certain conditions, such income may be treated as business income and depending on the nature of the sideline, income derived therefrom may not be recognized by the tax authorities as business income, regardless of the fact that a return has been filed to declare the same as such.

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Income derived from the rental of an apartment, condominium unit, or parking lot is referred to as real estate income. An ordinary salary earner who has a sideline and earns income from the management of an apartment, condominium unit or parking lot is obliged to file a tax return.

Real estate income is income other than capital gains or business income, and refers to income derived from the following:
○ Lease of land, buildings, and such other structures
○ Establishment and lease of real property rights, including surface rights
○ Lease of ships and aircraft.

It should be noted that any income arising from the sale and purchase of real estate may be considered as a capital gain or business income depending on the scale or form of the property

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Generally, capital gains are income derived from the transfer of assets such as land, buildings, shares of stock, golf club membership, etc. However, income arising from the sale of product inventories for business use as well as mountain or forest land are not considered capital gains.

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As a general rule, inheritance tax is imposed on all property owned by the decedent, such as cash, deposits and savings, securities such as stocks, public and corporate bonds, as well as tangible property such as real estate. It is also levied on intangible property with economic value such as goodwill, telephone subscription rights, patent rights and other intellectual property.

※ Property located outside of Japan is also subject to inheritance tax.

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Bookkeeping refers to the act of entering financial details of transactions that occurred in the conduct of the company’s business. The information necessary to be supplied in a tax return must be based on the books of the company. A book is a company’s general ledger showing the flow of money as well as the company’s assets and business condition on a daily basis. The company’s balance sheet and income statement are derived on information recorded in the books of the company which are necessary for filing a blue return.
Further, there are two types of accounting methods, namely, single-entry bookkeeping and double-entry bookkeeping. Those who intend to avail of the maximum special deduction of Six Hundred Fifty Thousand Yen relevant to the blue return must employ the method of double-entry bookkeeping.

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A tax audit refers to the survey conducted by a tax office under the jurisdiction of the National Tax Agency for the purpose of checking the accuracy of details provided in the taxpayer’s tax return.

There are two types of tax audits, namely, voluntary tax audit and compulsory tax audit. A voluntary tax audit is conducted with the taxpayer’s consent while a compulsory tax audit is carried out by the tax office as to include social sanctions.

The tax office also conducts audits of individuals.
※ It must be noted that most enterprises or sole proprietors are subject to tax audit when consumption tax has been refunded.

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Year-end adjustment is the process of comparing the annual income tax payable by an employee with the amount of income tax deducted from the employee’s monthly salary or bonus, and adjusting the excess or deficiency of income tax of the employee accordingly. The income tax for a given year is calculated when the income for one year has been determined and the tax due is withheld every month. After it has been determined at the end of the year that the total tax withheld for the entire year is more or less than the actual tax due, a year-end adjustment is made in December or January of the following year, and the company will collect any additional income tax due or refund to the employee any amount of income tax overpaid to the tax office.

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A payroll report is a combination of employees’ individual statements and a table summarizing the salaries paid to employees.

Individual Statement
An individual statement is similar to a withholding slip, bearing an employee’s name, address, date of birth, amount of salary, and the amount of insurance deducted from the employee’s salary. The individual statement is filed with the local government (and not the tax office) pertaining to the employee’s place of residence for the purpose of calculating the employee’s liability for residence tax and contribution to national health insurance.

Summary Table
A summary table sets out and functions like a cover for the employees’ individual statements. It indicates the number of employees’ individual statements submitted by the company, how many of them have retired, etc. Accordingly, by combining the summary table with the employees’ individual statements, a payroll report will be formed for the corresponding city, ward, town or village in which the employees reside.

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A statutory record is a document required to be submitted to the tax office under the income tax lax, inheritance law, and special taxation measures law. There are about 60 kinds of statutory records from which the tax office is able to determine the correct amount of tax due to be paid by a taxpayer. There are six (6) types of statutory records which are simultaneously submitted with the salary income withholding slips

Types

〇 Types of Tax Withholding Slips
・Salary income withholding slip
・Retirement income withholding slip
・Withholding slip for public pension, etc.

〇 Types of Payment Records
・Record of payment of compensation, fee, contract money and price
・Record of payment of fee for use of real estate, etc.
・Record of payment of consideration for assignment or transfer of an asset
・Record of payment of real estate broker’s fee
・Record of payment of dividends, distribution of surplus, money and basic interest
・Such other records of payment

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The tax levied on a company’s fixed assets that it uses in the conduct of business is called the depreciable asset tax. However, the depreciable asset declaration is prepared by the municipality (or the Tokyo Tax Office in the case of Tokyo’s 23 wards) to calculate the depreciable asset tax due. . For this purpose, the company must file a certain form to declare its fixed assets, and based on the contents thereof, the municipality will issue to the taxpayer a notice of depreciable asset tax due for payment. Further, the depreciable asset tax is due not only on real estate such as land, houses and similar structures, but also on other fixed assets such as machinery and equipment used in the business.

Example: Accessories for building construction, machinery and equipment, ships, aircraft, land vehicles, transport vehicles, tools, office equipment and fixtures, etc.

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Deductions for Dependents of Foreigners (Gist of 2016 Tax Reform)

〇 Deduction for Dependents
If a taxpayer has relatives who earn a living but whose income fall below a certain level, a certain amount may be deducted from the taxpayer’s income corresponding to the number of relatives. In other words, the tax to be paid by a taxpayer will be reduced proportionate to the number of relatives who depend on him for financial support.

〇 Deduction for Dependents also applies where the dependent-relatives reside abroad
【Prerequisites】
The taxpayer pays taxes in Japan.
The taxpayer provides economic support to relatives through remittance.

【In case of a Japanese citizen married to example : a Philippine citizen】
A Japanese citizen can avail of deductions with respect to Philippine citizen spouse's relatives up to the third degree of consanguinity (for example, spouse's parents, grandparents, brothers and sisters, nephews and nieces, uncles and aunts.

【In case of Philippine citizens】
A Filipino citizen can avail of deductions with respect to his own or his spouse’s relatives up to the sixth degree of consanguinity (for example, parents, grandparents, brothers and sisters, nephews and nieces, uncles and aunts, cousins, great grandparents, etc.

taxrefund.com

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※Tax Reform Provisions

Based on the partial revision of the Income Tax Act (Text based on homepage of the National Tax Agency)

To avail of the benefit of certain deductions from their salary or public pension with respect to deduction for dependents, spouse deduction, disability deduction, or special spouse deduction, or deductions for relatives residing abroad, residents must present evidence of kinship and remittance to their relatives (including a translation of documents that are written in a foreign language) to the enterprise obliged to make the withholding from the employee’s salary or public pension, or present such evidence for purposes of year-end adjustment . In other words, residents must have documentary proof of kinship and remittance to their dependents to avail of the applicable deduction.

〇 Kinship Documents
Documents certifying the place of residence of dependent relatives and kinship with taxpayers
A copy of the family register and related documents issued by the national or local government;
Documents issued by a foreign government or a foreign local public body (limited to those stating the name, date of birth, address or place of residence of the foreign resident relative)
(Examples) Certificate of family register, copies of birth certificate, marriage certificate, and passport.

〇 Remittance documents
Documents of a financial institution or a copy thereof, which clearly indicate that the resident taxpayer has remitted to his relative residing abroad through a foreign exchange transaction conducted by the financial institution. Documents of a credit company or a copy thereof, which clearly show that the foreign resident relative has presented the card issued by the credit card issuing company and the foreign resident relative has purchased the product etc., so that the purchase price of the product can be determined from such documents, or documents otherwise demonstrating that a reasonable amount of money has been received or will be received by the foreign resident relative from the resident taxpayer.
(Examples) Foreign remittance request form, remittance certificate, credit card usage statement

〇 Important things to note with respect to overseas remittance
If a taxpayer has more than one relative residing abroad, remittance documents are required for each such relative to be eligible for a dependent deduction. Accordingly, if the taxpayer has five foreign resident relatives to whom the corresponding dependent deduction may apply, evidence of remittance documents must be submitted for such five relatives.

※ If you are sending money to only one relative abroad, only that person will be recognized as a dependent.
※ Only recipients named in the certificate of remittance issued by a bank/financial institution or remittance agency will be recognized as dependents.
※ Moneys handed over to relatives by a taxpayer traveling or included in the taxpayer’s luggage, or otherwise sent by international mail are not recognized as allowable items for dependent deductions.

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Consumption tax is a tax that is widely and fairly levied on consumption in general. Therefore, as a rule, the sale of any and all assets produced and services offered within Japan are subject to consumption tax and the proprietor pays the consumption tax on sales generated by the business. To prevent the accumulation of tax (where the same assets or services are subject to multiple transactions), the person selling is obliged to deduct the amount of consumption tax due at the time of purchase for the purpose of calculating total sales (purchase eligible for tax credit) and pay the deducted tax amount. The amount corresponding to the consumption tax levied on the business is incorporated into the selling price as a cost and passed on, and eventually various expenses become subject to tax. (In contrast to income tax, which is referred to as a "direct tax", consumption tax is referred to as an “indirect tax”, where the taxpayer and the person who actually bears it are different.)

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When a person has contributed to the welfare pension system of Japan, he is entitled to claim the withdrawal of a certain amount of his contributions upon returning to his home country, and about 20% of such amount to be received is withheld as income tax. The corresponding income tax withheld may be refunded by filing an application for tax refund within five (5) years beginning January 1st of the year following the date of receipt of the lump-sum withdrawal payment.

For details
lump-sumwithdrawalpayment.com

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Under current rules, multinational corporations may have difficulty in determining whether they can allocate income to a country other than the country where the economic activity actually took place. This can lead to a situation where the income concerned is not taxed in any country and the corporate taxes paid by multinational corporations are considerable reduced.

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The Special Taxation Measures Law is a law that contains special provisions that are intended to be applied for a limited period of time in order to realize a specific policy. This law covers not only corporate tax, but a host of other special tax items.

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Transfer pricing taxation is a system of taxation whereby the amount of taxable income is calculated on the basis of the price as may be agreed between independent companies dealing with each other on an arm’s length basis, even though the transaction is made between related parties. Under the taxation system of Japan, transfer pricing taxation is applied to transactions entered into by companies and related foreign parties.

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A parent company that is a multinational corporation or is a member of a specified group of foreign corporations having public facilities (PE) in Japan must file a notification on the last day of its fiscal year, indicating its name, head office location, corporate number and the name of its representative who will file such notification electronically (e-tax).

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The OECD Transfer Pricing Guidelines provide new rules for transfer pricing documentation and have proposed a three-tiered approach: the master file, local file and national report (CDC report). Please refer to the Japanese Transfer Pricing Documentation for country-specific reports as provided in the 2016 tax reform legislation.

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A parent company that is a multinational corporation or is member of a specified group of foreign corporations having public facilities in Japan (PE) must file a notification indicating the organizational structure, business outline, financial status, etc. of the corporate group electronically within one year following the last day of the preceding fiscal year.

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The arms-length price is the price considered as established between foreign related parties as if the transaction occurred between independent third parties under similar circumstances. Therefore, it is a reasonable price based on an economically rational business relationship.

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An acting representative director is necessary:
1. Where a non-resident foreigner intends to establish a company in Japan while he is abroad.
2. When a foreigner delegates the management and operation of the company to a resident of Japan while he is abroad.
3. In cases where there are grounds for disqualification of current directors under the Corporate Law.

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Due diligence (DD) refers to the process undertaken to investigate and evaluate a certain company to which an investment or investments will be made, or the companies involved in a merger and acquisition (M & A)/ There are about seven (7) types of due diligence, namely, finance (in terms of liabilities), business (operational), legal affairs, tax affairs, personnel, information technology, and corporate environment.

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This refers to debt that is not recorded in the books of the enterprise. A typical example is contingent debt, such as debt guarantees or potential liability in disputed proceedings.

「Supplement」In corporate accounting, as a matter of principle, it is obligatory to make known the content and amount of contingent liabilities on the balance sheet with appropriate notation. Intentional concealment of debt by not making notes such as “guarantee obligations” or by attributing a loss to another company「skipping」 to conceal the unrealized loss of owned assets, is regarded as window dressing. Moreover, in the case of small and medium scale enterprises, accrued bonuses, obligations related to unpaid bonuses, retirement benefits, allowance for doubtful accounts, etc. may not be reflected in the balance sheet, or may appear only up to a certain extent to comply with transfer limits under the Corporate Tax Law. These are also deemed off-balance sheet debt.

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Skipping refers to the act of hiding losses by reselling unrealized assets to a third party at a price higher than the market price. When the market value of securities held by a company drops significantly, it is possible to avoid or delay recording of a loss in the financial statements by temporarily selling the same to another company with a different accounting period at a price close to the book value thereof. This transaction may be determined to fall within the meaning of loss compensation prohibited by the Financial Instruments and Exchange Act.

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Residents (excluding non-permanent residents) who hold overseas assets exceeding 50 million yen as of December 31 must submit a "Statement of Overseas Assets" to the competent tax office by March 15 of the following year (from 2023 tax year onward, the deadline is June 30 of the following year).
※1　The term "resident" mentioned above refers to individuals who have an address in Japan or have had a place of residence in Japan continuously for one year or more.
※2　The term "non-permanent resident" mentioned above refers to individuals who do not possess Japanese nationality and have resided in Japan (either with an address or a place of residence) for a total of five years or less within the past ten years.

Q. What qualifies as overseas assets subject to the "Statement of Overseas Assets"?
A. Movable property, real estate, deposits and savings, loans, accounts receivable, notes receivable, securities, documents, antiques, and precious metals.
※Debts cannot be deducted.

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① The submission criteria are: if the annual income exceeds 20 million yen for that year and the total value of assets held as of December 31 of that year is 300 million yen or more; or individuals whose securities and similar assets have a total value of 100 million yen or more; or if on the same date the total value of assets subject to the special provisions for capital gains, etc., when relocating overseas is 100 million yen or more.
② If, as of December 31 of that year, the total value of assets held is 1 billion yen or more; in addition to the previous criteria ①, submission is also mandatory for individuals with assets valued at 1 billion yen or more, regardless of income limitations.
When relocating overseas, unrealized capital gains on assets such as stocks are subject to taxation.

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