Starting Up Your Business in Osaka: Introduction
Accounting & Tax
1. Type of corporation taxes and tax rate
Taxes imposed on corporations are broadly classified into national and local taxes. Local taxes are taxes imposed by prefectures and municipalities (city / town / village).
Major taxes imposed on Japanese corporations in general include:
⇒ Taxes payable to the national government: Corporation tax, local corporation tax, consumption tax, income tax (withholding income tax)
⇒ Taxes payable to the local government: Inhabitant tax, enterprise tax, special local corporate tax, fixed property tax, business facility tax
(1) Corporation tax
Corporation tax is assessed on the taxable income of corporations. Corporation tax is calculated in the same manner for both subsidiaries (domestic corporation) and branch offices (foreign corporation).
- Calculation method: Taxable income calculated by making the necessary tax adjustments* to the net income per the statement of income is multiplied by the corresponding tax rate specified in item (2) below. (*Non-deduction of entertainment expense, directors’ bonus etc.)
- Tax rate: 23.2% (from the fiscal year beginning on or after April 1, 2018)
- Filing / Payment
a) Final return: (In principle) Within 2 months from the fiscal year end.
(Exception) If settlement of accounts is not completed within 2 months due to the audit schedule or for other unavoidable reasons, this 2-month period may be extended to a maximum of 3 months, subject to prior notification. Extension to file, however, does not extend payment of taxes due. Accordingly, interest tax will be imposed on corporation tax that is not paid within the original 2 month deadline.
b) Interim tax return: Required only when the amount of corporation tax for the first 6 months of the fiscal year is over 100,000 yen when calculated based on the tax amount of the previous year. Filing and payment for the interim tax return must be completed within 2 months from the end of the first 6 months of the fiscal year.
For small and medium sized companies with capital of 100 million yen or less (with the exception of wholly owned subsidiaries of large companies with capital of no less than 500 million yen), a reduced tax rate of 15% tentatively* applies for their portion of taxable income not exceeding 8 million yen. For the fiscal years reduced tax rate is not applied, 19% is applied for the same portion of taxable income in principle.
※Tax rate shown in above (2) applies to fiscal year beginning during the period April 1, 2012 to March 31, 2014.For fiscal year starting after April 1, 2014, tax rate is 25.5% since Restoration Corporate Surtax has been abolished. For small and medium sized companies with capital of 100 million yen or less (with the exception of wholly owned subsidiaries of large companies with capital of no less than 500 million yen), taxable income up to 8 million yen is applied 15%.
(2) Local corporate tax
A corporation which is liable for the corporate tax is also liable for the local corporate tax. The taxable year of the local corporate tax is the same as that of the corporate tax. Taxable basis of the local corporate tax for a given year is the amount of the corporate tax of such year and the tax rate is 4.4%. Filing of the local corporate tax return should be made within two months after the end of such taxable year.
(3) Consumption tax
A taxable enterprise for consumption tax purposes must file a tax return and pay the difference between consumption taxes received from sales or other revenues and consumption tax paid on purchases. Neither filing nor payment of consumption tax is required if an entity is not a taxable enterprise. Whether an entity is classified as a taxable enterprise or not is determined based on the amount of taxable sales which exceed 10 million yen in the period two years to the current year in principle. In case of newly established company whose capital is less than 10 million yen and met certain requirements, such entity is tax-exempt enterprise at first. Because requirements are complicated, please have a tax professional for more details, whether an entity is classified as a taxable enterprise or not.
- Calculation method：
Consumption Tax Payable = Consumption tax received – Consumption tax paid*
Consumption tax received: Consumption tax received on sales and asset transfers
Consumption tax paid: Consumption tax paid in connection with purchases and expenditures plus consumption tax paid to customs upon import. (*There are some cases where consumption tax paid on purchases and import is can wholly deductible.)
- Tax rate: 8% (6.3% for national tax, 1.7% for local tax)
※Tax rate is expected to be raised to 10% from October 1. 2019.
- Filing / Payment
a) Final return: Within 2 months from the fiscal year end (No extension system)
b) Interim tax return: If the tax amount of the preceding fiscal year exceeds 480,000 yen (national tax portion), an interim tax return must be filed within 2 months from the last day of each of the corresponding periods below:
More than 480,000 yen and no more than 4 million yen: 6 months period from the beginning of the fiscal year
More than 4 million yen and no more than 48 million yen: Every 3 months period from the beginning of the fiscal year (except for the last 3 month period)
More than 48 million yen: Every one month period (except for the last month)
(4) Withholding income tax applicable to domestic corporation
Corporations that make certain payments such as salaries, remuneration / fees etc. to residents in Japan are obligated to withhold taxes upon payment (withholding at the source) and pay the withheld amount to the government. It is important to note that it is the responsibility of the payer of income to withhold taxes, and failure to collect or pay withholding tax may result in such penalties as additional tax on non-payment or overdue tax on payer of income (Please have tax professional for more details on withholding tax assessed against payments to non-residents and foreign corporation).
For 25 years from January 2013, Restoration Income Surtax (2.1% of withholding tax) must be withheld together with withholding income tax.
- Payments subject to withholding income tax
a) Salary, bonus, retirement allowance, etc.
b) Professional fees to lawyers, licensed tax accountants, etc.
c) Fees for manuscript and lectures
No later than the 10th day of the month following the month the payments listed in section 1) above were made.
- Special provision for the due date: If a corporation pays salaries to fewer than 10 employees, income tax withheld for item a) and b) above may be paid semiannually (July and January) by submitting the notification to the tax office.
(5) Inhabitant tax
Inhabitant tax is imposed by prefectures and municipalities.The tax return must be filed with both the prefecture and municipalities.
- Calculation method
Inhabitant tax is calculated as the sum of “corporation tax levy” and “per capita levy”
- Tax rate
a) Corporation tax levy: 16.1% of the corporation tax (12.9% for companies whose capital is no more than 100 million yen and corporation tax amount is no more than 10 million yen).
b) Per capita levy: Tax amount is determined according to capital size* and the number of employees (within the range of 70,000 yen – 3,800,000 yen), so this levy is imposed even on deficit corporations. For example, in the case of a corporation having business facilities in Osaka city, the per capita levy is 20,000 yen for Osaka prefecture and 50,000 yen for Osaka-city when the capital is not more than 10 million yen and the number of employees is no more than 50. (*In the case of a branch office in Japan, the per capita levy is determined according to the capital size of the overseas head office).
- Filing / Payment: Same as in the case of corporation tax.
(6) Enterprise tax
Enterprise tax is levied by prefectures on businesses conducted by corporations. Taxation is based either on the pro-forma basis or on the income of corporations.
- Pro-forma basis taxation
a) Calculation method
Pro-forma basis taxation applies to corporations whose capital is more than 100 million yen (in the case of branch offices in Japan, the capital of the overseas head office applies). Tax is calculated as the sum of the following three components: (i) income levy based on the taxable income of corporation tax, (ii) capital levy based on the size of capital etc. and (iii) the added-value levy based on payroll, interest, etc.
b) Tax rate
Refer to List of Tax Rates.
- Corporation not subject to the pro-forma basis taxation
a) Calculation method
Corporations whose capital is less than or equal to 100 million yen are not subject to pro-forma basis taxation and will only be liable for the income levy component.
b) Tax Rate
Refer to List of Tax Rates.
(7) Special local corporate tax
Special local corporate tax applies to corporations that are obligated to file an enterprise tax return. This is classified as national tax, but is payable to prefectures based on the local enterprise tax amount.
(8) Fixed property tax
Fixed property tax is imposed by municipalities on tangible fixed assets (land, buildings, depreciable assets) owned by corporations.
For real property (land and buildings), municipalities will automatically send tax payment slips based on the registered information (“Official assessment method”). Other assets must be declared by the taxpayer.
Fixed property tax on depreciable assets (Declaration of depreciable assets)
- Tax rate: 1.4%
- Filing and payment
Details of depreciable assets (furniture and fixtures, interior equipment, etc.) owned as of January 1 of each year must be declared to municipalities by January 31. Tax amount is calculated by municipalities and paid in a maximum of four installments per year.
Fixed assets tax is exempted in the following cases.
If the taxable valuation of an asset in a municipality is less than 300,000 yen for land, 200,000 yen for a building, or 1,500,000 yen for a depreciable asset, fixed property tax will not be levied.
(9) Business Facility Tax
Business facility tax is imposed on corporations that own a large business facilities (office, hotel, warehouse, etc.). Corporations that have a business facilities in designated municipality such as Osaka city must declare this tax.
- Corporations subject to Business Facility Tax: Corporations that have a business facility with floor space exceeding 1000 ㎡ or the total number of employees working in the facility is over 100.*
- Tax rate
a) Asset based tax: Floor area (㎡) ×600yen
b) Employee-based tax: Total payroll ×0.25%
Within 2 months after the fiscal year end
*Corporations with either business facilities with floor space exceeding 800 square meters but under 1,000 square meters or total employee number exceeding 80 employees but under 100 square meters are not levied business facility tax but has obligation to file Business Facility Tax.
List of Tax Rates
Tax rate applied for taxable income recognized by corporations (for small and medium sized enterprises with paid-in-capital of 100 million yen or less)
Applicable for the fiscal years beginning on or after April 1, 2018
|Brackets of taxable income||Up to 4 million yen per year||4 million yen
to 8 million yen per year
|Over 8 million yen per year|
|Local Corporate tax||0.66%||0.66%||1.02%|
(except pro forma basis taxation)
|Special Local Corporate tax||1.47%||2.2%||2.89%|
|Total tax rate||22.46%||24.90%||36.81%|
|Effective tax rate||21.42%||23.20%||31.52%|
* The above tax rates are applicable under the following conditions:
- A small and medium sized enterprise with paid-in-capital of 100 million yen or less that is not wholly owned subsidiary of a large corporation with paid-in-capital of 500 million yen or more.
- Resides in Osaka-city and corporate tax amount is 20 million yen or less(inhabitant tax rate = corporate tax rate *12.9%).
- Annual taxable income is 50 million yen or less.
- Offices or other places of business located in not more than two prefectures.
Per capita levy on corporate inhabitant tax
|Capital amounts||Employee number||Per capita levy|
|Over 5,000,000,000 yen||-||Over 50||1,600,000 yen||3,000,000 yen||4,600,000 yen|
|Over 1,000,000,000 yen||Or under 5,000,000,000 yen||Over 50||1,080,000 yen||1,750,000 yen||2,830,000 yen|
|Over 5,000,000,000 yen||-||Or under 50||1,600,000 yen||410,000 yen||2,010,000 yen|
|Over 1,000,000,000 yen||Or under 5,000,000,000 yen||Or under 50||1,080,000 yen||410,000 yen||1,490,000 yen|
|Over 100,000,000 yen||Or under 1,000,000,000 yen||Over 50||260,000 yen||400,000 yen||660,000 yen|
|Over 100,000,000 yen||Or under 1,000,000,000 yen||Or under 50||260,000 yen||160,000 yen||420,000 yen|
|Over 10,000,000 yen||Or under 100,000,000 yen||Over 50||75,000 yen||150,000 yen||225,000 yen|
|Over 10,000,000 yen||Or under 100,000,000 yen||Or under 50||75,000 yen||130,000 yen||205,000 yen|
|-||Or under 10,000,000 yen||Over 50||20,000 yen||120,000 yen||140,000 yen|
|-||Or under 10,000,000 yen||Or under 50||20,000 yen||50,000 yen||70,000 yen|
Pro-forma basis taxation
|Applicable for the fiscal years beginning on or after April 1,2017|
|Osaka prefecture||Standard tax rate|
|Income levy||Up to 4 million yen per year||0.395%||0.300%|
|Over 4 million yen per year and under 8 million yen per year||0.635%||0.500%|
|Over 8 million yen per year||0.880%||0.700%|
|Special local corporate tax||414.2% of income levy calculated applying standard tax rate|
* Tax rate may be different among the prefectures.
2. Transfer pricing taxation
Under the transfer pricing system, if a business entity engages in sales/purchase of assets, rendering of services or any other transactions with its “foreign-related parties”, and the value received/paid in such transaction is less/more than the arm's-length price respectively, the foreign-related transaction is deemed to have been executed at an arm's-length price for taxation purposes.
Transfer pricing taxation is a system designed to prevent a company from shifting income to a foreign country through transactions with its foreign affiliates or “Foreign-Related Parties”. For example, a corporate group can minimize its global tax obligations by reducing the export price of its product to a foreign affiliate that is located in a low-tax country, which in effect shifts income taxable in Japan to a foreign affiliate.
The transfer pricing system assesses tax based on the assumption that such controlled transactions within a corporate group are executed at a reasonable price called the ”Arm’s-Length Price”.
1. What is the definition of a “Foreign-Related Party”?
The transfer pricing system applies to transactions among foreign-related parties. Foreign-related parties specifically refer to the following corporations.
- A foreign corporation that basically has a 50% or more shareholding relationship with the Japanese company.
- A foreign corporation with less than 50% shareholding relationship but has a substantial control relationship (in terms of directors, business dependency, funding) with the Japanese company.
2. What is Arm's-Length Price?
In order to compute arm’s-length price, there are three methods; (a) Comparable Uncontrolled Price Method (CUP Method),(b) Resale Price Method (RP Method), (c) Cost Plus Method (CP Method), referred to as the “Three Basic Methods”. If the “Three Basic Methods” are not applicable, equivalent methods to the “Three Basic Methods”, “Profit Split Method (PS Method)”, and “Transactional Net Margin Method (TNMM Method)” can be applied. There is no order of priority of the application among the methods to compute the arm’s-length price. The most suitable method to a certain controlled transaction is applied (the Best Method Rule).
3. New transfer pricing documentation rules (correspondent to BEPS Action 13 by the OECD)
- Notification for Ultimate Parent Entity, Country-by-Country Report(CbC report) and Master File
In correspondence with the discussion on base erosion and profit shifting (BEPS) in the OECD, a new documentation rule is launched which requires a multinational enterprise group (MNE) meeting a certain criterion (a specified MNE group) to file “Notification for Ultimate Parent Entity”, “Country by Country Report (CbC Report) and “Master File” in addition to the existing transfer pricing documentation (Local File). This obligation is applicable for the fiscal year of Ultimate Parent Entity that begins on April 1, 2016 or thereafter.The criterion of filing obligation and other information of the CbC Report and the Master File is described in the table below.Criterion and other information of Notification for Ultimate Parent Entity CbC Report and Master File
Notification for Ultimate Parent Entity CbC Report Master File Obligation of submission A specified MNE group having consolidated revenue of 100 billion JPY or over is obliged to file one. Who to file The Japanese entities belonging to a Entity of a specified MNE group(including PEs in Japan) the Japanese entities that are the ultimate parent entity of the specified MNE group in principle one of the Japanese entities belonging to a specified MNE group (including PEs in Japan) What to be described names of the Ultimate Parent Entity, etc., the location of its head or principal office, its corporate number, and the name of its representative quantitative information such as sales amount, amount of tax, number of employees of the constituent entities of the specified MNE group qualitative information such as organization structure, outline of business operation, and financial condition of the specified MNE Due date of submission By the day when the Ultimate Parent Entity’s fiscal year ends (via e-Tax) Within one year from the following day of the end of the fiscal year of the ultimate parent entity of the specified MNE group Language - English Japanese or English penalty - Fine of 300 thousand JPY or less Fine of 300 thousand JPY or less
- Local File
Regarding existing transfer pricing documentation (Local File), a corporation, except for ones which meet certain requirement for exemption, is obliged to prepare the Local File by the due date of the corporate tax return of the year (a contemporaneous documentation), and such obligation is applicable from the business year that begins on April 1, 2017 or thereafter. Companies are exempted from this new documentation rule with regards to foreign controlled transactions with a foreign related company when the transactional amount of foreign controlled transactions with such foreign controlled company (the total of receipt and payment) is less than 5 billion JPY and the transactional amount of foreign controlled transactions related to intangibles with such foreign controlled company (the total of receipt and payment) is less than 300 million JPY during the previous business year (the current business year if there was not the previous one). It should be noted that it doesn’t mean a company is not exempted from the preparation of the Local File itself even in a case where it is exempted from the contemporaneous documentation. Presumptive assessment or audit to similar businesses would be conducted by the tax authorities unless the company doesn’t file the document equivalent to the Local File at the request of the tax auditors by the last day of a period they designate within the range of 60 days.
3. Change in the method to tax on the profit of a branch of a foreign corporation
The method of taxation on branches of foreign corporations was changed from the “entire income approach” to the “attributable income approach” from the fiscal year beginning on or after April 1, 2016. Under the entire income approach, if a branch of a foreign corporation is located in the territory of Japan, all Japan source income earned by the foreign corporation is, whether or not such income is attributable to the branch, attracted to such branch (force of attraction) and the branch sums up and declares all of the income sourced in Japan. Under the attributable income approach, however, among the income earned by a foreign company, only income attributable to its branch (income attributable to PE) is the income subject to the declaration by the branch. On the other hand, the headquarter of which the branch is a part directly earns such income as rent or fee for the dispatch of professionals, such incomes are attributable to the headquarter and the tax obligation is imposed on the headquarter itself. If the headquarter of the foreign corporation directly earns such income as interest, dividend, royalty or some other types of investment income, withholding tax is withheld when such income is paid and the tax obligation of the headquarter is cleared.
As an income attributable to a branch becomes a Japan source income, an income earned by a branch outside Japan is also included in the Japan source income and subject to the declaration by the branch. Accordingly, the foreign tax credit will be applied to the branch of a foreign corporation to avoid the double taxation in the source country and Japan.
The income attributable to PE is calculated according to the authorized OECD approach (AOA). Under the AOA, transactions conducted by a branch will be distinguished into the external transactions and the internal dealings. The internal dealings of sales and costs should be assessed and recognized as if they were transacted between parties in arm’s-length and reflect the amount in the calculation of the profit of the branch. A method similar to the one which is adopted under the transfer pricing taxation is applied to the process to validate the transaction prices of the internal dealings. Please note a certain modification will be made to the calculation of income of a branch described above, e.g. internal royalties shall not be recognized, if the country where the headquarter is a resident and Japan conclude a tax convention based on the article 7 of the former OECD model tax convention.
It will be obligated to prepare documentations describing external transactions and internal dealings conducted by the branch. The documentations also need to include the information of the functions performed, assets used and risks assumed by the branch. These documentations need to be demonstrated to tax authorities when required.
In view of taxation, difference between a branch and a subsidiary will be smaller than before after the attributable income approach is in effect since the rights of taxation will be allocated by likening headquarters and its branches which have the same judicial personality to headquarters and its subsidiary which are the separate entities.
4. Differences by types of entities
1) Differences by scope of taxation (on or after April 1, 2018)
（KK, GK*, etc.）
|Classification for Tax Purposes||・Foreign corporation||・Domestic corporation|
|Taxable Income||・Income attributable to the branch is taxable (not only Japan source income, but also foreign source income)
・To avoid double taxation, the foreign tax credit applies to the branch.
|・Both Japan source income and foreign source income are taxable. (Foreign tax credit system is available for the purpose of avoiding double taxation.)|
|In the case of Loss||・In general, only inhabitant tax per capita levy applies to branch office. Pro-forma basis taxation in enterprise tax applies to corporations whose paid-in-capital of head office is more than 100 million yen.||・In general, only inhabitant tax per capita levy applies to subsidiaries. Pro-forma basis taxation in enterprise tax also applies to subsidiaries whose paid-in-capital is more than 100 million yen.|
|Borrowings||・Lending / borrowing between the head and branch offices is also deemed as a transaction with an outside party, so the branch in Japan needs to recognize the interest of any loan transaction with its headquarter or other parts of the company of which the branch is a part (hereinafter, “headquarter or other).
・Interest expense paid in connection with the borrowing above will be deductible for tax purposes.
・Related to the above, the interest derived from the lending / borrowing transactions with the headquarter or other which is located in a country with which the Japanese government concludes a tax convention based on the old model tax convention before AOA adjustment is not subject to the above rule. In this case, the interest between the branch and its headquarter or other is excluded in computing the taxable income.
・A rule similar to the thin capitalization rule is introduced to limit the deduction of interest expenses of the branch.
・Documents similar to contract documents should be prepared for each loan transaction between the branch and the headquarter or other.
|・Preparation of a loan agreement and payment of reasonable interest are required even in a parent-subsidiary relationship.
・Interest expense is deductible for tax purposes but attention should be paid to the thin capitalization rule.
・Tax on interest income must be withheld upon the payment of interest (Reference should also be made to the applicable tax treaty).
|Other Fund Transfers||・Surplus funds etc. to be remitted to the head office is merely an intra-company money transfer and will not be recognized as dividends. (No such matters as tax withholding will arise.)
・Documents similar to contract documents which explains the character of each remittance of funds need to be prepared.
|・Transfer of funds between the parent and subsidiary such as payment of dividend, interest & royalties, repayment of borrowings, settlement of AP and costs of assets purchased must be evidenced with invoices or agreements. Note that certain payments such as dividends are subject to withholding tax (Reference should also be made to the applicable tax treaty).
・Remittance of surplus funds of the subsidiary to the parent is considered as a loan from the subsidiary to the parent. Accordingly, the subsidiary must recognized interest income.
|Expenses incurred by the head office / parent company||・Expenses to be borne by the branch office may be allocated to the branch (based on reasonable standards). Evidence materials for allocation should be retained to prepare for tax audits in the future. Financial statements of the head office must be attached to the tax returns.||・No such concept as expense allocation since the subsidiary is a separate entity (Expenses paid on behalf of the subsidiary needs to be billed via an invoice and settled through payment).|
|Withholding tax||No withholding tax obligations will arise to any internal dealings between the branch and its headquarter or other.||Refer to each of the above explanations.|
|Tax Rate||There is no tax rate difference by types of entities.|
・ Because representatives at subsidiaries who do not meet certain requirements are not considered as directors in corporate tax law, bonus is deductible as expense.
・ Corporate tax return should be filed with financial statements of head office.
・ Inhabitant tax per capita levy and pro-forma basis taxation applies to corporations whose head office has paid-in capital of more than 100 million yen (even if the size of branch office in Japan is small).
・Documents similar to contract documents should be prepared for all internal dealings between the branch and its headquarter and other.
・ Burden of inhabitant tax per capita levy and pro-forma basis taxation can be reduced if a subsidiary whose paid-in capital is low even in case paid-in capital of foreign-parent company is more than 100 million yen.
・ Corporate tax return should be filed without financial statements from foreign-parent company.
・ Preparation of agreements for sending funds and/or any business transactions is required even in a parent-subsidiary relationship.
In case of opening a branch office or establish a subsidiary, it is required to submit the following notifications regardless of types of entities. Note that failure to submit notifications by the due date may result in the loss of various tax benefits.
|By the first
|Notification of Incorporation (National tax)||○||Within two months from the establishment of a branch/subsidiary.|
|Application for Approval of Filing a Blue-form Tax Return||○||The earlier of the end of the first fiscal year or within three months from the establishment of a branch/subsidiary.|
|Notification of Establishment of and Office Paying Salaries||○||Within one month from the establishment.|
|Application for Approval of Extension of Withholding Tax Payment||○||Applicable to W/H tax payments from the month following the application. Extension available only to businesses with less than 10 employees.|
|Application for Extension of Filing (National Tax)||○||Not required if extension is not necessary.|
|Notification of Inventory Valuation Method||○||Not required when adopting the final purchase method.|
|Notification of Asset Depreciation Method||○||Not required when adopting the straight line method (for buildings,equipment attached to buildings,structure) and declining balance method (for other assets).|
|Report on the Selection of Taxable Enterprise for Consumption Tax||○||Required only when a tax refund is expected.|
|Report on the Selection of the Simplified Tax System for Consumption Tax||○||Required only when applying for the simplified taxation method.|
|Notification of Incorporation (Prefectures)||○|
|Application for Approval of Extension (Prefectures)||○||Not required if extension is not necessary.|
|Notification for Extension of Filing the Corporation Tax Return (Prefectures)||○||Not required if extension is not necessary.|
|Notification of Incorporation (Municipalities)||○|
6. Losses treated for tax purposes
Tax losses are treated in the following two ways:
- Tax loss carry forward(from the fiscal year beginning on or after April 1, 2018)
Net losses incurred in each of the nine fiscal years prior to the first day of a given fiscal year may be offset against the income of such given year. However, other than the case where the corporation is Small and Medium-sized Corporations (“SMCs”)*, deductible amount is limited up to 50% of the income. In other words, losses incurred in the current fiscal year may be utilized against future income and may be carried forward for the next ten years.
The corporation must have a blue-form tax filing status to benefit from this treatment. Furthermore, this nine-year loss carry forward provision is not applicable if a corporation obtains a tax refund by way of a tax loss carryback.
- Tax refund by loss carryback
If a SMC* filing a blue-form tax return incurs losses in a given year and has paid corporation tax in the immediately preceding year, the SMC is entitled to a refund of prior year’s taxes by filing a claim for refund.
*Small and Medium-sized Corporations : Corporations with paid-in-capital of 100 million yen or less, and not wholly owned subsidiaries of Large Corporation with paid-in-capital of 500 million yen or more.
7. Audit systems applicable in Japan
- Disclosure system
A corporation established under the Companies Act of Japan is required to prepare financial statements (financial accounts) in accordance with the Companies Act, the Company Accounting Ordinance etc. and disclose them to its shareholders and creditors. Further, listed companies are required to prepare (consolidated) financial statements that comply with the Financial Instruments and Exchange Act and the (Consolidated) Financial Statements Regulation.
Note that both the Companies Act and the Financial Instruments and Exchange Act require financial statements to be prepared in accordance with the generally accepted accounting standards (GAAP).
- Japanese GAAP and IFRS
The current legal disclosure system in Japan requires financial statements to be prepared in accordance with the country’s own accounting standards (Japanese GAAP*), not with the International Financial Reporting Standards (IFRS). However, the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) reached an agreement in August 2007 to accelerate the convergence of Japanese GAAP and IFRS that began on March 2005.
As a result of this agreement, ASBJ and IASB have succeeded in resolving major differences between the two standards by 2008. Japanese GAAP is under review to eliminate the remaining differences.
From consolidated fiscal year ending on or after March 31, 2010, financial disclosure in accordance with IFRS is allowed to certain listed companies that satisfy specific requirement.
* Japan GAAP
Japanese GAAP collectively refers to the corporate accounting standards, practical guidelines, etc. established by various organizations such as the Business Accounting Council (a subordinate body of the Financial Services Agency "FSA"), the ASBJ (an organization represented by business leaders, scholars, accountants, etc.), and the Accounting Standard Committee (Japanese Institute of Certified Public Accountants "JICPA").
- Statutory audit
Companies that are generally subject to a statutory audit are as follows:
⇒As per the Companies Act:
A company that has paid-in-capital of 500 million yen or total liabilities of 20 billion yen or more
⇒As per the Financial Instruments and Exchange Act:
A company whose securities are listed on a financial instruments exchange
In addition, spurred by the US experience, an internal control reporting system has been introduced in Japan. Under this system, public listed companies are subject to internal control audits by their financial statement auditors from the fiscal years beginning on or after April 1, 2008.