Over the last decade, Japan has introduced various measures to combat perceived tax avoidance by multinational enterprises. Putting the activities of global corporations under increased scrutiny, it has become imperative for businesses operating in Japan to apply a sufficient amount of precaution and due diligence to all things tax-related.
As well as this, the global tax landscape continues to evolve, with each nation updating its own policies to be aligned with current trade and foreign policies. Should entities fail to navigate both the obligations of their home countries and Japan’s complex tax requirements, the consequences can be severe.
All this is to say that having a comprehensive tax advisory to support your expansion or Japan market entry activities is essential. We explore this topic and how to find your own tax advisory.
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What Do Tax Advisors Do?
Tax advisors offer a wide range of services that cover the various aspects related to tax compliances, including support for the preparation and filing of relevant tax documents. As well as actually helping you to gather information and compile important documentation to track your activities and prove that your organization is tax compliant, they will also help you to plan for future tax activities, helping you to streamline the process and avoid or minimize any tax penalties.
This kind of strategic support is where professional tax advisory can truly help multinational companies confidently operate in Japan, whether they are doing business in Japan for the first time or expanding their current operations through an existing subsidiary in Japan. Below are some specific activities tax advisors can help your business with.
Tax Accounting
A huge amount of information must be recorded and assessed as part of the yearly tax accounting process. While each company’s earnings, expenditure, expenses, and profit allocation to partners and shareholders must be tracked, large multinational businesses will be subject to additional tax scrutiny for many other processes and activities that take place as part of standard operations. This can include any exchange of funds externally or internally through intracompany transactions.
This extra layer of complexity is best handled through regular tax accounting support, rather than isolated periods of tax preparation. As many important transactions, agreements or exchanges can take place at infrequent periods throughout the year, it is common that larger organizations have constant tax accounting support to record the process diligently and make tax preparations accordingly.
Companies embarking on a Japan market entry venture also find that this kind of ongoing support is best paired with additional business and logistical support from a partner in Japan, to help overcome the inherent challenges of operating in a new market. This can include Japanese market research, localization support, and business consulting.
It is common that larger organizations have constant tax accounting support to record the process diligently and make tax preparations accordingly.
Japan was one of the first countries to implement advance pricing agreements (APAs) to cover transfer pricing. It now has one of the most developed transfer pricing landscapes where tax authorities are well-trained at monitoring transfer pricing activities and standards across the growing number of multinational corporations operating here in Japan.
As such, businesses who are entering the Japanese market for the first time or have been here for many years are equally expected to comply fully with the nation’s transfer pricing policy. This applies to global companies with annual consolidated revenue exceeding 100 billion yen, however, it is prudent for entities below this threshold to still calculate acceptable intercompany pricing within Japanese regulations.
A tax advisor will not only help you to comply with relevant regulations, but they can also help to establish a company-wide transfer pricing policy to inform relevant group companies how to comply with transfer pricing regulations in Japan. Some additional services offered by tax advisors for transfer pricing include:
- Transfer pricing audits
- Advanced pricing agreements (APA)
- Transfer pricing documentation
- Transfer pricing risk assessment
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Corporate Tax Returns and Support
Managing your tax obligations to meet corporate tax compliance expectations from relevant jurisdictions can be challenging. This is even harder for large multinationals with several subsidiaries.
To ensure that tax processes are undertaken responsibly and proactively throughout the year, it is common practice for businesses to establish a robust corporate tax approach that allows them to deliver transparent, effective, and compliant reporting of their tax returns. The cluster of individual corporate taxes levied in Japan include:
- Corporate Tax (National Tax)
- Local Corporate Tax
- Corporate Inhabitant Tax
- Enterprise Tax
Managing your tax obligations to meet corporate tax compliance expectations from relevant jurisdictions can be challenging.
Benefits of Hiring a Tax Advisory for Japan
The Japanese tax landscape has become increasingly more complex with time. This has presented challenges for businesses of all sizes and industries. Yet, as the market still offers unique benefits to all kinds of foreign companies, the focus is now on navigating the various tax obligations, following the regulations, and implementing best practices so that business is still profitable.
Improve Tax Efficiency
Without effective measures in place, tax processes can eat into valuable company time and resources. Incorrect details, lack of understanding of local regulations, or inexperience can all lead to serious consequences that extend across your network of business activities and subsidiaries. Hiring a professional tax advisor is the best option for saving your company time and ultimately improving the productivity of your overall operations in Japan.
Reduce Tax Liability and Costs
Another major benefit of working with a tax advisor is that they can help you lower your tax liabilities in Japan. With appropriate knowledge of Japanese tax regulations, tax advisors can work with you to structure your business in a way that limits the total tax liabilities you may be exposed to. With full compliance and diligence, you can optimize your transactions and agreements in order to avoid paying unnecessary tax-related costs.
This proactive approach will also remove unnecessary fines and penalties that you might incur if you do not adhere to tax deadlines for proper reporting to the relevant authorities. This can also be tied in with other global expansion plans, from operational planning to M&A activities, making sure all your efforts are completely tax compliant and diligently carried out.
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Avoid Tax Pitfalls with Confidence
Businesses that are not fully compliant with Japanese tax regulations risk facing severe penalties and incurring fines — and even extensive lawsuits, in some cases. This can put significant strain on a business, especially one that is trying to scale and explore new opportunities in the Japanese market. With a reliable tax advisory behind you, you can concentrate on important areas of your business without worrying that you are not fully tax compliant. This confidence can be priceless and is only achieved when you feel you have reliable and experienced tax support on your side.
Additional Reasons for Hiring a Tax Advisor
- You do not have in-house tax support
- You are new to the Japanese market and want local advice and expertise
- You are handling complex transactions and exchanges
- You are managing with multi-jurisdictional requirements and obligations
- You want greater proactivity with your tax processes
- Your business is growing and you want to get ahead by managing all tax implications
- Your current tax model is inefficient
With a reliable tax advisor, you can concentrate on important areas of your business without worrying that you are not fully tax compliant.
How to Choose a Tax Advisory
Tax advisory goes far beyond tax preparations alone. You will want to hire a tax advisor who is willing and able to guide you with the rules that need to be followed in order to operate effectively. You also need them to work more holistically across your business rather than function in isolation of your wider activities.
Reputable and Proven
Diligently vetting your potential tax advisors is crucial. For large-scale Japan market entry activities, service quality can range significantly, and you will want to bring on board someone you can trust and depend on them from the start. Often, these individuals (or teams, more often) will play a vital role in how your business operates and you should feel confident about exposing them to the financial workings of your business.
Referrals are a time-proven way of finding a reputable tax advisory firm, but you can also perform your own background checks of potential tax advisors by reviewing their track record with past and current clients.
Local Experience
Knowledge and expertise of both the local tax regulations in your home market, as well as in Japan, will ensure you achieve the important integration that your business needs to succeed across borders. Having a tax advisor who has several years of experience in navigating international agreements and treaties, as well as in facilitating wider Japan market entry activities, will help you grow and operate with confidence. While a large team of global specialists is a good sign for this, be careful that expertise is actually tailored to the services you need, whether it is corporate tax, M&A tax support, tax auditing, tax structuring, tax provisions, or transfer pricing.
Holistic Tax Advice and Japan Market Entry Support
The best tax advisors can offer support across multiple areas of your business. To secure this, it is important to opt for those that are backed by extensive knowledge, resources,
and support in areas that extend beyond tax compliance services alone. Some tax advisory services will also offer a host of other resources and expertise aimed at supporting your holistic approach to business in Japan, through tasks like operational outsourcing and HR and Labor Law Support.
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Proactive Tax Strategies
Japan’s taxation environment will continue to change based on macro-economic factors, such as the increasing financial deficit, aging population and growth rates, pressures on the social security system, and a need to stay competitive in the international marketplace.
One can only predict how these things will impact future tax implications for businesses and it is very likely that Japanese tax authorities will continue paying particular attention to whether corporate taxpayers located in Japan are sufficiently reporting taxable income in relation to their functions and risks.
Therefore, it is prudent to prepare yourself with proactive, professional, and reliable tax strategies through a trusted advisory firm to help you navigate the complexities of various regulations in Japan.
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