Tax Complexity and Accounting in Different Countries

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Ah, those blithe joys of “hanami,” wonderful views, delicious food, and mysterious culture of Japan.  How many of those who once visited the country of rising sun wanted to come back there again? 

Indeed, Japanese culture and architecture gather a lot of attention from foreign visitors providing a good reason for including them on your bucket list. Without a doubt, your “tourist” life here will be a breeze – and full of unforgettable experiences on top of that!

But is that true for those who decided to settle in Japan, run their business here, or plan to incorporate their foreign company

Being the 3rd largest economy, Japan is the leading center for innovation with its capital, Tokyo, fast turning into a city of choice for foreign companies, SMEs, and start-ups. In fact, many Western and Asian companies are attracted by the Japanese capabilities in the R & D sector, personnel, and well-developed laws.

But, unfortunately, every rose has its thorn. 

Despite its attractive and lucrative market, Japan is ranked 114th for the ease of doing business. With its high standards and meticulous level of detail comes a complicated tax system.  That’s, perhaps, the reason  Japan (together with Australia and Germany) developed a concept of Zeirishi, or a tax accountant, who can comply with the high level of tax complexity and contribute to the smooth running of your business.

In this article, we’re going to look at the Japanese tax complexity level compared to different countries to understand how it correlates with the pricing policies of different accounting offices.



*Disclaimer: This article was accurate at the time of publishing and is intended to give you a quick overview of the tax. Whether certain regulations are applicable to your situation or not can only be decided by a professional tax accountant after careful examination of your documents. For this reason, we are not held responsible for any damages caused by this article.


 

Table of Contents

TAX COMPLIANCE IN JAPAN

In service-focused businesses, the service fee generally depends on the level of the case complexity. With so many companies in the tax & accounting industry, it may be difficult to differentiate those that will truly provide efficient service and handcrafted solutions and those that are more concerned about helping their own bottom line.  Fortunately, understanding the statistical data on the tax and accounting complexity will tell you a lot about the company’s client approach and the pricing system.

Tax complexity varies from country to country, and it can be assessed by looking at the time to comply with corporate tax and consumption tax. 

Corporate Tax Compliance in Japan

Corporate Tax is a global issue and is integral for international competition and the foreign market. While many countries try to simplify Corporate Tax, Japan tries to keep its high complexity at any cost.

The following chart shows the number of hours it takes each country to comply with Corporate Tax.

Source: PwC, 2018

As you can see from the chart above, the compliance time for Corporate Tax in Japan (38 hours) is substantially higher than many other major countries, which directly corresponds with the tax complexity involved.

These numbers may cause a great deal of indecision over the attractiveness of the Japanese market. As such, with a view to making the Japanese market more enticing, the Japanese government decided to reduce the Corporate Income Tax rate at the national level from 25.5% to 23.9% for tax years beginning on or after 1 April 2015. 

Consumption Tax Compliance in Japan

Another controversial issue is the Japanese Consumption Tax (JCT), which is levied on the volume of business (aka “taxable sales”) and is paid based on the self-assessment method. The concept of the Japanese Consumption Tax is quite unique yet similar to that of the European VAT. That’s why here at Otani Accounting, we usually refer to JCT as VAT- it facilitates the understanding of our European clients.

While it is very similar to VAT, it is, in fact, very different. In European countries, all companies have a VAT number but imagine a world where VAT numbers do not exist. How would the tax system work then?  As you have probably guessed already, the uniqueness of the Japanese Consumption Tax system rises many complications making it confusing for most of our clients. 

Still, data from PwC 2018 indicates that Japan takes the lowest amount of hours to comply with this tax. 

That’s probably because it is handled by knowledgeable insiders, like us. Therefore, let us know if you need local knowledge to navigate through this unique concept.

Source: PwC, 2018

Total Tax Compliance in Japan

 

There is an interesting phenomenon when it comes to the total amount of hours it takes each country to comply with taxes- Japan stands between France and Spain. It has a total tax compliance time of 151 hours compared to 139 hours in France and 152 hours in Spain.  

 

The similarity in the number of hours to comply corresponds with the latest data from our Marketing Department which shows that the vast majority of our clientele are French and Spanish. This is likely because the tax complexity in France and Spain is similar to the tax complexity in Japan, making the Japanese market attractive to our clients from France and Spain. 

It is also worth mentioning that the Otani Accounting Office focuses on providing support for European clients mostly. These days, however, we receive a lot of inquiries from US expatriates which makes sense because the total tax complexity in the US is almost the same as in Japan.

 

The chart below shows the total tax compliance hours for a variety of countries, and it can be seen that Japan has a similar amount of compliance hours compared to France and Spain. 

Source: PwC, 2018

Overall, data from PwC 2018 highlights that the EU as a region generally has a lower than average time to comply, whereas the US and Asia tend to take longer to comply.

So, if you think your Japanese tax accountant overcharges or, on the contrary, charges less than expected, don’t be reluctant to compare the tax complexity and take into account the bilingual service, if any– it will open your eyes to the reason why the service fees are like this.

CONCLUSION

Indeed, there is a bunch of things to consider before entering the Japanese market. Unfamiliar regulations, the tax system, and business environment may deter many foreigners from expanding their business to Japan, thus depriving you of a wonderful opportunity to grow bigger and expand internationally.

It is true that the Japanese tax system is unique, different, and challenging, but it does not need to be a burden for you. Our wealth of experience, as we help foreign companies expand and operate across Japan and help foreign individuals establish their business here, can relieve your headache and help you become much more action-oriented. 

Having local help on board is essential to help you reach new limits in Japan without being bound by the tax technicalities.

Make informed decisions with our on-call professionals’ help to ensure the success of your business in Japan.

Need more information? Reach out to our office via one of the web forms or phone.

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