Comprehensive Handbook of Japanese Taxes 2006 - AL-Tax

NOTE TO READERSComprehensive Handbook of Japanese Taxes is publishedannually with the authorization of the Tax Bureau(Shuzei-Kyoku) of the Japanese Ministry of Finance.No rights may be derived from this book. The authors arenot liable for any errors or omissions.EnquiriesResearch Division,Tax Bureau, Ministry of Finance

Chapter III Corporation Tax (Corporate Income Tax)

Taxes on Property, etc.Chapter IV Inheritance Tax and Gift Tax

Chapter V Land Value Tax Chapter VI Registration and License Tax Chapter VII Stamp Tax

General Consumption TaxesChapter VIII Consumption Tax

Excise TaxesChapter IX Liquor Tax Chapter X Tobacco Tax Chapter XI Special Tobacco Tax Chapter XII Gasoline Tax Chapter XIII Liquefied Petroleum Gas Tax

Chapter XIV Aviation Fuel Tax Chapter XV Petroleum And Coal Tax Chapter XVI Local Road Tax Chapter XVII Motor Vehicle Tonnage Tax Chapter XVIII Promotion of Power-Resources Development Tax

Payment , Penalties , and Tax DisputesChapter XIX Payment of National Taxes Chapter XX Penalties on National Taxes Chapter XXI Collection of National Taxes

Chapter XXII Tax Disputes Local TaxesChapter XXIII Local Taxes

International TaxationChapter XXIV Taxation of Nonresidents and Foreign Corporations

AdministrationChapter XXV Organization of the National Tax Agency

Appendix

PREFACE

CHAPTER IINTRODUCTION TO THE JAPANESE TAX SYSTEM Historical BackgroundTax System Before the End of World War II Prior to the Beginning of World War II

Tax System during World War IIA. Direct Tax System a. b. c. d. e. B. Indirect Tax System a. b. C. Increased Role of Direct Taxation Tax System After World War II

First Period - Economic Chaos after the War (1945 - 49) A. Introduction of Anti-inflationary Tax Measures B. Introduction of the Self-assessment System on a Current Basis

C. Trial Introduction of the Turnover Tax D. Local Tax System E. Establishment of National Tax Agency Second Period - Economic Stabilization and Restoration (1950 - 59)

A. Main Features of the Reform of 1950 based on the Shoup Recommendations a. National Taxes

\ b. Local Taxes B. Modifying Shoup’s Taxation Systema. b.

C. Natural Increase in Revenue and the Adjustment of the Tax Burdena. b. Third Period - Economic Progress (1960 - 69)A. Pursuit of Tax Reduction Policies and Refinement of the TaxationSystema.

. c. B. Long-range Plan for Taxation a. b.

c. d. C. Tax System Pursuant to Deficit Financing Policies and the Issue ofGovernment Bondsa.

Fourth Period - Improvement in National Welfare (1970 to the pre-sent)A. Growing Role of the Public Sector B. Restoration of the Fiscal Balance \ \ \ \

Recent Tax ReformsA. Drastic Tax Reform of 1987 to 1988 a. b.

B. Tax reform from 1989a.

. c.

d. C. Recent counter - cyclical policies and permanent tax reduction \ D. Tax reform toward the construction of a desirable tax system

Present Tax System Taxes on Income:

Taxes on Property, etc. : Taxes on Consumption:

Revenue Estimates by Tax Items (FY 2005 )

National TaxesTax Laws and Regulations a. b. c. d.

National Tax Laws and Regulations

National Tax Laws and Regulations (Continued)

National Tax Laws and Regulations (Continued) National Tax Laws and Regulations (Continued)

Local Taxes

CHAPTER IIINCOME TAX (INDIVIDUAL INCOME TAX)Characteristics of Japan’s Income TaxGenerala. b. c. d. e. f.

g. ∗ Taxpayers Taxpayers and Taxable Incomea. Resident Taxpayer ∗

. Nonresident Taxpayer c. Corporation *

2. Rules for Income Attributiona. Principle of Attribution of Income to an Actual Beneficiary * b. Attribution of Profits from Trust Property

Calculation of the Tax BasePrinciples of Taxable Income Calculationa. b. c. d. e. f. g.

Categories of Income and Method of Calculation

Categories of Income and Method of Calculation (Continued) \ \ \ \\ \ \ \ \ \ \ \ \ \\ \ \

Categories of Income and Method of Calculation (Continued) \ \

Categories of Income and Method of Calculation (Continued) \ \ \ \ \ \ \\ \ \

Calculation of Business Income a. Calculation of Gross Receipts b. Calculation of Necessary Expenses \

\\ \\

c. Special Deduction for Filing a Blue Return \ \d. Separate Taxation of Business Income and the like regarding Land andother Holdings of Real Estate Dealers and the like.

Special Tax Treatment of Employment Income Deduction for employees’specific expenses 5. Special Tax Treatment of Timber Incomea. Estimated Deduction from Timber Income b. Special Deduction for Timber Income from Forest Programs

Special Tax Treatment of Capital Gains a. Acquisition Cost b. Recognition of Capital Gains Based on Market Value c. Exchange of Land, Buildings, etc.

Special Tax Treatment of Capital Gains from the Transfer of Land, Buildingor Right to Use Land (d. - k.)d. Special Tax Treatment of Capital Gains Derived from Transfer of Land,Buildings, or Right to Use Land: Principle \ \\\ \ \\\ e. Special Tax Treatment of Capital Gains Derived from ExpropriatedProperty etc.

\ \ \f. Special Tax Treatment of Capital Gains for Specific Public Projects \ \

\g. Special Tax Treatment for Capital Gains on Residential Property \

h. Special Tax Treatment for the Replacement of Business Asset

i. Special Tax Treatment for Replacement of Lands used for the Constructionof Mid-rise and High-rise Fireproof Buildings j. Special Tax Treatment for the Acquisition of Land through an ExchangeArranged by the Agriculture and Residence Association k. Special Tax Treatment for Exchange of Land in Large-scale Housing andLand Development Projects l. Special Tax Treatment of Capital Gains Derived from the Transfer of Securities

\m. Other Forms of Special Tax Treatment Special Tax Treatment of Miscellaneous Income, etc.

Nontaxable Income [Items to apply to single parent households, and the physicallyhandicapped.] \ \ \

Aggregation of Income and Treatment of Profits and Losses

Carryover of Losses a. Taxpayers Filing a White Return

. Taxpayers Filing a Blue Return \ Carryback of Net Losses

Income Deductions 1. Deduction for Casualty Losses \ Deduction for Medical Expenses\ \ Deduction for Social Insurance Premiums Deduction for Small-scale Enterprise Mutual Aid Premiums, etc.

Deduction for Life Insurance Premiums \\\\\\ \ \\ \\\\\\Deduction for Casualty Insurance Premiums \ \\

\\ \\\\ \\ \\ \\ Deduction for Contributions or Donations \ Exemption for the Handicapped \ \ Exemption for Widows, Widowers, or Working Students \\\\ \

Exemption for Spouses \ a. \ b. \ \ Special Exemption for Spouses\ \ \ \ \ \\\\ Exemption for Dependents

a. \ b. \ c. \ \ Basic Exemption\ Calculation of Tax Amounts Tax Rates Individual Income Tax Rates\\\ \\\\\\\\\\\ \

\\\\\Individual Income Tax Rates (From FY 2007) \\\\\\\\\\\\\\\ Taxation on Timber Income Averaging Taxation on Fluctuating and Extraordinary Income

Tax Creditsa. Credit for Dividends \\ \\ b. Credit for Foreign Taxes

c. Credit for Housing Loans

\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

Proportional Tax Credit\\\ Payment of Income Tax General Keeping Proper Records \

Estimated Payment\ Final Returns

\ \ \\ Assessment in the Event of Failure to File Correct Returns

General Blue Returns Approval by the Director of the Tax Office Privileges a. b. c. d. \

e. f. g. \ General Withholding Income Tax at the Source * Interest and Dividend Income

Income from Original Issue Discounts on Debentures Employment Incomea. Ordinary Salaries ∗ ∗

Excerpts from Monthly Tables (Column A) \ \

\\ b. Bonuses \ \\Excerpts from Rate Tables (Column A)

\\\c. Year-end Adjustment Retirement Income Miscellaneous Income from Public Annuities \

\ \ \ Remunerations, Fees, etc. a. \

. \ \ \ \ \ \ \

Quasi-Financial Products Othersa. b. Inquiries and Examinations for Taxpayers and Information Returns Inquiries and Examinations Payment Records

a. Payment Records for Interest \ \\\b. Payment Records for Dividends \\ \ c. Notice of Receipt

d. Records for Withholding \ e. Payment Records for Remunerations, Fees, etc.

CHAPTER IIICORPORATION TAX (CORPORATE INCOME TAX)GeneralCharacteristics of the Japanese Corporation Taxa. b. c. ∗ d. ∗

e. \\ f.

g. h. Special Taxation Measures \

Tax Measures Concerning Corporate Reorganization Including CorporateDivision, Consolidation, etc. 1. Taxation on Corporations 2. Taxation on Shareholders

3. Handling of Reserves, etc. 4. Preventive Measures against Tax Avoidance 5. Others

\ \

Trial Calculation of Loss in Revenue as an Effect of SpecialTaxation Measures for Corporation

1. Scope of Taxpayers Taxpayersa. Taxable Corporation ˉ ˉ

. Nontaxable Corporation Rules for Income Attributiona. Principle of Attribution of Income to an Actual Beneficiary b. Taxation of a Trust

Taxable IncomePrinciple of Calculation of Taxable Income Items Excluded from Gross Revenue or Gross Expenses in Calculation ofTaxable Incomea. Items to be Excluded from Revenue for Tax Purposes :

. Items to be Excluded from Expenses for Tax Purposes

Valuation of Inventoriesa. Selection of the Method of Valuation b. Report of Valuation Method \\

c. Acquisition Cost of Inventories Depreciation Allowancea. Calculation of Depreciation Allowance \\ \\b. Methods for Calculating Depreciation (excluding deferred assets)

c. Report on Depreciation Methods (excluding deferred assets) d. Statutory Useful Life and its Adjustment Measure

e. Residual Value (as an Allowable Limit for Depreciation) f. Treatment of Thin or Excessive Depreciation

Sample of Statutory Useful Lives of depreciation Assets

g. Acquisition Cost of Fixed Assets Advanced Depreciation Tax-Free Reservesa. Reserve for Bad Debts

. Reserve for Loss on Returned Goods Profit or Loss from the Transfer of Securities and their Term-endAssessmenta. Profit or Loss from the transfer of securities b. Term-end assessment of securities and their appraised profit and loss

c. Profit or loss from derivatives transactions d. Profit or loss on effecting hedges e. Conversion of foreign-denominated transactions

Special Rule for the Recognition of Specific Profits and Expensesa. Special Accounting Methods Regarding Profits and Expenses of LongTerm Installment Sales, etc. b. Special Accounting Methods Regarding Profits and Expenses ofLong-term and Large-scale Construction. - 3/4 Calculation of Tax Amounts Methods of Tax Calculationa. Corporation Tax on Income for Each Accounting Period

. Corporation Tax on Liquidation Income Tax Ratesa. Tax Rates for Ordinary Income \ \\ \ b. Tax Rate for Retirement Pension Funds c. Tax Rates for Liquidation Income d. Reduced Rate Applicable to Special Medical Corporations Tax Creditsa. Income Tax Credits

. Credit for Foreign Taxes

Carryover and Carryback of Losses Taxation of Retention Money on Family Corporations \ \ \\\\

Special Additional Tax on Retirement Pension Funds of Trust Companies,Life Insurance Companies, etc. Returns Payment, and Refunds of Corporation Tax Final Returns

Interim Returns \ Refunds

The Blue Return System Blue Returns Privileges for Corporations Filing a Blue Returna. b. c. d. e. f. Approval by the Director of the Tax Office

Correction and DeterminationAssessment in the Event of Failure to File Correct Returns Credit of Corporate Tax Brought by Correction in Case of Overpayment toDisguised Accounting Act of Family Corporation etc. and Denial of Calculation Special Taxation Measures Special tax credit and income deductiona.

. c. d.

e. f. g.

h. i. Special Measures for Depreciationa. In General

. Increased Initial Depreciations

c. Additional Depreciations

Reservesa. Reserve for Overseas Investment Loss ‧‧‧‧‧‧ ‧‧‧‧‧‧ ‧‧‧‧‧‧ ‧‧‧‧‧‧ ‧‧‧‧‧‧ ‧‧‧‧‧‧ ‧‧‧‧‧‧

‧‧‧‧‧‧b. Reserve for Prevention of Mineral Pollution in Metal Mining, etc. c. Reserve for Prevention of Certain Disasters d. Reserve for Large-scale repair of Shinkansen railways e. Reserve for Loss in Buying Back Computers f. Reserve for Reprocessing Used Fuels g. Reserve for the Removal and Disposal of Atomic Power Generation h. Reserve for Extraordinary Casualties

i. Reserve for Kansai International Airport Adjustment or Reserve forCentral Japan International Airport Adjustment j. Special Reserve for Repairs k. Reserve for the contribution to society and community l. Reserve for Locating New Mineral Beds in Japan and Abroad

m. Reserve for Utilization and Accumulation of Farmland Other Special Taxation Measuresa. Special Additional Tax on Capital Gains from Sale or Transfer of Land,etc. b. Special Rule for Replacement of Business Assets (Tax Deferral)

c. Special Taxation of Capital Gains from Expropriated Properties d. Other Special Deductions for Capital Gains from Land \ \ \ e. CFC Tax Measure

f. Transfer-Pricing Taxationa. b.

g. Thin Capitalization Rules

Income Examination General Investigation Procedures 2. Corporations under the Jurisdiction of the Examination Department \\

CHAPTER IVINHERITANCE TAX AND GIFT TAX General Revenue from the Inheritance Tax and Gift Tax

Taxpayers a. b. c. Inheritance Tax Tax Base a. b. c. \ d. \ Basic Exemption\\

Calculation of Tax Amountsa. b. a.c. b.d.

\ \\ Tax RatesInheritance Tax Rates\\\\\\ \ \ \ \ \ Example of inheritance tax calculation \

\ \ \Calculation of tax amounts \\\ \\\ \ \ \\ \ \\ \ \ \ \ \ \ \ \ \ Special Rules for Calculation of the Tax Base with Respect to Small Sites,etc.

Special Tax Treatment for Calculation of Taxable Value for Special BusinessAssetsa. \b. Special Tax Treatment for Farmland Gift Tax (Calendar-Year Taxation) Tax Base a.

. c. d. e. f. g. \ Basic Exemption\ Exemption for Spouses \ Tax RatesGift Tax Rates(Calendar-Year Taxation)\\\\\\ \\\\\

OutlineTaxation System for Settlement at the Time of Inheritance Taxpayers covered by this taxation system (His/her age is the age as ofJanuary 1 of the year when donation takes place.) Special deduction (range of tax-exemption)\ Tax amount calculation \

Application procedures Special cases (applicable till 2007) for acquisition of residence under thetaxation system for settlement at the time of inheritance \ \ Returns Returns and Tax Paymenta. Inheritance Tax b. Gift Tax Tax Paymenta. b. \

CHAPTER VLAND VALUE TAX General Taxpayers Tax Base Basic Deductions and Exemptions ,etc. Basic Deductions \\\\ \\\\ \ Exemptions ,etc.

a. b. c. d. \e. f. g. h. i. Tax Rate Returns and Tax Payment

CHAPTER VIREGISTRATION AND LICENSE TAX Taxpayers Taxable Registration and Licenses Tax Base

Tax Rates Registration of Real Estate \ Registration of Ships Registration of Personal Property

Registration of Aircraft \ Registration of Copyrights or Rights of Patent \\ \ Registration of Commercial Companies \ \ \ \ Registration of Lawyers, Doctors, Certified Public Accountants, or Appraisersof Real Property Licensing of Banking Business, etc.\ \ \ Licensing of Manufacture and Sale of Liquor \\

\ Permission for Construction Activities \

CHAPTER VIISTAMP TAX Taxpayers Tax Rates Stamp Tax Rates \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

Tax Payment

CHAPTER VIIICONSUMPTION TAX General Taxable Items General

Transactions subject to Consumption Tax

Criteria for Classification of Domestic and Overseas Transactionsa.

c. Non-taxable Transactionsa.

. c. d. e. f. g. h. i. j.

k. l. m. n. o. p. q. Tax Exemption for Exports, etc. a.

. c. d.

e. Import Transactionsa.

. Taxpayers General

\\\ \ Base Perioda. b. Election of Non-Exemption from Tax Liability

\ Special Rules in Cases of Inheritance, Corporate Mergers, and CorporateDivision, etc.a. \ \ \\ b.

\\ \\ \ \\c.

\ \ \ \ \

\\ \\ Place of Tax Paymenta.

. Attribution of Asset Transfers, etc.a. b. Time of Asset Transfers, etc. General Rules a. b.

c. d. Exceptions for Time of Asset Transfers for Installment Sales b. Exception for Time of Asset Transfers for Construction Work

. c. Tax Base and Tax Rate Tax Basea.

. Tax Rate

Tax Credit for Consumption Tax on Purchases, etc.Tax Credit for Consumption Tax on Purchases a. b. c.

e. Adjustment of Tax Deductions on Purchases

Simplified Tax System \\a. \ b. \ c.

d. Other Deductions Tax Deduction for Refunds of Sale Prices Tax Deduction for Losses from Bad Debts

Self Assessment and Payment Domestic Transactionsa. b. c. \ \\

\\ \ d. Import Transactions

. Special Provisions Concerning Government and Entities Special Provisions Concerning National and Local Governmentsa. b. Special Provisions Concerning Deductions on Purchases

Special Provisions Concerning Due Date for Tax Returns Obligation to Show Gross Price (reference) Local Consumption Taxa. b. c. d. e.

CHAPTER IXLIQUOR TAX Method of Taxation on LiquorGeneral Characteristics of Liquor Tax Administration a. License for Manufacturing or Sale of Liquors \\

Taxable Quantity and Revenue from Liquor Tax ōū ōū ōcū b. Inspection and Supervision c. Administration of the Law Concerning Liquor Business Associations andMeasures for Securing Revenue from the Liquor Tax

Taxpayers Tax Base and Tax Rates Liquor Tax Rates (Example) \ \ \ \ \ \ \

\\ \\ \\ \ \ \\ \ Tax Exemption a. Suspension of Tax b. Tax Exemption for Exports Assessment and Payment

CHAPTER XTOBACCO TAX General Taxpayers Tax Base Tax Rates Tobacco Tax Rates\

Tax Payment Others

CHAPTER XISPECIAL TOBACCO TAX General Taxpayers Tax Base Tax Rates\ Tax Payment Others

CHAPTER XIIGASOLINE TAX General Taxpayers Tax Base Tax Rate\ Tax Payment

CHAPTER XIIILIQUEFIED PETROLEUM GAS TAX General Taxpayers Tax Base Tax Rate\ Tax Payment

Others

CHAPTER XIVAVIATION FUEL TAX General Taxpayers Tax Base Tax Rate\

Tax Payment

CHAPTER XVPETROLEUM AND COAL TAX General Taxpayers Tax Base

Tax Rates \\ \ \ \\ \ \ Tax Payment

Others

CHAPTER XVILOCAL ROAD TAX General Taxpayers Tax Base Tax Rate\ Tax Payment

CHAPTER XVIIMOTOR VEHICLE TONNAGE TAX General Taxpayers Tax Rates ** \ \

\ \ \ \ \ \ \ \ \ \ \ \ \ \

\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

\ \ Tax Payment Tax Exemption Other

CHAPTER XVIIIPROMOTION OF POWER-RESOURCES DEVELOPMENT TAX General Taxpayers Tax Base Tax Rate \\ Tax Payment

CHAPTER XIXPAYMENT OF NATIONAL TAXES General

National Taxes and Their Respective Collection System Agencies Collecting National Taxes

Budgetary Procedures for Receipt of National Taxes

CHAPTER XXPENALTIES ON NATIONAL TAXES General Supplementary Taxes Delinquent Tax Additional Tax a. b.

c. d. e. a.d. c. National Tax Violation Control Law

CHAPTER XXICOLLECTION OF NATIONAL TAXES General Procedure for Collection of National Taxes Demand * Attachment

Request for Share Distribution Sale of Properties Distribution of Proceeds, etc. Investigation of a Delinquent Taxpayer’s Properties Other Measures to Secure Collection of National Taxes

Priority of National Tax Claims Extension of Liability for Tax Paymenta. Succession of Liability for Tax Payment * b. Joint and Several Tax Obligations c. Joint Tax liability d. Secondary Tax Liability

Advance Collection * Provisional Attachment Provisional Security Protection of Taxpayers and Other Persons Concerned Measures for Mitigationa. Grace of Tax Payment

. Suspension of Execution of Disposition Properties Not Subject to Attachment Protection of Third Party Rights Remedy for Violation of Private Rights

GeneralTime Limits on Assessment and Collection Time Limit on Assessmenta. Ordinary Limit on Assessment b. Special Rule for Limits on Assessment

Extinctive Prescription of Collection Extinctive Prescription of Refunds Miscellaneous Refund * Penalty\

\ Interest Tax *

CHAPTER XXIITAX DISPUTES General Number of Cases of Reinvestigation, Reconsideration and Litigation

Number of Cases of Reinvestigation, Reconsideration and Litigation(Continued)

Number of Cases of Reinvestigation, Reconsideration and Litigation(Continued) Tax Disputes in the Executive Branch

Tax Dispute in the Judicial Branch

CHAPTER XXIIILOCAL TAXES Legal Foundation Local Public Entity Kinds of Local Organizations Prefectures

Municipalities

Local Public Finance System Local Revenue Structure Local Taxes

Local Transfer Tax \\

\\ Special Local Allocation

Local Allocation Tax \\\\\\ National Subsidies

Local Public Bonds Miscellaneous Revenues, etc. Prefectural Taxes Prefectural Inhabitants Taxa. Taxpayers b. Tax Base and Tax Rates\ \

\ \ \\\ \\\ \\\ \ \c. Time of Payment and Collection

Enterprise Tax *a. Taxpayers b. Tax Base and Tax Rates

\ \\ \ \ \ \ \

\\ \\ \\ \\ \ \ \ \

\ c. Payment

Local Consumption Taxa. Generalb. Taxpayerc. Tax Base d. Tax Ratee. Assessment and Payment

Real Property Acquisition Taxa. Taxpayers b. Tax Base and Tax Rates \ \ \ \ \ c. Payment

Tobacco Taxa. Taxpayerb. Tax Basec. Tax Rates \ \d. Payment Golf Course Utilization Taxa. Taxpayersb. Tax Base and Tax Rates\\c. Payment Automobile Taxa. Taxpayersb. Tax Base and Tax Rates \ \ \ \ \ \ \ \

\ \ \ \ \ \ \ \ \ \ \ \ \ \ \\ \ \ \c. Payment Automobile Acquisition Taxa. Taxpayers

. Tax Base and Tax Rate\c. Payment Mine-lot Taxa. Taxpayersb. Tax Base and Tax Rates\ \\ \c. Payment

Hunting Taxa. Taxpayersb. Tax rate\\\c. Payment Light-Oil Delivery Taxa. Taxpayers b. Tax Base and Tax Rate\\c. Payment Other Taxes

Municipal Taxes Municipal Inhabitants Taxa. Taxpayersb. Tax Base and Tax Rate

\ \ \ \ \ \\ \\ \ \ \ \ \ \\ \\ \

\\ \ \ \ \ \ \\\ \ \\ \ \\ \ \ \\\ \\\\\

\\ \ \ \ \ \ \ \ \ \ The standard tax rates mentioned below apply to taxable income. \ \ \ \ \ \

\ \ \ \ \ \ \ \ \ \ \

\ \ \\ \ \\ \ \\ \ \ \ \ \\ \ \ \ \ \\ \ \ \ \\ \ \ c. Payment

Property Taxa. Taxpayers b. Tax Base c. Tax Rated. Exemptions

\ \ \ e. Payment Light Vehicle Taxa. Taxpayersb. Tax Base and Tax Rates \ \ \ \ \ \ \

\ \ \ \c. Payment Tobacco Tax Mineral Product Taxa. Taxpayersb. Tax Base and Tax Rates \ Special Landholding Tax a. Taxpayers

. Tax Base and Tax Rates c. Exemptions d. Non-taxable Cases e. Taxation on Idle Land f. Payment

Bathing Taxa. Taxpayers and Tax Amount\b. Payment Urban Planning Tax Business Office Taxa. Taxing Entities b. Tax Base and Tax Rates \ c. Taxpayers

d. Tax Exemption e. Payment Other Taxes

CHAPTER XXIVTAXATION OF NONRESIDENTS AND FOREIGN CORPORATIONSTaxation of NonresidentsClassification of Taxpayers and Their Tax Liabilitiesa. b.c. Income from Sources within Japana. General Description

. Income from Business Conducted in Japan ( income in a. above)

c. Income from the Use, Holding, Sale, or Disposal of an Asset Situated inJapan ( income in a. above)

Classification of Nonresident Taxpayers and Respective Taxable Incomea.

Principle of Tax Calculationa. b. Special Taxation Measures Applicable to a Nonresident Taxpayer

Withholding Income Tax at the Sourcea. b. c.

Special Rules for Filing a Return and Paying Taxa. b. Jurisdiction over Taxation Matters for Nonresidents

Taxation of Foreign Corporations Tax Liabilities-General Rule Income from Sources within Japana.

. Classification of Foreign Corporations and Assessment of Corporation Taxand/or Income Tax on Foreign Corporationsa.

Principle of Tax Calculationa.

. c. \\d. Withholding Income Tax at the Sourcea. b.

c. Special Rules for Accounting Periods Filing of Returns

Jurisdiction over Taxation Matters of Foreign Corporations Tax TreatiesJapan’s tax treaties Tax Treaties of Japan

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

Tax Treaties of Japan (Continued)

2. Contents of Treatiesa. Taxation of Business Profits b. Taxation of Investment Income (Dividends, Interest, and Royalties)

Taxation of Investment Income

c. Taxation of Personal Services d. Taxation of Income from International Transportation

e. Relief from Double Taxation f. Inquiry and inspection rights for exchange of information

CHAPTER XXVORGANIZATION OF THE NATIONALTAX AGENCY General Tax Bureau of the Ministry of Finance (Shuzei-kyoku)

The Co-ordination Division The Research Division The Income Tax and Property Tax Policy Division The Consumption Tax Policy Division The Corporation Tax Policy Division is The International Tax Policy Division National Tax Agency (Kokuzei-cho) General Organization

a. The Commissioner’s Secretariat b. The Taxation Department

c. The Revenue Management and Collection Department d. The Examination and Criminal Investigation Department Affiliated Organs . The National Tax College

The National Tax Tribunal c. The National Tax Council

Regional Taxation Bureaus( Kokuzei-kyoku) The Management and Co-ordination Department The First Taxation Department The Second Taxation Department

The Revenue Management and Collection Department The Examination and Criminal Investigation Department \

Tax Office (Zeimusho)

Standard Organization of Tax Offices (Zeimusho)

Appendix I Trends in Tax

Reform, etc. in Recent Years

Appendix I Trends in Tax

Reform, etc. in Recent Years (Continued)

Appendix I-1APoints of the Drastic Tax Reform (December 1988, etc.)1. Reduction and rationalization of income tax burdens \\ \\ \\\\ \\\\ \\ 2. Measures for more equitable distribution of tax burdens

\ 3. Reduction of the inheritance tax \\\\ \\ 4. Fundamental reform of indirect taxes

\ \ \

5. Reduction of corporation tax \ \

\\ 6. Distribution of Consumption tax revenue to local governments

Appendix I-2BIPoints of the Land Taxes Reform, etc. (FY1991, etc.)Re-examining the Land Taxation System1. Introduction of land value tax a. b. c. d. e. f. a. b.

\ a.\\ \b. \ \\\

2. Taxation on capital gains a. \\b. c. a.

. c. a. b. \\

3. Revision of inheritance tax II. Re-Examining Consumption Tax1. Expanding nontaxable objects 2. Changes of Special Measures for Small and Medium Enterprises \\

Appendix I-3CPoints of Tax Reform (November 1994, etc.) I. The tax burden for individual income tax and individual inhabitant tax wasdecreased.1. Reformation of Tax Rate Structures

2. Basic Exemptions 3. Deduction for Employment Income 4. Reducing Burdens of Inheritance Tax \ \ \ \ \ \ \ \ \ \ \ \ \

\ \ \ \ \ \ \ \ \ \ \ \5. Temporary Tax Reduction \\II. Reformation of Consumption Tax 1. Increasing the Tax Rate

2. Special Rules for Small Businesses \ \\ 3. Tax Credit for Consumption Tax on Purchases 4. Re-examination clause III. Increasing Local Tax Revenue

Appendix I-4Confirmation of the Consumption Tax Rate (25 June 1996) (NOTE1) Review Clause (NOTE2) Outline of the Tax Reform Act of 1994 \ \ \ \

Appendix I-5DPoints of Corporate Taxes Reform, etc. (FY 1998, etc.)1. Temporary Income Taxes Reduction in FY 1998 2. Corporate Income Taxation

3. Land Taxation

Appendix I-6EPoints of Permanent Tax Reduction, etc. (FY 1999, etc.)1. Permanent Tax Reductions, etc. \\ \\ a. \b. \ a. \\b. \\

2. Housing-and Land-related Tax Measures 3. Tax Measures Related to Financial Markets

Appendix I-7FY 2002 Tax Reform (Main Points) \Consolidated taxation system

SMEs \\\\

Financial/stock markets \\

Coping with socioeconomic changesLand and housing Environment/welfare Okinawa

Others Other Special Taxation Measures

\ \

Appendix I-8

Appendix I-9

Appendix I-10FY2005 Tax Reform (Main Points)Ministry of Finance20 December 2004.With a view to establishing a ‘desirable tax system’ that will contribute to sustainableinvigoration of the economy and society, while taking into account the current economic andfiscal environment and having a vision for anticipated review of individual income taxation atnational and local levels in the FY2006 tax reform, the FY2005 tax reform will reduce thebenefits of the proportional across-the-board tax credit and take measures in taxation ofhousing, financial assets and stocks, international transactions and SMEs.Individual income taxation (national and local)• FY2005 reform: Based on directions given inthe Outline of FY2004 Tax Reform of theruling coalition (Dec 2003), half of thebenefits of the across-the-board tax credit willbe reduced(Income Tax) Applicable from 2006‣ The rate of tax credit will be reducedfrom 20% to 10%‣ The ceiling on the tax credit will bereduced from ¥250,000 to ¥125,000(Local Inhabitants Tax) Applicable from 2006‣ The rate of tax credit will be reducedfrom 15% to 7.5%‣ The ceiling on the tax credit will bereduced from ¥40,000 to ¥20,000Housing• The scope of old houses qualifying for specialtax treatments (such as tax credit forresidential mortgages) will be expanded toinclude certain old houses that satisfyanti-earthquake safety standards, irrespectiveof the limitation on the number of years fromconstruction (ie. 20 years for non-fire proofhousing and 25 years for fire-proof housing).Taxation of financial assets and stocks• Stocks held outside of security corporationsmay be deposited in a new type of specialaccount system by election (applicable forstocks the actual purchase price of which isavailable).• A new measure will be introduced to treat thebook value of stocks deposited in the newtype of special account system as capital losswhere the economic value of such stocksbecomes nil.International Taxation• Deductible period for dividends from foreignsubsidiaries whose retained earnings weretaxed under the anti-deferral rules forcontrolled foreign corporations (CFC rules)will be extended from 5 years to 10 years.Overseas companies, which mainly operate ina resident country and are effectivelymanaged there, will be allowed to deduct10% of their direct personnel expenses fromthe taxable retained earnings under the CFCrules.• Procedural requirement for interest taxexemption for non-resident holders of theJapanese Government Bond (JGB) will bestreamlined.• Capital gains derived from the sale of stocksor other comparable rights in a companywhich derives at least 50% of its value directlyor indirectly from real property in Japan willbe taxed in Japan.• Capital gains derived by a partnership fromthe sale of stocks or other comparable rightsin a company will be taxed in Japan, if thatpartnership holds 25% or more of the entireshare capital of the company and if italienates 5% or more of the entire sharecapital during the year.• Allocable income to a non-resident partner,which is earned through partnership activitiesin Japan, will be withheld at 20% tax rate on anet profit every year.

Decentralization• As part of the ‘three-part-reform’ (reforms ofsubsidies, local allocation tax and transfer oftax revenue sources from national to localgovernments), the carry out full-fledgedtransfer of tax revenue sources from IncomeTax (national) to Local Inhabitance Tax.• As a temporary measure, transfer ¥1,115.9billion as local transfer of income tax to localgovernments. (3/5 shall belong to prefecturalgovernments and 2/5 shall belong totownships and villages. Each localgovernment shall receive the transfer inaccordance with its population).(Human Investment tax credit)• A new tax credit (25% of the increasedamount of expenditure of corporations fortraining employees) will be introduced. Forsmall corporations, larger benefits will begiven.(Deduction for social insurance premiums)• For the purpose of applying deductions forsocial insurance premiums, it will be madeobligatory to attach a copy of national pensionpremium receipts when filing tax returns.SMEs and Entrepreneurships• Application of special tax treatment (tax oncapital gain will be reduced by half) forqualified sale of stocks of qualified ‘ventures’will be extended until FY2006 (‘Angel’taxation).Others(Promoting activities of non-profit makingorganizations)• The scope for qualified NPOs will be relaxed‣ Apply ‘public support’ through theaveraging of donations/subsidiesreceived in the past two years (currentlythe condition must be met in eachtaxable year).‣ Simplify documentation for applying thestatus as qualified NPOs and informationreporting obligations.• Increase the limitation of deductions fordonation under income tax (25% of taxableincome to 30% of the same).(Reference)** * *FY2005 Tax ReformTentative estimation of revenue changesimplemented by the reform in FY 2005(National)(Billion Yen)Reduction of the ‘across-the-board’ + 185tax creditHousing - 3Other discretionary measures- Corporations - 10- Individuals and others - 1Subtotal +171Local Transfer of income tax - 691Total - 520*Rounded figures and provisional estimation.(Restructuring of corporations)• When liquidation of a corporation under theCivil Rehabilitation Law or certain privatearrangements are conducted, the followingspecial treatments will be given to the debtorcorporation: (i) appraisal gain/loss of thecorporation shall be taxed/deducted and (ii)carry-over of loss of the corporation arisingfrom taxable years prior to the past 7 taxableyears (i.e. limitation for carry forward of loss)may be deducted against the taxable gains ofthe corporation from forgiveness of debts byits creditors.

Appendix I-11

Appendix II Summary of \ \\\ \ \ \ \ \ \ \ \\ \ \ \ \ \ \ \\ \\

the National Tax System \ \ \ \ \ \ \ \ \ \ \ \ \\

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the National Tax System

Appendix II Summary of

the National Tax System \ \ \ \

Appendix II Summary of \ \

the National Tax System \ \ \ \ \ \ \ \ \ \ \ \

Appendix II Summary of \ \ \

the National Tax System \ \ \ \ \ \ \ \ \

Appendix II Summary of

the National Tax System \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

Appendix II Summary of

the National Tax System\\ \ \ \ \

Appendix II Summary of

the National Tax System\ \ \ \ \ \ \ \ \ \ \

\Appendix III Summary of \ \ \\ \\ \ \\\\\ \

the Local Tax System \ \ \ \ \ \ \ \ \ \\ \\\\\

Appendix III Summary of \

the Local Tax System \ \ \\ \ \ \ \ \ \ \\ \ \

Appendix III Summary of \ \ \ \ \ \

the Local Tax System

Appendix III Summary of

the Local Tax System\\\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

Appendix III Summary of \

the Local Tax System \ \ \\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \

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the Local Tax System \ \ \ \ \ \ \\\\

Appendix III Summary of

the Local Tax System \ \ \\\\\ \ \ \

Appendix III Summary of

Appendix IV INCOME TAX BURDEN Income Tax Revenue Burden of Income Tax and Local Inhabitants Taxes

Income Tax threshold

Number of Taxpayers and Income for Various Classes of Income (2004) Wage Earners

Appendix V CORPORATION TAX BURDENShares of Corporation Tax and Income Tax in Total National Tax Revenue

Stratification of Corporations by Capitalization (2004)

Appendix VI INHERITANCE TAX BURDEN \\ \\ \\\\\\\\\ \\ \\ \\ \\

Appendix VII Revenue from National Taxes; FY1998 – 2006

REVENUE

Revenue from Local Taxes ; FY2003-2006

Appendix VIII ORGANISATIONAL CHART FOR THE MINISTRY OFFINANCEInternal Subdivisions, Ministry of FinanceMinister's SecretariatBudget BureauTax BureauDirector-General of theTax BureauCo-ordination DivisionResearch DivisionIncome Tax and PropertyTax Policy DivisionIndirect Tax Policy DivisionCorporation Tax PolicyDivisionDirector of International TaxPolicy DivisionCustoms and Tariff BureauDirector-General of theCustoms and Tariff BureauCo-ordination DivisionPersonnel DivisionTariff Policy and Legal DivisionEnforcement DivisionCustoms Clearance DivisionPost-Entry Examination andCustoms Area DivisionFinancial BureauInternational Bureau

Appendix IX ORGANISATIONAL CHART FOROrganization Chart of the NTA

NATIONAL TAX AGENCY (in FY 2005)Organization Chart of Regional Taxation Bureau (except Okinawa)Organization Chart of Tax Office