What is the tax levied on Japanese branches of foreign corporations?
As a result of the tax reform, since 2016, corporate tax has been levied on branches in Japan for income earned in Japan and abroad that attributed to the branch.
Corporate tax is calculated separately for income earned directly in Japan by the head office of a foreign corporation.
The details of the tax reform are as follows.
Taxation principal applied to a foreign corporation was changed from an “entire income approach” to an “attributable income approach,” in line with the OECD Model Tax Convention amended in 2010.
(Former) Entire income approach: Any income earned in Japan is taxable as the income of branch, regardless of attribution.
< New > Attributable income approach: The income earned in Japan and foreign countries attributed to Japan branch is taxable as the income of branch.
The domestic income earned by foreign headquarters had been declared together with the income of Japan branch, and the income earned in the foreign countries had been non-taxable even when it is attributed to Japan branch. However, the revised tax law provides that headquarters and branch should calculate their own taxable income independently including internal transactions, and branch have to declare its income regardless of the country where it is earned. Both of headquarters and branch have to prepare and maintain the necessary documents for clarification of nature and prices of internal transactions, such as contract and purchase order, so that the attributable income can be determined.
Since Japan branch is required to declare foreign income which is attributed to itself, it is allowed for branch to take a foreign tax credit to avoid double taxation.