Tax treatment that varies according to the tax and method of overseas expansion

If you expand your business overseas, the taxation method will be different from when you do business only in Japan. Pay attention to where you pay taxes, tax treatment, and so on, which may vary depending on how you enter your country. Looking at overseas, we have to consider the tax laws of Japan and the host country, as well as a tax treaty to adjust the taxes of both countries. Let’s check the payment method and tax treatment of the tax which should be suppressed in overseas expansion.

Taxes that vary depending on overseas locations
Taxes that vary depending on how you do business overseas
Points of taxation and reduction overseas
Summary

Taxes that vary depending on overseas locations

What I want to be careful about the tax problem when I go abroad is that the tax system and tax rate differ from country to country. It depends not only on the tax system in Japan and the destination, but also on which country you are going to advance. When you expand your business overseas, you need to check the laws of your country and the tax treaties you have concluded with that country. Tax treaties preempt the country’s laws, eliminating double taxation and preventing tax evasion.

A tax treaty is a bilateral treaty between Japan and the other country, and the contents are discussed depending on the economic situation of each country. Therefore, the contents vary from country to country, and the scope of application varies. In addition, there are countries that have not concluded a treaty, and in such a case, there are no relief measures and the tax system may be disadvantageous.

Taxes that vary depending on how you do business overseas

When it comes to overseas expansion, many people think of direct investment, which involves opening branches overseas and working with the head office to carry out business. However, export and import is one of the ways to expand overseas, and direct investment is not the only way to expand overseas. And depending on how you expand your business overseas, the tax payer and the kind of tax you have to pay will be different.

Taxes on exports

One way for Japanese companies to expand their business overseas without having a branch office is to export Japanese products to overseas companies. This is a less risky and less costly way to expand overseas.

As for taxes, since we do not have a branch office or a branch office locally, we basically only pay corporate tax in Japan for profit.

Tax on sales of own products through branch offices

If you have a branch office, you have to pay local corporate tax for the sales profit there. In addition, since Japan’s tax is based on “global taxation” which taxes the profits gained in all over the world, a corporation tax is also imposed in Japan.

This is called double taxation, and the way to avoid it is “foreign tax credit”. You will be charged double tax on the same profit, so you will be able to deduct a part of the tax levied abroad.

Taxes when a subsidiary sells its goods

When a subsidiary is established, the head office and subsidiary are separate entities. Therefore, the head office pays taxes to Japan, and the subsidiary pays corporate taxes to the country in which it was established. The headquarters and subsidiaries are a group, but the income can be spread as a separate company and the risk is also spread.

However, withholding tax and other administrative tasks tend to be complicated, and expenses cannot be recorded even if the company withdraws in loss.

Taxes when a subsidiary purchases and sells goods from its parent company

In cases where a subsidiary purchases goods from its parent company in Japan and sells them, there is a possibility of tax evasion due to differences in tax rates, and “transfer pricing taxation” is applied to prevent this. In addition, in Japan, tax havens may be taxed if a subsidiary is established in a less taxed country.

Establishment of a representative office prior to overseas expansion

When we expand our business overseas, we sometimes send a representative to the site for preliminary research and preparation. Until the start of the overseas business, the expatriates often visit the site to select local partners, negotiate, and conduct field surveys. These resident missions are basically tax-free because they are not profitable facilities.

Points of taxation and reduction overseas

Basically, both in Japan and overseas, the points to be taxed are “Were there any sales activities?” and “Whether there was a profit or not”. Even if you have an overseas office, you don’t have to pay tax if you are not doing business. On the other hand, even if you do not have a base, you may be taxed locally if you provide services by dispatching employees from Japan.

In addition, when establishing a branch office, or subsidiary overseas, the taxation method differs depending on whether the company is a corporation or not, so it is necessary to choose how to develop the business based on the company’s management situation. When overseas branches and offices are established, they are not independent as corporations, so they are taxed by adding up the income of the head office and branches and offices in Japan.

Subsidiaries, on the other hand, are taxed locally independently. Therefore, if there is a loss at a branch, it can be combined with the head office to reduce taxes. As a result, we need to change our strategy so that we can develop our business as a branch office when it is difficult to make a profit, and then make it a subsidiary after making a profit.

Summary

In order to expand overseas, it is necessary to examine the contents of each country’s tax system and tax treaties and make a careful judgment whether there will be any disadvantage in transactions. Learn about the contents of treaties and tax rates in each country, and proceed with the plan while paying attention to the differences in taxes depending on how you enter the country.