The issue of determining whether or not an item of income has been “paid” for withholding tax purposes, thus triggering the obligation to remit the taxes withheld to the authorities within an allowed time limit, is an issue common to all withholding tax systems.
Japanese tax law provides some, somewhat scant, guidance in this area as well as addressing the withholding tax that applies when a debt on which withholding tax would otherwise apply is waived.
Income Tax Law Article 183 and Tax Instructions 181-223
Income Tax Law (‘ITL’) Article 183 is the somewhat zen inspired provision concerning when an item of income is paid for WHT purposes. Article 183 states that WHT must be collected “…at the time of payment….” of the income concerned (in Japanese 「その支払いの際」). The taxes so withheld in principle should be remitted to the relevant tax office by the tenth day of the month following the month in which the date of payment falls. This article discusses the place of tax payment in these circumstances.
Meaning of “payment”
The meaning of “payment” in this context is interpreted by the ITL Tax instruction (‘TI’) which address principles common to ITL Articles 181-223. This Tax Instruction is also brief on the topic of the timing of payment, but explains that payment should be interpreted not only as including exchange of monetary assets but also the inclusion of interest into the balance of principle, the electronic transfer of funds from a deposit account of the debtor to the creditor and any other actions that result in the reduction of a liability owed to a creditor.
The Tax Instruction implies that actions such as offsetting or netting a payment obligation against amounts due or netting down intra-group receivables would likely be interpreted as being payment for withholding tax purposes.
One year rule
There are some exceptions to the above general rule that withholding tax arises at the time of payment. These rules accelerate the date WHT is due for certain defined liabilities that have been unpaid for one year. For example, an obligation to collate and remit withholding tax arises on the day stated for the cases below:
- Where a dividend remains unpaid one year, from the date that the obligation to pay the dividends was confirmed, then the day one year from that date.
- Where the bonus of a corporate officer remains unpaid after one year has passed from the date that the obligation to pay the bonus was confirmed, a WHT obligation arises on that date one year from the day the obligation to pay the bonus arose.
Withholding tax and debt release
The Tax Instructions also outline procedures to follow in the event of the release or waiver of a debt that would give rise to a withholding tax obligation when it was actually paid (for example, the waiver of a loan including waiver interest when that interest had not yet been paid in cash or through being compounded into the principal of the debt).
In the event that such a debt is released the withholding tax obligation arises to the Payor at the time such release is effective and the Payor is obliged to remit the withholding tax to the tax office according to the schedule outlined above.
However, in circumstances where the release of debt is made in circumstances where it is recognized that that the Payor has been unable to pay the payment of the debt and where the Payor has been in a position where its liabilities have exceeded its assets for an appropriate period of time, then to that extent the Payor is not obliged to impose withholding tax (tax instruction to ITL Articles 181-223).
Surrender by a corporate office of his right to receive payment of unpaid bonus
In addition to the above rule relating to withholding tax on the release of an unpaid debt for a payment on which withholding tax would otherwise apply, where a corporate officer of a company which has gone into corporate rehabilitation (or where similar special circumstances apply) from the point of view of reducing the losses to general creditors surrenders his bonus then, under these special circumstances, if withholding taxes are not collected and accounted for at the time of such surrender the tax authorities would not normally disturb such treatment (rule also from the same tax instructions above).