Outline – Japanese tax interest and penalties
This post discusses types of interest and penalties – or futaizei/f付帯税- under Japanese tax law. there is a wide range of different tax penalties in Japan with rather confusing and overlapping names similar economic functions. Also, in contrast to UK or US tax practice, penalties and interest cannot be mitigated at the discretion of the tax authorities although mitigation is available in certain prescribed circumstances under the law (such as destruction of records owing to natural disaster – see the comments under each section). Also under some circumstances the economic impact of the interest and penalties can be disproportionate to a subjective assessment of the wrong doing in the facts and circumstances that gave rise to the penalty. For example, penalties may still be very material if you are a day late compared with being a year late with filing your return.
The imposition of futaizei is governed by the kokuzei tsuusoku hou/国税通則法. This law establishes principles common to the other tax laws such as the income tax, estate or corporate tax law. Note that in this respect Japanese tax law resembles the German tax law system in establishing separate laws for each tax with one common set of principles.
- Entaizei/延滞税 – Tax Extension Charge – based on an interest style calculation and imposed when legal obligations for filing and tax payment have not been met
- Rishizei/利子税 – Interest – charged when tax filings and payments have been made in accordance with legal obligations but where extension of time has been allowed for payment. Interest is still paid based on the due date before extension of the filing time limit in these circumstances.
- Kashou shinkoku kasanzei/過少申告加算税 – Insufficient Return Penalty
- Mushinkoku kasanzei/無申告加算税 – No Return Penalty
- Funoufu kasanzei/不納付加算税 – No Payment Penalty
- Juu kasanzei/重加算税 – Heavy Penalty
Outline of entaizei
Entaizei is a time based charge for late payment of tax. Under the kokuzei tsuusoku hou it is charged at a rate of either 7.3% or 14.6%, but from 2000 onwards the STML introduced a measure to substitute the rate of 7.3% (but not the 14.6%) for a more reasonable rate. Where a 7.3% rate would normally apply the STML allows the use of the higher of 7.3% or the Bank of Japan lending rate on the last day of November of the previous year plus 4%. Given Japanese rates have been less than 1% for recent years the rate of entaizei has varied between 4.5% and 4.7% between 2000 and 2009.
Circumstances when entaizei can arise
Entaizei can arise on:
- Taxes payable by return submission (申告納税方式による国税/shinkoku nouzei houshiki ni yoru kokuzei). This covers most corporate, income, consumption and some other taxes. Entaizei may arise when returns are submitted within the legal time limit but complete payment is not made by the time limit for payment or when taxes are payable for late returns, amended returns or as part of the kousei or kettei (assessment or determination) process.
- Taxation further to determination by the revenue authorities (賦課課税方式による国税/fukakazei houshiki ni yoru kokuzei). This covers certain specialized taxes and situations such as such as imports by post etc. Entaizei applies when tax notified as due is not paid by the legal time limit.
- Late payment of advance income tax payments (予定納税による所得税/yotei nouzei niyoru shotokuzei). Income tax payers who have significant amounts of income that is not taxed at source (e.g. perhaps from annual awards of overseas stocks, options etc) may have to pay advance estimated income tax payments was notified by their tax office.
- Late payment of withholding tax due at source (源泉徴収による国税/gensen cyoushuu niyoru kokuzei)
As a general rule Entaizei is charged at the lower of 7.3% or the base rate + 4% (explained above) for up to two months from the legal date of payment of tax (houtei noukigen/法定納期限houtei noukigen) with the rate then increasing to 14.6%. In practice this means that the 14.6% rate will tend to apply only once the tax due has finally been determined (e.g. by filing a revised assessment, assessment or determination) and two further months have passed as a grace period for paying the required tax. Entaizei at the lower rate would likely apply from when the tax concerned was first due.
Mitigation of entaizei
One of the purposes of entaizei is to help ensure fairness between taxpayers who do not comply on a timely basis with their tax obligations and those that do so comply. Given this underlying intent it is not possible for the tax authority to apply any discretion in mitigating a charge to entaizei but only to mitigate the charge according to the limits prescribed under the tax law. Entaizei can also be exempted or mitigated under certain special provisions allowing postponement of taxes, for example on abandonment of a business. Back to types of interest and penalty
Rishizei arises when an extension has been given to tax filing deadlines, filing is made on a timely basis but payment is later than the due dates that would normally apply without the extension. The rate is currently the lower of the central bank rate plus 4% and 7.3% (i.e. the same as entaizei). Special rates other than 7.3% also apply to the postponement of tax payments for inheritance and estate taxes. In practice whether you are paying rishizei or entaizei is very much an academic question. Back to types of interest and penalty
Penalties overview – 加算税/kasanzei
Penalties for Japanese tax purposes are collectively referred to as kasanzei. They apply when tax returns have not been submitted by required deadlines or not submitted correctly and have the nature of an administrative sanction. The following penalties apply:
The insufficient return penalty applies to additional tax payable on submission of a revised return (修正申告/shuusei shinkoku) or on a tax assessment (更正/kousei). It also applies if an excess tax repayment request has been made which is subsequently corrected. The rate of the penalty is 10%. However if the additional tax is greater than the higher of JPY500,000 or the tax first reported (i.e. effectively if additional taxes paid are greater than taxes first reported with a de-minimus exclusion) then an additional 5% penalty applies to make the total 15%.
Mitigation of Insufficient Return Penalty
”Appropriate reasons” concerning the facts on which the tax calculation is based can mitigate this penalty, however the application of this method of mitigation is much more limited than it may at first sound. Such “appropriate reasons” may not just be related to the responsibilities of the taxpayer but be objective reasons that, when looking at the reasons for the imposition of the penalty, mean that it would be unjust or unreasonably strict. (最一判平成18.4.20・民集60巻４号1611). An example would be preparing a return based on a publicly distributed tax interpretation (such as a tax office instruction) what was subsequently revised, giving rise to the need to revise a return and pay additional tax. Furthermore, the onus of proof that “appropriate reasons” exist is on the taxpayer.
A rare case where mitigation was granted for “appropriate reasons” was where a taxpayer, who was a travelling official of the local court Japanese court system, deducted his costs of travel and lodging from his total income under the guidance of his local tax office.
There are plenty of cases where mitigation of penalties has been denied because reasons put forward for mitigation are not “appropriate reasons”:
- An owner of a drive-in made cash payments to the drivers of sight-seeing buses for brining them to his premises. Although interpretation of the nature of these payments for tax purposes was difficult, they were treated as entertainment and disallowed. Penalties where not mitigated.
- Reasons for an incorrect tax return was inappropriate acts (e.g. fraud or similar) by a director of the company who was also in charge of its accounting.
- Capital gains were under-reported by a taxpayer after discussion with the tax authorities consultation office. However the taxpayer was held not to have provided sufficient information to the tax office, hence there were no “appropriate reasons” to mitigate the penalties.
Submission of revised return where possible assessment is not known in advance Where a taxpayer files a revised tax return under their own volition without having any expectation of tax examination then penalties can also be mitigated. The onus of proof to show that there was no such expectation is on the taxpayer. Back to types of interest and penalty
This penalty applies when either (a) a return is filed or a determination of tax payable (kettei/決定) is made after the appropriate time limit; or (b) when an amended tax return or assessment (kousei/更正) is made on such a return.
The rate of penalty is 15% of the tax that should be paid. However when such tax exceeds JPY500,000 then a further 5% penalty applies.
Mitigation of the No Return Penalty is possible with similar grounds to those stated above for the Insufficient Return Penalty (i.e. where there are “appropriate reasons” or where possible additional assessment is not known about in advance). However in this case Insufficient Return Penalty can still apply. Also, under very limited circumstances, where there was an intention to file a return but the return was filed late, the No Return Penalty can be mitigated . However these circumstances are so limited it would be very unwise to rely on them. In particular if a return is filed late but:
- It is still filed within two weeks of the required deadline; and
- the taxpayer has paid no No Return Penalty for tax returns for the previous five years; and
- taxes required by the return had already been paid in full by the relevant required legal deadlines for the taxes concerned (which may well have been before the due date of the return itself)
…then the No Return Penalty may be mitigated. Back to types of interest and penalty
The No Payment Penalty seems most likely to be imposed on a taxpayer who was required to withhold taxes at source (for example withholding taxes on royalties or interest payments) but failed to correctly withhold and was subsequently required to pay the taxes to the tax office on audit or similar.
The rate of the penalty is 10%. Mitigation of the tax is possible when “appropriate reasons” apply (see discussion under entaizei above) or when there was an intent to pay the taxes within the legal time limit, no notification of the payment requirement has been received and payment is made within one month from that limit.
More realistically, mitigation from a 10% to 5% penalty is possible where payment is made after the time limit but before notification of requirement to pay from the tax authority (e.g. as a result of an audit) is made and where there was no expectation that an audit would take place. See the discussion under the Insufficient Return Penalty as similar considerations apply. Back to types of interest and penalty
Heavy Penalty Tax is in summary intended to apply to cases where taxes are underpaid owing to concealment or deception.
The rate of Heavy Penalty Tax is 35% for cases where a tax return has been filed and when an Insufficient Return Penalty would normally apply but where concealment or deception was involved in the calculation of the National tax due. Where no tax return has been filed the penalty rate is 40%. Where concealment or deception is involved in imposing a No Payment Penalty the rate is 35%.
An important point to note is that it is not necessary for the tax authorities to prove intent on the taxpayer’s part in order to impose the Heavy Penalty Tax but merely to show that, on an objective basis, concealment or deception occurred. Where intent is involved criminal penalties may additionally apply (see below).
Examples of concealment and deception
Concealment may consist of maintaining two sets of accounting books, excluding sales items or including fictional costs. Deception may involve using a nominee account, making false statements or similar. Examples from public cases include:
- Not reporting income from sale of land but instead recording the proceeds in a deposit account in a nominee name
- Backdating a sales and purchase contract and notices of a directors meeting in order to exempt gains from taxation
- Using an arbitrary value as cost of acquisition when calculating gains on disposals of assets (this also involved the use of a nominee name)
Heavy Penalty Tax and criminal responsibility
The imposition of Heavy Penalty Tax is a severe administrative sanction implying serious wrongdoing. One academic question that has been raised is whether the imposition of both the Heavy Penalty Tax and criminal proceedings is unconstitutional given the same offence should not be punished twice. Court cases have, however, found that the imposition of the Heavy Penalty Tax, while being a serious administrative sanction, can be clearly distinguished from anti-social or immoral acts that would be the subject of criminal prosecution. Accordingly the imposition of Heavy Penalty would not prevent further criminal action against certain types of tax related wrong-doing. Back to types of interest and penalty