This post gives an overview of the role of the “blue form tax return” in the Japanese tax system. A Japanese taxpayer becomes a “blue form” tax filer by submitting an election to the authorities and then maintaining their accounting records to an acceptable standard.
In theory the blue form tax return system is intended to encourage better record keeping and reporting by individual and corporate taxpayers by conferring certain benefits on the “blue form” tax filers. In practice many of the benefits from blue form filing status (such as the carry forward of tax losses) are fundamental to the Japanese tax system.
The blue form system is often the cause of great frustration to foreign investors given the strict deadlines for filing the required election and the not entirely uncommon assertion from the tax authorities during a tax audit that blue form filing status should be revoked. Revocation of blue form filing status could potentially give rise to severe financial loss and, certainly for regulated businesses, at a worse case revocation of relevant business licenses.
The blue form election for a company can be found here (in Japanese). Section (1) of the form asks the applying company to check the applicability and date of various matters such as whether a re-application for blue form status, whether being made by a newly established company, whether being submitted further to separation from a consolidated tax group, whether submited further to a corporate split, whether submitted further to rules relating to the ending of a consolidated tax group etc. Section 2 of the form asks for an outline of the system of accounting records held by the company.
Benefits from blue form filing status
Below is a list of some of the benefits arising from blue form filing status with cross references to the Japanese income tax law, corporation tax law or special taxation measures law (ITL, CTL or STML respectively):
- Benefits relating to calculation of income
- Inclusion of specified provisions in deductible expenses ITL52-54
- Inclusion of specified reserves in deductible expenses STML20-20 no 4, 22, 24 no 2, 55-57 no 9, 58, 61 no 2
- Special (increased) depreciation STML10 no 2-15, 42 no 5-52 no 3
- Shortening of years for depreciation of certain assets ITLEO 130
- Increased depreciation for plant and equipment ITLEO 133
- Special depreciation for worn out assets ITLEO 133 no 2
- Use of lower of cost and market value 低価法 for inventory valuation ITLEO 99
- Deduction of wages for certain specified workers (e.g sole proprietors) from business income ITL 57(1)
- Special provisions for timing of recognition of income and expenses for certain small scale businesses ITL67
- Recognition and carry forward of tax losses ITL70, CTL57
- Request for repayment on carry back of losses ITL140, 141, CTL80
- Special provisions relating to deduction of certain small assets acquired by small or medium sized businesses – STML 28 no 2, 67 no 8
- Benefits related to calculation of tax amount
- special tax credits – STML10-10 no 7, 42 no 4-42 no 11
- income tax credits, blue form tax return tax credits STML 23, 25 no 2, 59, 60
- Procedural, administrative benefits
- tax assessment can in principle not be issued without audit of financial records ITL155(1), 156, CTL 130(1)
- reasons for an assessment have to be included with a tax assessment ITL155, CTL130(2)
- direct appeal to tax tribunal is allowed Tsu 75(4)
Time limits, issues on completion and filing of blue form election
The blue form tax election is one of a number of forms that is typically prepared and filed when establishing a branch or company in Japan. The problem tends to be that law firms establishing Japanese companies do not routinely complete a blue form election and your accounting firm may not know this or may not have received the information required to complete the form in time for submission.
Time limits for newly established companies
Note (2)(1) gives the time limit for filing in order for blue form filing status to be effective in the financial year when an ordinary company or co-operative associations is established. The limit is the day one day before the earlier of the two following days: (i) the day within three months from the establishment or the company concerned; or (ii) the last day of the financial year concerned (note we are assuming that financial and tax years are the same in this discussion). As an example therefore, if you established your company on 20 December with a 31 December year end then you only have ten days until the end of the year to file the blue form election. Failure to meet these deadlines will defer blue form status from being recognised until an effective election is finally submitted, for instance in the following year. Accordingly it is essential to check that the firms establishing your company and doing your tax filings are meeting the deadline.
Application on leaving a consolidated tax group
Note 4 to the form lists some points to watch out for. One of these – 4(1) – points out that when an entity leaves a consolidated group it should reapply for blue form filing status and that time limits apply.
Revocation of blue form filing status
CLT127 lists grounds for revocation of blue form filing status. If these grounds arise in a particular tax year then the benefits of the blue form filing would be lost for that year and succeeding years. This is the case even if, for example, the fact that such grounds existed was not found until some years after the year the grounds arose perhaps as a result of an audit or similar examination of the records of the company. If in the years for which blue form status is revoked a tax loss had arisen that had been relieved against taxable profits of later years such a loss would be revoked (along with the loss of other blue form benefits) giving rise to potentially serious financial consequences.
Possible grounds for revocation of blue form filing status include, in summary:
- the access, recording or preservation of financial records is not in accordance with the requirements of the relevant ministerial orders
- types of financial records have not been kept in accordance with the directions of the relevant head of the tax office having jurisdiction
- there are sufficient appropriate reasons exist to doubt the reliability of the whole of the recorded items in the financial records on account of the concealment or disguise of all or some part of the transactions from the financial record concerned
- the final tax return (or liquidation tax return if applicable) has not been submitted within the time limit allowed
There is clearly an element of subjectivity in some of the above grounds. Taxpayers should ensure that their records are in good order AND provided promptly to the authorities on audit to prevent the possible loss of blue form status being raised as an issue in a tax audit.