Japan operates a self-assessment tax system: taxpayers calculate their own tax and file their own returns, and a tax examination is the procedure by which the tax office verifies that a filed return is correct — what many English speakers would casually call a tax audit. Examinations are, in principle, conducted on a voluntary basis with the taxpayer’s cooperation, although examiners have statutory authority to ask questions and inspect books and records.
How examinations begin, and the periods examined
A field examination generally begins with advance notice. The taxpayer — and the tax agent or tax representative, where one has been appointed — is notified in advance of the date, time and place of the examination, its purpose, and the taxes and periods to be examined. An examination typically covers the most recent three years. Where underreporting or a failure to file is suspected, it may extend to five years, and where deception or other wrongful conduct is involved, to seven years.
Common issues for foreign owners
What issues, then, tend to arise in an actual examination? Taking as an example a foreign owner who leases out real estate in Japan, the points below are raised with some frequency:
- Unreported rental income (non-residents often assume, incorrectly, that withholding at source settles their Japanese tax obligations);
- Errors in allocating the purchase price between land and building, and in depreciation;
- Rent paid to the non-resident owner without the required 20.42% withholding — an obligation of the paying side, but a point that surfaces in the owner’s examination as well; and
- The scope of deductible expenses (travel to Japan, expenses of a household or personal nature, and so on).
These are areas where mistakes occur easily, because the Japanese rules are in some respects unique to Japan and in others simply different from those of other countries.
Additional taxes if a return is wrong
If a filed return is found to be incorrect, additional taxes — such as the additional tax for understatement and the heavy additional tax — and delinquent tax are imposed on top of the principal tax. Where no return was filed at all, the additional tax for failure to file is 15% as a rule, with higher rates applying to amounts above certain thresholds, so the burden is not insignificant.
Where the examination identifies errors, the taxpayer is first encouraged to file an amended return; if the taxpayer does not, the tax office issues a reassessment or determination. For taxpayers who cannot accept the findings, formal appeal procedures are available as a remedy.
As day-to-day preparation, it is effective to keep the source documents underlying your returns — purchase agreements, lease agreements, remittance records, statements from your property manager — organised at all times.
Who may represent you in an examination?
Finally, tax representation, including attending a tax examination on a taxpayer’s behalf, is work that the law reserves to certified tax accountants (zeirishi) and tax accountant corporations. A property manager or an acquaintance cannot deal with the tax office in your place. If you receive notice of an examination, organise your records for the periods concerned and consult a tax accountant at an early stage.
Received notice of a tax examination?
We support taxpayers before and during Japanese tax examinations, including foreign owners of Japanese property — by email.
Every enquiry is read and answered personally by the principal — first reply within 3 business days.
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