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What is a Blue tax return system for income tax purposes in Japan?

Blue tax return system in Japan is intended to improve accounting practices of taxpayers and encourage honest self-assessment. Those who maintain proper accounts as required under the blue tax return system are given certain privileges for tax purposes. Basically, there are two types of income tax returns which taxpayers can choose from: White Form or Blue Form. Blue tax return is usually preferable because it offers some extra tax benefits, including special deductions.

 

Blue tax return system for individuals

When sole traders start a business in Japan, they can take advantage of income deduction by filing an application form for approval of filing blue return. White filing is the default, so if you do nothing you are automatically considered as a White-form filer. The tax authority requires the following for the blue return taxpayer:

1. Filing the application form by March 15.
2. Filing the application form within 2 months of business commencement if taxpayers start a business after January 16 of the year.
3. Taxpayers are required to keep correct accounting records and journals.
4. The blue tax return must be filed together with the balance sheet, income statement, and other documents indicating the items necessary for calculating the income amount.

 

What is the tax merits for blue tax return filing status?

Once a taxpayer obtains approval, he or she is entitled to file a blue return for all subsequent years. If the taxpayers meet the above requirements, the blue tax return system provides the following benefits:

1. A deduction of up to JPY650,000 is available if the taxpayers keep double-entry accounting records, and attach the income statement and the balance sheet on the return.
2. A deduction of up to JPY100,000 is available if the taxpayers keep single-entry records for their business.
3. A net loss for a year can be carried forward to the next 3 years.
4. A net loss for a year can be carried back to the preceding year.
5. The taxpayer is allowed to treat the payment of wages as deductible expenses when it is paid to relatives living in the same household (family employees).

Please note that JPY100,000 is deducted from the taxable income for property owners. If they operate more than 5 houses or a building with more than 10 rooms, JPY650,000 is deducted. If you plan to apply for JPY100,000 deduction, you need to prepare a spreadsheet which includes the detailed amount of revenue, expenses and cash balance. Using accounting software is recommended when you apply for JPY650,000 deduction.

 

Blue tax return system for corporations

If the company has blue-form tax return filing status, tax losses can be carried forward and utilized against taxable income for the following periods:

①9 succeeding years – tax losses incurred in fiscal years ending on or after April 1, 2008 and beginning before April 1, 2018
②10 succeeding years – tax losses incurred in fiscal years ending on or after April 1, 2018

Submission of an application should be done by whichever is earlier, either 3 months from the establishment of the company or the end of the first fiscal year. Generally, corporations file the application for blue tax return filing status together with a notification of commencement of business establishment to the tax office.

VAT on real estate transactions in Japan

Japanese consumption tax is sales based tax applied on supplies on certain goods and services within Japan, and it is similar to VAT/GST in AUS. The sale or lease of an asset located in Japan is a taxable transaction, however there are some transactions which are specifically excluded from being taxable, such as the sale or lease of land. The current consumption tax rate is 8%, and this will increase to 10% on 1 October 2019.

If you have an investment property in Japan, or use a property in running a business, there might be implications for income tax (including capital gains tax), consumption tax, and other related taxes. Japanese taxation can be difficult to handle especially for foreigners. Click here for more information about Japanese real estate taxation. The following will further explain Japanese consumption tax on real estate in Japan.

 

Buying a property in Japan

There is an increasing number of foreigners purchasing real estate here in Hakuba, Japan, ever since Hakuba became well-known for one of the greatest ski resorts in Asia. In the past, the most common investments are from Australia, but nowadays investments coming from Asia, such as China, Taiwan, Singapore are rapidly increasing.

The sale of land is excluded from being taxable for consumption tax purposes, however, when you buy a house or flat, or when build, it is subject to consumption tax.

For example:
Price of a house:JPY40,000,00
Consumption tax :JPY3,200,000 (JPY40,000,000×8%)

Commission to an agent:JPY1,200,000
Consumption tax: JPY96,000(JPY1,200,000×8%)

 

Rent out a property in Japan

Some of foreign investors acquire a property for investment purposes, and such non-resident owners consider leasing their properties. Also, non-Japanese living in Japan look for ski resorts as investment opportunities, or purchase properties as their second home. Such Japanese resident owners may consider leasing their properties during their absence as well.

When you rent out a property, the following transactions are non-taxable for cumsumption tax purposes:

-Leases of land
-Rental of housing (residential purpose)

If you rent out a property for residential purposes, you should not receive consumption tax from lessee. If you receive rental income from a rental cottage, flat, hotel, office tenant etc., it is subject to consumption tax.

In principle, consumption taxpayer status is determined depending on the amount of domestic taxable sales in the past. If your domestic taxable sales is over JPY10M a year, you are required to file a consumption tax return to the tax office. The amount of consumption tax payable is calculated based on the net of (i) consumption tax received on domestic taxable sales minus (ii) consumption tax suffered on domestic taxable purchase. There is a possibility that you will receive a consumption tax refund if the purchase price is high.

The taxable period is the respective fiscal year for a corporate taxable person, and the calendar year for an individual taxable person. If you need more information regarding your tax obligation in Japan, please feel free to contact us. If you need our tax advice before asking tax preparation services, we would be glad to offer an e-mail consultation.