How Tax Audits Work in Japan: What Foreign Business Owners Should Expect
【Koshida Accounting Firm Column Date:】
” The politician’s promises of yesterday are the taxes of today.” － William Lyon Mackenzie King
Hi, my name is Taisei Koshida, and I am a certified public accountant as well as a tax accountant.
I aim to assist non-Japanese business owners who struggle with reading or writing in Japanese. If you find the Japanese tax return system challenging, I can help you with your tax filings.
If you are unfamiliar with how tax audits work in Japan, this article will explain the basic process, how often audits occur, and the situations that are more likely to attract the attention of the tax authorities.
1. Japan’s Self-Assessment Tax System
Both income tax and consumption tax in Japan operate under a self-assessment system, where taxpayers calculate their own taxes and submit them to the tax office. Tax audits are carried out to verify the accuracy of tax filings and ensure no errors.
2. How Often Do Tax Audits Occur?
For small business corporations, tax audits are usually conducted once every five to seven years. In the case of individual taxpayers, tax audits are conducted once every decade, or sometimes they may never occur at all.
3. Situations That May Trigger a Tax Audit
Tax audits are more likely to be conducted when there are significant fluctuations in the financial statements, as shown below.
When there is a rapid increase or decrease in sales.
When there is a rapid increase or decrease in profit.
Additionally, inconsistencies in the financial statements can trigger tax audits.
For example, when sales increase, but inventory decreases.
Or when purchases decrease but accounts payable increase.
4. Information Available to the Japanese Tax Office
In addition, the tax authorities collect a wide range of information on taxpayers. This includes data such as outsourcing fees, bank transactions, and other financial records submitted through various reporting systems.
Also, the tax authorities may, in practice, monitor businesses. For example, they may visit restaurants as regular customers and observe daily operations. This allows them to understand whether the actual business activities align with the reported figures.
If they notice anything unusual or inconsistent, they may review the information more closely. In some cases, this can lead to a tax audit.
For this reason, it is important to maintain accurate records and ensure that your accounting reflects the reality of your business operations.
This theme is continued in the following.
How are tax audits conducted in Japan? part 2
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