Terrie's Take 974 - Japan's Hidden Corporate Taxes, e-biz news from Japan
terrie at mailman.japaninc.com
Mon Dec 17 22:05:04 JST 2018
* * * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
General Edition Sunday, Dec 16, 2018, Issue No. 974
- What's New -- Japan's Hidden Corporate Taxes
- News -- DeNA extends free papers idea to free taxis
- Travel Picks -- Korea Town in Shin-Okubo, Imai-cho in Nara
- News Credits
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+++ Japan's Hidden Corporate Taxes
Over the last couple of weeks, we have been heavily involved in the
implementation of an ERP system for our business, with the focus being
on defining processes and costs. It's been eye-opening because of the
need to load the system with fresh rules and tax data reflecting the
core numbers the company is required to pay in order to operate in the
"Land of Wa". Of course as a manager in a business, you are always
looking at the monthly P&L and the taxes and levies therein, but with
all the noise and distractions of managing others, somehow your
awareness of the tax burden takes a backseat. However, once you list
the numbers and the many tax types up, it does hit you with a jolt.
Japan has a long list of direct taxes and pseudo taxes, coupled with
the administrative drag of having to fulfill them - time-wasters like
having to render monthly reports to the Justice Ministry when foreign
employees leave the company, end-of-year HR reports to the Labor
Standards office, and the manual tax filings (yes, there are now
electronic tax filings available, but small companies prefer paper as
the electronic versions are viewed with suspicion and stricter
assessment by the Tax Office). Everyone knows that Japan is a high-tax
country, and one that probably misspends much of its tax take on
administrative boondoggles and subsidizing failed companies. But at
least as a nation we can can get medical treatment at a manageable
price, we are not financing military adventurism abroad (yet), and we
can count on a subsistence income when we retire.
And yet, in reviewing the tax burden numbers for the ERP job, we
became curious about how Japan fares in comparison with other
countries. In particular, how does Japan shape up not just for
corporate tax, but the social taxes that come with employing people?
The official corporate tax rate in Japan varies with a number of
factors, such as the number of employees, the capitalization of your
business, and where you are located (e.g., Tokyo is the highest taxing
location). The Japanese corporate tax (Corporate + Enterprise tax on a
large corporate) is 29.9%, which doesn't sound too bad, and in fact
places the country at No. 6 in the OECD tax level rankings. But then,
when you look a bit deeper, as you will find at the JETRO website,
you'll discover that this low-end number is for the basic national
taxes, and ignores the various local taxes and taxes-on-taxes that
apply to all companies. As the JETRO site points out, the typical tax
burden of a mid-to-large-sized corporation is more like 36.81% -
putting Japan at about 160% more tax than most OECD nations (yes,
excepting the U.S. and Germany, which are higher).
http://bit.ly/2QE4ShB [JETRO's tax page]
But it doesn't end there. For political reasons after the War, the
government introduced the concept of worker-supporting taxes, and
chose to label them "insurance" - today called Social Insurance
("shakai hoken"). These pseudo taxes are what puts Japan close to the
top of the tax league table, just under such famous snowy
jurisdictions as Sweden, Norway, and Denmark. Unfortunately what
started off as insurance, and a discretionary one at that, has now
morphed all but in name into a tax. As a result, after consumption
tax, these social welfare contributions are the fastest-growing source
of tax revenue for the bureaucrats in Kasumigaseki. Why? Because as
companies move away from manufacturing, their labor costs as a
percentage of overall corporate costs soars. In contrast to 30 years
ago, today's average start-up is a service company with labor costs
reaching 60%~80% of revenues. If this sounds too high, just keep in
mind that most Japanese companies eke out 10% or less profit before
tax. So there is still 10%+ in those costs for rent, equipment,
consumables, etc. In fact, the average EBIT profit for Nikkei listed
companies last year was paltry 7.8%, and for most private companies -
the EBIT is negative (more on this below).
[Article continues below...]
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So if you add the social taxes to the corporate taxes, you get a
corporate tax level of nearer 50%. How did we get that number? Well,
if your social insurance is 15.775% (our's is this) of personnel
costs, which in turn are 80% of your revenues, you get an adjusted
social insurance cost of 12.62% (of revenues). Either way you look at
it, 50% is a big tax bite. And that doesn't include the
"almost-compulsory" home-work commutation and other allowances that
employees in Japan expect as a right.
In addition to the corporate taxes and shakai hoken, you also have
taxes involved in the ordinary course of doing business, such as
buying and selling company vehicles and equipment, buying and selling
real estate, and similar investments and divestments. The World Bank
has done a great job of capturing many (but surprisingly not all) of
these transactions into a "Cost of Doing Business" ranking for all the
major countries of the world. According to them, Japan ranks No. 39
out of 190 countries for cost of doing business, with the category of
"ease of paying taxes" coming in at 97th place. According to them,
after adding up a "standardized" medium-sized company (60 people,
making 20% EBIT profit margin), Japanese companies on average would
pay out about 46.7% of their profits in taxes. If you ask us, this is
actually an optimistic scenario, given that more than 70% of Japanese
companies made no profits last year!
Still the World Bank numbers are useful, because:
a) The bank makes an attempt to capture all aspects of the tax and
social benefits burden - for a complete picture.
b) We get to compare that same meticulous methodology with other countries.
And what you can learn from the World Bank approach in interesting.
Here is Japan compared to other regional economies that a foreign firm
might see as an alternative location to set up in here in Asia:
* Japan - overall No. 39 for doing business as an average ongoing
profitable SME, No. 93 for starting a company! And No. 97 for paying
taxes! Actual taxes as a % of profits, as mentioned above, is 46.7%
* S. Korea - No. 5 for doing business, No. 11 for starting a company,
and No. 24 for paying taxes. Taxes as % of profits - 33.1% (much more
* Taiwan - No. 13 for doing business, No. 20 for starting a company,
and No. 29 for paying taxes. Taxes as % of profits - 34.6%
(surprisingly low tax rate, considering their national infrastructure)
* HK - No. 4 for doing business, No. 5 for starting a company, and No.
1 for paying taxes. Taxes as % of profits - 22.9%
* Singapore - No. 2 for doing business, No. 3 for starting a company,
and No. 8 for paying taxes. Taxes as % of profits - 20.6% (any wonder
why all the foreign corporations use Singapore as their Asian base?)
* China PRC - No. 46 for doing business, No. 28 for starting a
company, No. 114 for paying taxes. Taxes as % of profits - 67.7% (ok,
China's rates are the most horrible, we were just interested how
Here is how Japan compares with some other leading OECD economies.
* Japan - No. 39 for doing business, No. 97 for starting a company,
and No. 97 for paying taxes. Taxes as a % of profits - 46.7%
* Australia - No. 18 for doing business, No. 7 for starting a company,
and No. 26 for paying taxes. Taxes as % of profits - 47.4% (high tax
rates, but much easier to run a business there)
* USA - No. 8 for doing business, No. 53 for starting a company, and
No. 37 for paying taxes. Taxes as % of profits - 45.7%
* UK - No. 9 for doing business, No. 19 for starting a company, and
No. 23 for paying taxes. Taxes as % of profits - 30%
* Germany - No. 24 for doing business, No. 114 for starting a company,
and No. 23 for paying taxes. Taxes as % of profits - 49% (whoa!)
* Sweden - No. 12 for doing business, No. 18 for starting a company,
and No. 27 for paying taxes. Taxes as % of profits - 49.1% (not so
much higher than Japan, but with much better benefits)
To see more on the World Bank figures, you can find their website here:
http://bit.ly/2URpAJ6 [World Bank website]
The take away on this thought exercise is that as the Japanese
government gets ready to punch consumers with yet another rise in
Consumption Tax (8% -> 10%) in October next year, you have to ask what
on earth they are doing to encourage more start-ups to broaden the tax
base? The real cost of starting and doing business in Japan is one of
the most prohibitive in the developed world, and is becoming
increasingly more so. Yes, the government decided last year to drop
the tax rate for some companies down to 23%, but only for the big boys
with factories and significant numbers of workers. So the little guys
continue to get crushed under uneven tax and regulatory burdens. It's
no wonder then, that few founders of startups in Japan employ staff if
they can help it, and instead either automate, stay small, or create
an off-shore production to reduce the crippling costs here.
Per the World Bank numbers, Sweden and Germany appear to have harsher
tax rate than Japan, but we wonder if the bank hasn't left out some
numbers that would then push Japan's tax rate even 1%~2% higher? For
example, nursing ("kaigo") surcharges for employees older than 40 and
the recent child-rearing surcharge. If so, that means Japan comes in
spitting distance of the two worst-taxed countries in the developed
world. And within Asia, well who in their right minds would choose
Japan on a purely numbers basis over HK, Taipei, Seoul, or Singapore?
Only PRC China looks worse.
OK, Japan does have relatively clean air, so that is one ameliorating
factor, and unless you're a fossil fuel producer that isn't taxed yet.
Lastly, our apologies for the late delivery of the Take today. The
fact-checking of tax rates turned out to be more trying than we first
imagined, especially since different authoritative sources each have
their own definitions of what is an "effective" tax rate and what is
not. But now that is done, we feel we've earned a couple of weeks off
for Christmas/New Year. We wish all of our readers a relaxing year-end
and we will be back with our 2019 Predictions on Sunday, January 13th.
...The information janitors/
- So you got cancer? Get back to work!
- Namahage characters win UNESCO listing
- DeNA extends free papers idea to free taxis
- Waste paper - the boom before the bust
- i-kasa, an umbrella rental business
=> So you got cancer? Get back to work!
A recent health ministry survey has found that 82% of cancer and heart
patients around the country continued doing remote work for their
firms even as they were hospitalized and receiving treatment. An
astounding 91.1% of patients at least had their smartphones by their
beds and were taking work-related calls. Others who were more able,
had their PCs at the hospital and would work from common spaces around
each facility. ***Ed: Addiction to work? Or optimism that the cancer
treatment was temporary? Either way, this gives you a pretty good idea
how difficult it's going to be for the government to introduce the
concept of work-life balance. Work is the purpose for living for many
Japanese. Our take is that peer group pressure and a lack of any other
real purpose in life is mostly to blame for this state of affairs. To
fix it, a generation of reeducation is required.** (Source: TT
commentary from kyodonews.net, Dec 16, 2018)
=> Namahage characters win UNESCO listing
One thing the Japanese tourism authorities are good at is getting
places and things listed with the U.N., in order to boost attention to
some of their less well-known tourism assets. This time around it's
Namahage, the demons who go around from house to house in Akita
calling out if there are any crying kids (if there are, they threaten
to eat them, or at least tell them off). Kind of sadistic practice,
but the demon costumes themselves are amazing and certainly worth
traveling a couple of hundred kilometers to go see. ***Ed: This is the
kind of attraction that rural Japan needs to capitalize on and create
choreographed performances for.** (Source: TT commentary from
mainichi.jp, Dec 16, 2018)
=> DeNA extends free papers idea to free taxis
You can't keep a highly profitable internet company down, and in this
case, the ad-supported business idea may not be so dumb. DeNA is
operating a fleet of 50 taxis which are free for registered users. The
cars are available from 07:00 to 22:00 and to get one you have to have
installed DeNA's ride hailing app. DeNA thinks it can cover the cost
of the cabs with advertising, just like a free paper, and is planning
to plaster its fleet both inside and outside with corporate messaging.
The first sponsor is Nissin Foods, the ramen company. ***Ed: Actually
this could really take off. Moving billboards in Tokyo sell for up to
JPY1m per month, and DeNA could argue that its cabs will get more
attention (both inside and outside) than a billboard truck.** (Source:
TT commentary from the-japan-news.com, Dec 08, 2018)
=> Waste paper - the boom before the bust
These are interesting times for the waste paper traders. On the one
hand, the Chinese government has said that it will end the import of
solid waste by 2020, and yet on the other hand, the demand for
cardboard boxes there is at a record high thanks to online shoppers -
and Japanese waste paper is a vital part of the supply chain.
Apparently Japan shipped about 1.1m tons of scrap paper to China in
the first 9 months of 2018. Accelerating the trend to using Japanese
waste paper is a 25% surcharge on U.S.-sourced waste. The current
import allowance for all of China is 18m tons, which is still
substantial, and as a result, the cost of waste paper in Japan is at a
record high. ***Ed: So if you wonder why your paper is gone at 07:00am
each recycling day, even though the city garbage guys come later in
the morning, it's because the waste paper guys got in first.**
(Source: TT commentary from asia.nikkei.com, Dec 15, 2018)
=> i-kasa, an umbrella rental business
At JPY350 for a cheap umbrella, and JPY500 for a more robust one,
available at any convenience store, you might have thought there is no
need for an umbrella rental service. Nonetheless, a start-up called
Nature Innovation has stepped into the market with just such a
service. You pickup and return your umbrella at any one of 50 "i-kasa"
locations around Tokyo. Each location has about 40 umbrellas available
for the compelling price of JPY70/umbrella rented through LINE. The
app behaves similarly to a share bike service, whereby you log in to
find the nearest i-kasa point, then use it to scan the QR code on each
umbrella. ***Ed: We can think of lots of things that might go wrong
with this service, not least of which that when it rains, you have to
dash through the rain to get to the i-kasa pickup point. Once there,
you're likely to encounter a lot more than 40 people fighting over the
last couple of brollies left. And when it doesn't rain, there will be
no business - perhaps for days on end. On the other hand, you can
certainly run a lot of sponsor ads on an umbrella.** (Source: TT
commentary from timeout dot com, Dec 13, 2018)
NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.
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No upcoming events this week.
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=> No corrections or feedback this week.
+++ TRAVEL DESTINATIONS PICKS
=> Tokyo's Korea Town: Top 10 Things to Do in Shin-Okubo
Japan’s Korea Town is located in Shin-Okubo, near Shin-Okubo Station,
on the Yamanote Line (JR). It's not just for those obsessed with the
pretty faces of the Korean Pop world, but instead is a small, vibrant
area that boasts a ton of street food, karaoke, markets, restaurants
and bars that show off the South Korean vibe and way of life. Our top
10 things to do there are:
1. Street Food - cheap, plentiful and super tasty.
2. Korean-Style Barbecue - get ready for a lot of meat.
3. Fried Chicken - highly recommended!
4. Korean Karaoke/Clubbing - "Bar Blue" has K-Pop nights, with a cover
charge of JPY2,000 (women) or JPY3,000 (men).
5. Markets - more Korean cooking (and drinking)
6. Korean Bars - ever been to a Korean “Boyfriend” or “Girlfriend” bar? Naughty.
7. Cosmetics - you’ll find tons of face masks, lotions, and makeup -
with plenty of testers to try stuff out.
8. K-Pop Shops - more than 10 specialty shops lined from wall to wall
with K-Pop paraphernalia.
9. K-pop Cafe - enjoy coffee, a parfait or cake while watching and
listening to K-Pop.
10. Meet a K-Pop Boy/Girl - check out the bands and their fans, who
hang out on the street passing out advertising fliers for their
=> Introducing Historic Imai-cho, Nara
A merchant town born in the cross-fire of history
A living town with 500 Edo Period merchant houses is Kashihara City’s
best kept secret! If you like the machiya of Kyoto and the old streets
in Takayama, then Imai-cho will charm you for sure. Imai-cho got off
to an interesting start. At the end of the Period of Warring States
(1467-1600), the most powerful warlord at the time, Oda Nobunaga,
tried to unify the country. The warrior-monks of Ishiyama Honganji,
who opposed the role of feudal lords, attacked Nobunaga. The Imai
residents participated in the attack under their leader, a man by the
name of Imai Hyobu. Needless to say, this incurred Nobunaga’s wrath.
Luckily, it did not come down to a fight, though, as Imai-cho wisely
surrendered and disarmed, and in return it was not destroyed. What’s
more, the town received political and legal autonomy. A letter written
by Oda Nobunaga to this end is preserved by the town today.
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+++ ABOUT US
Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)
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