5th Report of Market Access Ombudsman Council (March 17, 1998)

8-(3) Improvement of the issue of the per capita rate for local inhabitants tax on corporation

1. Complainant: Korean embassy

2. Ministry concerned: Ministry of Home Affairs

3. Background:

(1) Types of corporation tax

Among the types of taxes applied to corporations, there is the corporate tax, which is a national tax, and local taxes including enterprise tax (prefectural tax) and local inhabitant taxes on corporation (prefectural tax, municipal tax), collected in accordance with the Local Tax Law.

(2) Breakdown of local inhabitant taxes on corporation

The amount of local inhabitant taxes on corporation is based on the total tax calculated according to the corporation tax rate for inhabitants tax and the per capita rate for local inhabitant tax on corporation. The per capita rate for local inhabitant tax on corporation is collected so that "companies broadly contribute to the expenses of the local community of which they are members" (the recommendations of the Taxation Commission, January 1984), and even if the company has no income (regardless of whether it has any profit-generating operations in the community, for example, if the company has employee housing located in the community in question), it is taxed the per capita rate for local inhabitant tax on corporation.

(3) Taxpayer of per capita rate for local inhabitant tax on corporation

Taxpayer of per capita tax rate for local inhabitant tax on corporation are having offices or places of business, employee housing and so on, and corporate or foundation without status of juridical person but which have a designated representative or manager, in the prefecture and the municipality. In the case of foreign companies, the scope of offices or places of business, etc. liable for taxation is set out in Article 7-3-5 of the Cabinet ordinance for the Local Tax Law.

(4) Calculation standards and tax rates

The per capita rate for local inhabitant tax on corporation is calculated based on the total amount of capitalization or investment and on the amount of asset accumulation and according to the standard tax rate (the tax rate usually applied by local governments). Because there are differences in the financial ability of companies to bear the tax burden, depending on their capitalization, and because of the need to lessen the burden on small and medium-size companies, there are five standard tax rate brackets for prefectural tax, ranging from ¥20,000 to ¥800,000, and nine standard tax rate brackets for municipal tax, ranging from ¥50,000 to ¥3,000,000 (maximum tax rate of ¥60,000 to ¥3,600,000).

The tax rate for prefecture tax is set only on the basis of the amount of capitalization, etc., but the tax rate for municipal tax is set according to the amount of capitalization as well as on whether the number of employees in the company is above or below 50.

* The maximum tax rate is the highest tax rate, which may not be exceeded, in the taxing at an excessive rate. Taxing at an excessive rate to collect, within the scope of the maximum tax rate, which is over and above standard tax rate, when there are special fiscal reasons for doing so.

4. Complaint:

When the inhabitant tax is collected on branches of foreign companies, the Local Tax Law stipulates that the tax rate is determined in accordance with the amount of capitalization of the head office in the home country. In some cases, companies must pay substantial local taxes, regardless of the size of the branch.

Because of this, the Complainant requests that the calculation standards for inhabitant tax on foreign companies' branches be changed to the calculation method for capitalization ("head office capitalization" multiplied by "branch assets," divided by "total assets") which is used for calculating the maximum allowable deduction for entertainment expenses or donations.

5. Results of deliberation:

According to the ministry concerned, the basic reasoning behind the per capita rate for local inhabitant tax on corporation is to have companies, which are members of the community, broadly contribute to the community's expenses; taking the ability of the companies to pay taxes into account, they are taxed a specific amount according to the tax bracket they are in depending on the amount of capitalization and number of employees they have. Some believe that the tax calculation standard based on the number of employees should be introduced for prefectural tax as well, and that the standard should be revised. However, since such a revision could result in higher taxes, any review of the tax rate for the local inhabitant tax on corporation should be made from a comprehensive perspective, including its relationship to other local taxes.

The tax rate for per capita rate for the local inhabitant tax on corporation is applied to domestic and foreign companies alike, and is, accordingly, non-discriminatory. Some believe that the issue of differences in tax systems between Japan and abroad should be studied.

The Taxation Commission will continue to study the issue of local corporation taxes. And, the ministry concerned should undertake a broad study of issues, including that of the per capita rate for local inhabitant tax on corporation, from the viewpoints of fairness, impartiality and simplicity, and in order to create a climate facilitating the business activities of domestic and foreign companies.

Government decision (March 23, 1998)

5-(3) Study of the issue of the per capita rate for local inhabitants tax on corporation

Regarding the local inhabitants tax, a broad study of issues, including that of the per capita rate for the local inhabitants tax on corporation, will be undertaken, from the viewpoints of fairness, impartiality and simplicity, and in order to create a climate facilitating the business activities of domestic and foreign companies based on the issues studied by the Taxation Commission.