Offshore Retailers Face Tax in Japan

TOKYO – Japan is cracking down on online retailers who skip taxes by not having an office in the country.

The government of Japan recently announced that it is looking to amend current legislation to update the definition of a permanent establishment of a business, in an effort to bring a number of online businesses into the country’s tax net.

Currently, Japan applies corporate income tax to businesses which have a permanent establishment in the country.

The current definition of permanent establishment primarily consists of offices, and misses warehouses and distributions centres.

The specifics of the tax mean that online retailers which do not have an office in the country, but have a distribution centre, can earn significant profits from Japanese customers, but not pay any tax on the earnings.

The new legislative definition would ensure that warehouses and distributions centres now fall under the category of permanent establishment, as would any other facility which handles core business operations.

Further, even if the distribution is charged to a local company, the operations and sales could still be regarded as “agent permanent establishments” and subsequently taxed.