JAPAN Law and Practice Contributed by: Yutaka Shimoo, Anderson Mōri & Tomotsune
Tax audits by the NTA are generally conducted on a non-compulsory basis. In this case, tax auditors usually visit the office of taxpayers and check book records or evidence thereof. However, unannounced visits or tax audits for the counterparty of the trans - actions may be made, depending on the attitude of taxpayers or the complexity of the transactions. In addition, compulsory investigations may be carried out in cases of tax fraud or tax evasion. A criminal investigation group from the regional tax bureau is generally responsible for compulsory investigations. As a general rule, in cases where a taxpayer fails to report their taxes or fails to pay the tax amount by the due date, the following penalties are levied on such taxpayers. • Underreporting: the additional tax is 10% of the difference between the unreported and reported taxes (the “reporting difference”) plus 5% of the difference between the reporting difference and the larger of JPY500,000 or the reported tax. • Failure to file a tax return: the additional tax is 15% of the unreported tax plus 5% of the difference between the unreported tax and JPY500,000. • Failure to pay withholding tax: the additional tax is 10% of the unpaid amount. 6. Penalties and Sanctions 6.1 Tax Penalties If a taxpayer files a tax return with the correct tax amount (after filing an earlier erroneous tax return) without having predicted a disposition by the tax authority, additional tax is reduced or not imposed according to the situation of the taxpayer. On the other hand, for tax evasion, the rate of addi - tional tax as a penalty is increased to 35% (in the case of underreported tax or non-payment of withholding tax), or 40% (in the case of non-filing). In addition, late payment charges are levied on the taxpayer until payment.
The rate of additional tax on unpaid tax is: 7.3% per annum for the period up to the due date or the period up to the day by which two months will have elapsed since the day following the due date; and 14.6% there - after until the date payment is completed. However, under the current rule, the 7.3% and 14.6% rates are reduced respectively to: 1% plus a certain rate based on the average rate of banks’ new short-term loans; and 7.3% plus the certain rate. Regarding cross-border transactions, there is no spe - cific tax penalty that is only applicable to cross-border transactions. However, if a taxpayer is required to sub - mit a foreign assets report, whether the assets were already reported in the foreign assets report would affect the rate of additional tax. 6.2 Criminal Penalties In case of tax fraud/evasion where, for example, a taxpayer intentionally fails to file returns to pay the tax amount, criminal penalties may be imposed on the taxpayer. Specifically, in brief, criminal penalties are levied in the following cases: • tax fraud/evasion offender – this offender’s behav - iour includes deliberate: (a) underreporting; (b) claiming a tax refund; (c) non-reporting; or (d) non-payment of withholding tax; and • tax obligation offender – this offender’s behaviour includes deliberate: (a) late reporting without reasonable reason; (b) submission of false records or non-submission; or (c) obstruction of a tax obligation. The scale of penalties differs according to the scale of the offence. However, as a general rule, an individual taxpayer or executive of a corporate taxpayer is sen - tenced to imprisonment and/or a fine, and a corporate taxpayer also bears fines that run parallel to any indi - vidual criminal penalties. For example, where a tax - payer is prosecuted for corporate tax fraud/evasion, the statutory penalty is imprisonment for up to ten years and/or a fine of up to JPY10 million. In addition,
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