8/3/2019 CCH AA Directors Presentation
1/36
www.Accounting.Asia
Key Issues for Directors in Japan:
Tax, Legal, HR, Risk Management & Corporate Governance
October 12, 2011
Jon Karlsson & Paul Previtera
CCH Seminar
8/3/2019 CCH AA Directors Presentation
2/36
Agenda
Part I: Directors Risks & Responsibilities
Part II: Directors Compensation Issues
Part III: Tax-Planning Opportunities for Directors
Director Issues in Japan October 12, 2011 2
8/3/2019 CCH AA Directors Presentation
3/36
What is a Director?
Inside Directors
Outside Directors
1. Independent Directors2. Nominee Directors
Note: Not Employee
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
4/36
Who Can Be a Director?
Natural person (not corporation)
Adult (not minor)
No criminal record
Resident in Japan (if Representative Director)
Not Statutory Auditory, Accounting Auditor, orAccounting Counsel
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
5/36
How are Directors Appointed & Removed?
Appointed by shareholders resolution
Dismissed at any time without cause byshareholders resolution
Note:
1. Must satisfy minimum number of directors underArticles of Incorporation at all times
2. Must promptly update Company Register
Tip: Appoint surplus of directors
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
6/36
How are Directors Compensated?
Determined in Articles of Incorporation or byshareholders resolution
Stock options if approved by shareholdersresolution
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
7/36
How Long Can Directors Serve?
Generally 2-year term
Up to 10 years for closed companies if permittedin Articles of Incorporation
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
8/36
What is the Role of a Director?
Traditional model: Shareholder-focused
Japan-model: Employee-centric
Recent trend
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
9/36
What are the Liabilities of a Director?
Legal liability
Personal liability
Criminal liability
Shareholder Derivative Suits
Case-study
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
10/36
8/3/2019 CCH AA Directors Presentation
11/36
Duty of Care & Loyalty
Duty of Care of Good Manager
Duty of Loyalty
Must comply with applicable laws, Articles ofIncorporation, and shareholders resolutions
Must perform duties faithfully
No self-dealing
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
12/36
Business Judgment Rule (BJR)
Use best judgment
Not liable for reasonableBJR
Tips:
Conduct research & analysis
Seek & follow advice of external advisorsDocument decision-making process
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
13/36
Duty of Supervision
Obligated to supervise performance of duties ofother directors
Must report risk of significant damage toStatutory Auditor or shareholder(s)
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
14/36
Duty to Establish Internal Controls
Must establish system to ensureappropriateness of operation of corporation
Mandatory for large corporations
Recommended for all others
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
15/36
Risk Management (Legal 1)
Exemption from liability possible (if allshareholders consent)
Partial exemption possible
By special shareholders resolution
By board resolution (if Articles permit)
By contract for outside directors
Statute of limitations: 10 years
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
16/36
Risk Management (Legal 2)
Obtain D&O liability insurance
Safeguard Registered Company Seal
Conduct annual review of Company Register &Articles of Incorporation
Document everything
Retain professional advisors
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
17/36
Tax risk is unexpected tax result (additional tax)
Tax Compliance (e.g., late filing)
Tax Calculation (e.g., deductibility of expenses)
Scope of activities (Permanent Establishment)
Inter-company transactions (Transfer Pricing)
Controversy (Tax Audit)
Risk Management (Tax):
Tax Risks
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
18/36
Penalties levied for late filings
Often repercussions in parent jurisdiction (U.S.)
Companys fiscal year determines filing dates
NTA focus on deductibility of expenses(directors comp. and entertainment expenses)
Review particularly if comp. changes planned
Maintain compliance timeline
Risk Management (Tax):
Tax Compliance & Calculation
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
19/36
Non-resident may be subject to Japan corporate
tax if activities here break certain threshold
Example: Japan K.K. enters into sales contracts
with customers on behalf of non-resident affiliate
Japan profits may be taxed 42% corporate tax
Ensure legal structure is consistent with reality
Directors need to be aware of PE risk
.check with your advisors
Risk Management (Tax):
Operational (Permanent Establishment)
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
20/36
Transfer Pricing
Determining the appropriate price for atransaction between related parties
Opportunity to avoid tax via price manipulation
NTA very aggressive in this area
No documentation required unless requested
Dont wait for NTA requestDevelop TP strategy
Risk Management (Tax):
Related-Party Transactions (TP)
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
21/36
Contact your tax advisors immediately
Exposure can be managed if detected early
Respond to tax auditor in timely manner
Provide all relevant requested information
Tax advisors can develop audit strategy
Risk Management (Tax):
Controversy (Tax Audit)
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
22/36
Director Resources
Japan Association of Independent Directors (JAID)www.JapanDirectors.org
Board Director Training Institute of Japan
(BDT Institute) www.BDTI.or.jp/english/home
Japan Independent Directors Network (Shagai-net)www.Shagai-net.jp/e-index.htm
Japan Association of Corporate Directors (JACD)
www.JACD.jp/e/ Japan Corporate Governance Forum (JCGF)
www.JCGF.org/en/index.html
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
23/36
Tax-Planning Opportunities for Directors
Assumption: Directors are Residentsof Japanfor individual income tax purposes
Tax-payer status determines scope of taxableincome and tax rate
Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
24/36
How Can Japan Taxes be Optimized?
Tax-Effective Structuring Opportunities:
Offshore Salary Payment
Company Housing
School Fees / Tuition Plans Home Leave
Moving Expenses
Timing of Departure
Retirement Payment
Employee v. Director Status
Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
25/36
Tax Planning:
Offshore Salary Payment
Days-in / Days-out Benefit: Taxable income ofemployeesmay be reduced to the extent of timespent outside Japan on business
Not available to Perm. Residents or Directors
Example: If 6 months spent working in China, of income may be excluded in Japan
Japanese withholding tax not required
Tax payment deferred until tax return filing
25Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
26/36
Tax Planning:
Company Housing
Housing allowance generally taxableEmployer-provided housing may significantly
reduce taxable benefit to Employees(approx.5~10% of rental value)
Note: Less beneficial for Directors(35 or 50%)
Basic requirements:
Employer must contract directly with Landlord
Employer must pay rent directly to Landlord
Tenant must reimburse certain % to Employer
26Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
27/36
Tax Planning:
School Fees / Tuition Plans
Tuition allowance generally taxable
Employer contribution to qualified intl school
may eliminate taxable benefit
Basic requirements:
Employer must make donation to specified
school under special contribution plan
School grants scholarship to employees child
Note: School bus fees still taxable benefit
27Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
28/36
Tax Planning:
Home Leave
Home travel allowance generally taxableEmployer-provided home leave may eliminate
taxable benefit
Basic requirements: Employer must reimburse actual travel expenses
incurred by employee
Employees trip (flight & hotel) must be
reasonable, and limited to once per year
Note: Not available during year of arrival
28Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
29/36
Tax Planning:
Moving Expenses
Relocation allowance generally taxable
Employer-provided relocation may eliminatetaxable benefit
Basic requirements:
Employer must reimburse actual movingexpenses incurred by employee
Moving expenses must be reasonable, andlimited to year of arrival and departure
Note: Not available for moves within Japan
29Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
30/36
Tax Planning:
Timing of Departure (1)
Beware: Local Tax is all-or-nothing
Local Tax imposed on individuals who areresident in Japan as of January 1
Taxpayers planning to leave Japan may benefitfrom early departure (no later than Dec. 31)
30Director Issues in Japan October 12, 2011
T Pl i
8/3/2019 CCH AA Directors Presentation
31/36
Tax Planning:
Timing of Departure (2)
Example: 2011 taxable income is JPY30 million
Local Tax payable in 2012 would be approx.JPY3 million (10% of Y30M) if taxpayer isresident in Japan on January 1, 2012
If taxpayer leaves before December 31, 2011no Local Tax would be due in 2012(Y3M saved)
31Director Issues in Japan October 12, 2011
8/3/2019 CCH AA Directors Presentation
32/36
Tax Planning:
8/3/2019 CCH AA Directors Presentation
33/36
Tax Planning:
Employee v. Director Status (1)
Directors taxed unfavorably in Japan
No days-in / days-out benefit: Business tripsoutside Japan not excluded from taxable income
Lower company housing benefit: 35 or 50% of
rent paid by Employer to Landlord is taxable(compared to 5~10% for Employees)
Bonuses generally non-deductible for Japanesecorporate tax purposes
33Director Issues in Japan
October 12, 2011
Tax Planning:
8/3/2019 CCH AA Directors Presentation
34/36
Tax Planning:
Employee v. Director Status (2)
Not eligible for Japanese labor insurance
Possible solution: independent director
Video: http://www.japandirectors.org/video/foreya-partners-video
Director Issues in Japan
October 12, 2011
8/3/2019 CCH AA Directors Presentation
35/36
Special Issues for U.S. Directors
IRS reporting requirements
Must report all directorships
Must report all foreign bank accounts (over whichyou may have control as a director)
Failure to comply results in severe penalties
Director Issues in Japan
October 12, 2011
8/3/2019 CCH AA Directors Presentation
36/36
Contacts
More questions? Please contact:
Jon Karlsson
Tel: 81-3-5456-5611E-mail: [email protected]
Paul Previtera
Tel: 81-3-6416-3236
E-mail: [email protected]
Director Issues in Japan October 12 2011