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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


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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


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What is a Director?

Inside Directors

Outside Directors

1. Independent Directors2. Nominee Directors

Note: Not Employee

Director Issues in Japan October 12, 2011


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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



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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



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How are Directors Compensated?

Determined in Articles of Incorporation or byshareholders resolution

Stock options if approved by shareholdersresolution



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How Long Can Directors Serve?

Generally 2-year term

Up to 10 years for closed companies if permittedin Articles of Incorporation



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What is the Role of a Director?

Traditional model: Shareholder-focused

Japan-model: Employee-centric

Recent trend



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What are the Liabilities of a Director?

Legal liability

Personal liability

Criminal liability

Shareholder Derivative Suits

Case-study



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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



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Business Judgment Rule (BJR)

Use best judgment

Not liable for reasonableBJR

Tips:

Conduct research & analysis

Seek & follow advice of external advisorsDocument decision-making process



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Duty of Supervision

Obligated to supervise performance of duties ofother directors

Must report risk of significant damage toStatutory Auditor or shareholder(s)



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Duty to Establish Internal Controls

Must establish system to ensureappropriateness of operation of corporation

Mandatory for large corporations

Recommended for all others



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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



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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



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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



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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


Tax Compliance & Calculation



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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


Operational (Permanent Establishment)



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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


Related-Party Transactions (TP)



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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


Controversy (Tax Audit)



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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



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Tax-Planning Opportunities for Directors

Assumption: Directors are Residentsof Japanfor individual income tax purposes

Tax-payer status determines scope of taxableincome and tax rate



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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


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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

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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


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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


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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


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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


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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)


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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)



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Tax Planning:


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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:


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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


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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


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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

cch aa directors presentation

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