Global

Details

  • Service: Tax, Global Indirect Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Business and industry issue, Regulatory update, Survey report
  • Date: 5/1/2012

Country perspectives on taxing the cloud – Japan 

KPMG in Japan takes a look at how local tax authorities are approaching the challenge of cloud computing, by examining the potential taxes applied.

Digital distribution of a certain shrink-wrapped software

tax infographic

Permanent establishment

Assuming that the Japanese channel partners are treated as principals (as opposed to agents), then the third channel partners should not cause a vendor to have a permanent establishment (PE) in Japan.


The sales and marketing assistance from the local country sales agent in Japan should also not cause a vendor to have a PE in Japan, as this agent should have no authority to contract.


If the third party channel partners act as the local country sales agent, or if this agent's activities are expanded, the agent's activities may cause the vendor to have a PE in Japan.


Withholding tax

Digital distribution of shrink-wrapped software would be characterized as a sale of goods, to the extent that there is a fixed price for perpetual license of a shrink-wrapped software's source-code, notwithstanding that the legal form is a license. Payments for the sale of goods are not subject to withholding tax. However, the Japanese tax enforcement practice may not be clear; therefore, in order to determine the income characterization, the factual situation and legal implications of the payments must be carefully analyzed.


If the payments are made to a US resident who is a beneficiary owner, payments for the use of a software's copyright should be exempt from withholding tax under Article XII(1) (Royalties) of the US-Japan treaty.


Indirect tax

Customs duties apply only if goods are imported.


Consumption tax should not apply if the software is licensed by a non-resident of Japan, regardless of whether or not it has a PE for the sale and distribution in Japan.


Other issues or planning opportunities

The location of the server should be irrelevant.


Public cloud

tax infographic

Permanent establishment

The sales and marketing assistance from the local country sales agent in Japan should not cause a vendor to have a PE in Japan, as this agent should have no authority to contract.


A Japanese based server may cause a PE in Japan. If a backup server is located in Japan, some income should be allocated to the backup server.


Withholding tax

Unless the end user is granted a certain right to download and modify certain software's source-code for its use, the payments would be classified as business income, in which case no withholding tax is imposed.


If the payments are made to a US person, payments for use of the software's copyright should be exempt from withholding tax under Article XII(1) (Royalties) of the US-Japan treaty.


Indirect tax

Consumption tax should not apply unless the vendor has its PE in Japan.


Other issues or planning opportunities

Japanese tax authorities have not yet usefully commented on this type of arrangement.


Private cloud

tax infographic

Permanent establishment

There is likely to be no business carried on in Japan and thus the vendor should not have a PE in Japan.


The hardware (servers) should be considered to be used outside of Japan.


Withholding tax

Unless the Japanese affiliate is granted a certain right to download and modify certain software's source-code for its use, the payments would be classified as business income, in which case no withholding tax is imposed.


If the payments are made to a US person, payments for the use of software should be exempt from withholding tax under Article XII(1) (Royalties) of the US-Japan treaty.


Indirect tax

Consumption tax should not apply unless the vendor has its PE in Japan.

 

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Contact

Tatsuya Endoh

KPMG in Japan

+81 362 298 120 x 975120