Japan: New Reporting Requirement for Foreign Stock-Based Compensation
A new reporting requirement for foreign stock-based compensation was introduced in Japan under the 2012 tax reform. While it is the individual’s responsibility to report all taxable compensation, including stock-based compensation, on his or her tax return, a new regulation imposes on employers a new reporting requirement on the stock-based compensation. With the Japanese authorities increasing their scrutiny of the reporting of stock-based compensation and the declaration of such compensation on individuals’ tax returns, compliance with the new reporting requirement is essential.
Under current regulations, compensation, such as wages, cash-/stock-based bonuses, allowances, etc., paid to residents who are directors/employees via an offshore payroll are not subject to Japanese withholding requirements. In addition, for residents, there is no requirement for the employer to report the offshore compensation to the Japanese government. In recent years, there have been cases where individuals receiving foreign stock-based compensation as offshore income are not reporting the income on their individual Japanese tax returns. In this respect, the authorities have been scrutinizing individuals’ proper reporting of foreign stock-based compensation on their tax returns.
New Reporting Requirement
When a director/employee of 1) a Japanese subsidiary of a foreign company (only where 50 percent or more of the outstanding shares in the Japanese subsidiary are directly or indirectly held by the foreign company) or 2) a branch in Japan of a foreign company, earns stock-based compensation (as indicated below), the Japanese subsidiary or the Japan branch is required to prepare and submit a “Statement to Report Foreign Stock-Based Compensation” (Form 9(3)) to the competent tax office by 31 March of the following year. Stock-based compensation to be reported
Stock, money, or any other benefits received from the foreign company based on the following rights granted under a contract between the director/employee and the foreign company:
Rights to receive stock for no consideration or at a preferable price
Rights to receive money or any other benefits equivalent to the stock price or the dividends derived from the stock
Rights to receive stock, money, or any other benefits where the stock price, the performance of the foreign company, or any other indicator achieves a pre-determined target.
The tax authorities suggest the following as primary examples of stock-based compensation: stock option, restricted stock, restricted stock units, employee share purchase plan (ESPP), stock appreciation rights (SARs), performance-based share, performance-based unit, phantom stock.
KPMG Tax Corporation considers the above list of stock-based compensation as not exclusive. Moreover, note that the above “stock” includes stock issued by another foreign company that has a capital relationship of at least 50 percent with the foreign company that has the contract with the director/employee.
This new requirement will be implemented for Form 9(3) to be submitted on or after 1 January 2013. Thus, the first submission should include stock-based compensation earned in 2012.