Between an overseas headquarters and a Japanese subsidiary, cost sharing for items such as personnel costs, system fees, and management support can easily become unclear. Without sorting out the approach, problems can arise in accounting and tax.
- It has not been decided how to charge the Japan entity for costs headquarters paid
- The basis for charges from and payments to headquarters is not documented
- There are many out-of-pocket payments, and settling them later takes effort
- There is uncertainty about tax treatment and no way to decide
This article explains how to sort out cost sharing between an overseas headquarters and a Japan entity.
Why Cost Sharing Tends to Be Unclear
When the Japan entity uses systems or services contracted by headquarters, or headquarters staff support the Japan entity's work, costs tend to be processed without making clear who bears how much.
Transactions with overseas affiliates also affect tax treatment. If the basis for cost sharing cannot be explained, it may become a problem later.
Items to Organize
When sorting out cost sharing, align headquarters and the Japan entity on the following items.
| Item | What to Organize |
|---|---|
| Types of cost | The kinds of cost that arise, such as system fees, personnel costs, management support, and travel |
| Approach to allocation | The basis for deciding shares, such as degree of benefit or volume of use |
| Contracts and documentation | Intercompany agreements, the basis for charges, and a record of what was agreed |
| Settlement method | Billing frequency, payment timing, and handling of currency and exchange rates |
| Handling of out-of-pocket payments | How costs paid by headquarters or the Japan entity on the other's behalf are settled |
Have Specialists Check
Treatment of intercompany costs involves tax and accounting judgment. It is advisable to have a specialist who knows Japanese tax check the allocation basis and the content of the agreements.
Review the rules you set as the business grows or the organization changes. Checking them regularly and recording the basis makes it easier to respond to tax audits and financial audits.
Summary
- Unclear cost sharing between headquarters and the Japan entity easily leads to accounting and tax problems
- Organize types of cost, the approach to allocation, documentation of agreements, settlement method, and handling of out-of-pocket payments
- Have a specialist who knows Japanese tax check the basis and the agreements
- Review as the business changes and record the basis
Contact
JBN supports foreign companies' Japanese subsidiaries in sorting out intercompany cost sharing from tax and accounting perspectives.
To discuss sorting out cost sharing with headquarters, please contact us.