When a tax audit identifies an issue, what charges are added to the principal tax, and how much are they? The provisions on ancillary taxes in the Act on General Rules for National Taxes set out the overall framework.

This article helps taxpayers facing audit findings and their tax advisers understand the overall burden and identify the relevant provisions. Each type of tax is discussed in a separate article.

There are 6 types of incidental taxes

Article 2, Item 4 of the Act on General Rules for National Taxes defines incidental taxes as "national taxes meaning delinquent tax, interest tax, additional tax for underreporting, additional tax for failure to file, additional tax for non-payment, and heavy additional tax," and these six are all-inclusive, with no others qualifying as incidental taxes.

The penalty tax for stamp duty is outside this definition. Article 60, Paragraph 1, Item 3 also lists it separately alongside additional tax for non-payment and heavy additional tax. Delinquency charges and additional charges for local taxes are governed by the Local Tax Act, rather than the ancillary-tax provisions of the Act on General Rules for National Taxes.

Two distinct categories

The six types fall into two categories with different purposes.

One category depends on the period involved. Delinquent tax is charged according to the period for which tax remains unpaid after the payment deadline. Interest tax is charged for an approved period of deferred payment, payment in kind, or extension of a filing deadline (Article 64). Delinquent tax addresses a delay, while interest tax addresses an officially approved postponement.

The other category concerns conduct in filing and paying tax and consists of four types of additional tax. Article 69 collectively calls them “additional taxes.”

When each of the four additional taxes applies

Which one is imposed is determined by whether the tax return was filed on time, what was missing, and whether there was any concealment or disguised reporting.

• A timely return was filed, followed by an amended return or reassessment — additional tax for understatement (Article 65)
• No timely return was filed, followed by a late return or determination — additional tax for failure to file (Article 66)
• Withheld or similarly collected national tax was not paid by the statutory payment deadline — additional tax for non-payment (Article 67)
• Concealment or disguise occurred in any of the above three situations — heavy additional tax (Article 68)

Heavy additional tax is imposed in place of the original additional tax, rather than on top of it. Delinquent tax belongs to a separate category and can therefore be charged alongside additional tax.

Voluntary correction can reduce the burden

What the four types of additional taxes have in common is that their rates are designed to change depending on whether you corrected the issue yourself before the tax office took action.

For additional tax for understatement and failure to file, there are two dividing lines: whether correction occurs before or after audit notification, and whether the taxpayer anticipated a reassessment or determination. For additional tax for non-payment, the dividing line is whether the taxpayer anticipated a notice of tax payment.

Additional tax for failure to file and non-payment also have exemptions for prompt correction. Both provisions specify a window ending one month after the statutory filing or payment deadline (Articles 66 and 67). This is the first window to check when you discover that a deadline has passed.

When will it be established?

Article 15, Paragraph 2 sets out when liability for additional tax arises. For understatement, failure to file, and heavy additional tax under Article 68, Paragraphs 1 and 2, it arises when the statutory filing deadline passes. For non-payment and heavy additional tax under Paragraph 3 of that article, it arises when the statutory payment deadline passes.

Pursuant to Article 15, Paragraph 3, delinquent tax and tax on interest are determined in amount to be paid upon their establishment without requiring any special procedures. Unlike additional taxes, no notice of tax imposition determination is issued.

It can sometimes disappear due to rounding down fractions.

Paragraph 3 of Article 118 provides that when calculating the amount of incidental tax, if there is a fraction of less than 10,000 yen in the tax amount that serves as the basis for the calculation, or if the entire amount is less than 10,000 yen, such fraction or amount shall be rounded down.

Paragraph 4 of Article 119 applies when there is a fraction of less than 100 yen in the determined amount of incidental tax, or when the total amount is less than 1,000 yen (less than 5,000 yen for those related to additional taxes) is specified to be rounded down. It is important to note that the criteria differ for the additional tax and delinquent tax.

In cases where the increase in the main tax is small, this rounding down may result in no additional tax being assessed.

The tax item is the same as the main tax.

Additional tax is treated as national tax of the tax item to which the tax amount serving as the basis for the calculation of that amount belongs (Article 69). Delinquent tax is treated the same way (Article 60). In the case of an amendment to corporation tax, it is treated as additional tax on corporation tax; in the case of an amendment to consumption tax, it is treated as additional tax on consumption tax.

Common practical questions

Clients often consult us immediately after an audit finding. The total burden varies substantially with the number of years involved and the period subject to delinquent tax, as well as the additional-tax rate. There can be scope to choose which years to correct and in what order, so it is worth considering the whole picture before filing amended returns.

Legal basis

• Article 2, Item 4 of the Act on General Rules for National Taxes (Definitions)
• Article 15, Paragraph 2, Items 14 and 15, and Paragraph 3, Item 7 of the Act on General Rules for National Taxes (Establishment of Tax Liability and Determination of Amount of Tax Payable)
• Article 60, Paragraph 1 and Paragraph 4 of the Act on General Rules for National Taxes (Delinquent Tax)
• Article 64, Paragraph 1 of the Act on General Rules for National Taxes (Interest Tax)
• Article 65, Paragraph 1 of the Act on General Rules for National Taxes (Additional Tax for Understatement)
• Article 66, Paragraphs 1 and 9 of the Act on General Rules for National Taxes (Additional Tax for Failure to File)
• Article 67, Paragraphs 1 and 3 of the Act on General Rules for National Taxes (Additional Tax for Non-Payment)
• Article 68, Paragraph 1 to Paragraph 3 of the Act on General Rules for National Taxes (Heavy Additional Tax)
• Article 69 of the Act on General Rules for National Taxes (Tax Items Subject to Additional Taxes)
• Article 118, Paragraph 3 of the Act on General Rules for National Taxes (Rounding of Fractional Numbers for Tax Bases of National Taxes, etc.)
• Article 119, Paragraph 4 of the Act on General Rules for National Taxes (Rounding of Fractional Amounts of Established National Tax, etc.)

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