After a back and forth Twitter discussion yesterday with David Barnard about how Japanese tax withholding works in the the App Store I figured I’d write a quick post to clarify how it works. I am neither an accountant nor a lawyer, so it is a good idea to contact one of those before making any major decisions on this topic. This is also written entirely from a US perspective. I have no idea how things work around the world.
In a Nutshell: The Japanese government requires that Apple withhold 20% of your profits from App Store sales unless you have filed forms demonstrating that you are a foreign company and taxable there instead. The forms are a bit complex and the process a bit cumbersome, but unless you complete it 20% of whatever you make in Japan is taken and not returned.
The Process: To get an exemption to this you need to complete a couple of forms and then also get some paperwork from the IRS. An outline of how this works is found in iTunes Connect.
- Goto “Contracts, Tax, and Banking”.
- Then “Tax Info” for paid apps.
- Here you’ll see a link to “Japan Tax Forms”.
- Complete the forms and process outlined here and your account will avoid this charge.
I won’t go into the process in detail here since it is better described in those documents, but I will say that it takes a bit of time and a fair bit of patience to complete.
The Timeline: Once all your papers are filed and the process complete I found that it took one full payment cycle for the change to become effective. I believe Apple says this can take up to 90 days, but I submitted mine in September of 2010 and it was effective in November. From this point on your sales in Japan won’t be taxed, however, it is not retroactive to previous sales.
Reporting: You can see just how large of a bite this is taking from your sales in iTunes Connect.
- Goto “Payments and Financial Reports” area.
- Open the “Payments” tab
- Note the “Withholding Tax” column in the payment display.
This shows how much tax is being withheld from your payments. The value given is in Yen and can be converted to dollars using the FX Rate given in the table. This is also the place that you can go to verify that the change has taken place once your paperwork is approved.
The numbers given in “Sales and Trends” do not include the withholding, it is only shown in the final payment reports once everything is settled.
By The Numbers: It is worth noting that the tax is applied to your profits (after Apple’s 30% cut). So if you sold an app for ¥85, Apple would take ¥25 leaving you ¥60 from the sale. 20% of this (¥12) would then be withheld leaving you with ¥48. So you receive 56.5% of the gross sale price (or 43.5% is taken).
Why Doesn’t Apple Pay?: I’ve heard it asked why Apple doesn’t have to pay this since they are the ones in Japan. I believe this is because the way Apple has setup the App Store individual developers are the ‘Sellers’, not Apple. In a legal sense, Apple is acting more like a payment processor (VISA, PayPal) than a retailer. The money made from each sale is the developer’s (from which Apple takes a commission), rather than Apple’s. So any taxes due on the income resides with the developer. This is also why you don’t get a 1099 from Apple for app sales (only iAd revenue).
IRS Tax Reporting: Exactly how this withholding shows up on your business taxes depends on how you report app income to the IRS. You can take this charge as either a business deduction or as a credit for foreign taxes paid. What you cannot do is deduct it twice. If your reported income already includes the withholding amount subtracted you cannot then also claim it as foreign taxes since that would be a double deduction.