Japanese business entertainment expense
In the previous section on Japanese recruitment and performance related pay, we looked at salary structures that could cut your company’s Japanese subsidiary’s fixed wages costs by 30% or more. Next we’ll look at controlling the Japanese subsidiary’s other business costs, starting with maybe the most contentious after salary; entertainment expenses.
Business entertainment is traditionally a significant cost for Japanese companies, possibly because in the 1980s corporate and personal income tax rates were over 60%, while 80% or more of business entertainment expenses were legitimately tax-deductible. The business expense account became a tax-efficient way for companies to give benefits and added prestige to executives and managers; so much so that in the mid 1980s, Japanese business entertainment expenses surpassed Japan’s defense budget by almost 25%. Fast forward three decades and the attitudes of the tax office and public have changed. In the early 2000s, tax revenues were declining as Japan’s recession wore on, and Japan’s regular salarymen complained that while they were suffering reduced bonuses and no annual pay raises, executives and managers were still benefiting from tax-free entertainment perks. The result? The government overhauled the Corporation Tax Law so that companies with more than JPY100,000,000 paid-in capital can no longer deduct any entertainment expenses from taxable income (although they can deduct 50% of meal expenses), while companies with less than JPY100,000,000 paid-in capital can only deduct entertainment expenses up to JPY8,000,000 a year. Japan’s Corporation Tax Law may have changed, but some Japanese executives’ and managers’ attitudes have not. In most markets your company deals in, it’s probably traditional to an extent to wine and dine non-government customers in the hope of improving the level of business done with them, but in Japan, business entertainment is almost a corporate institution. Many very expensive restaurants (and 90% of the hostess clubs and other private ‘clubs’) in the more fashionable areas of Tokyo, earn much of their income from corporate business entertainment.
Recent corporate income tax reductions and the gradual reduction in the amount of business entertainment expenses deductible from pre-tax income, has greatly increased the corporate cost of business entertainment. It is also generally realized that a large amount of Japanese business entertainment is not entertaining legitimate customers (although managers and executives report it as such) but often managers and executives entertaining friends and colleagues. A company must justify its business entertainment expenses with receipts, but some receipts are very vague, such as the infamous Japanese ‘ryoushushou’; a hand-written receipt which shows the total amount paid but no detail of goods bought. Restaurants, department stores, all manner of smaller stores, bars, hostess clubs (where Japanese men pay from US$500 – US$1,500 per person to sit drinking with glamorous young women into the small hours) and other ‘venues’ issue ryoushushou and the tax office accepts them as proof of expense. These factors, combined with the effects of the 1990s recession on corporate profits and social concern at the increase in alcoholism in Japan, caused many of Japan’s largest companies to impose strict internal rules on allowable business entertainment. If your company wants to survive doing business in Japan, then it must follow those companies’ example and have a written policy about just who in its Japanese subsidiary has authority to incur entertainment expense, with whom and when.
One of those infamous myths of the Japanese market claims that “……you must entertain customers if you want to succeed doing business in Japan……”. Agreed your company will need to entertain certain Japanese customers from time to time, but before allowing that myth to foster a carte blanche ‘anything goes’ attitude to Japanese business entertainment expenses, consider that:
- An evening’s formal entertainment in Tokyo for just 2 people can easily cost anywhere from US$300 – US$2,000 or more.
- Japanese customers often attend meetings, evening meetings included, in groups of 3, 4 or more; if you field 2 or 3 people, you will easily incur a substantial and often unjustifiably expensive expense.
- It is well-known that some Japanese (and some resident foreigner) executives accept positions with foreign company subsidiaries to benefit from the use of an unrestricted (due to remoteness and lack of understanding of Japanese business culture) expense account.
- It is also well-known that some executives of Japanese companies use their expense accounts for entertaining friends, including girlfriends, and family.
If not firmly controlled, the cost of Japanese business entertainment will wreck your company’s business in Japan. I knew one executive, a foreigner resident in Japan, who in 3 years burned through almost US$500,000 in ‘business entertainment’, most of which had nothing to do with business and a lot to do with his nightlife; the subsidiary he was managing was meanwhile rotting in the gutter. Japanese business entertainment is one area where your company’s CFO must impose strict checks and balances to safeguard against abuse. Once again, the example your Japanese company President sets will be crucially important.