National Tax Agency Publishes FAQs Related to Electronic Ledgers


On June 30, the National Tax Agency (NTA) released a series of notices and Q&A’s related to electronic books and records. The published notices and answers provide information on the preservation of books and documents, preservation by scanning, and each of the systems for electronic transactions.

About “SearchRequirements" for Electronic Transactions

In principle, electronic transactions that occur when documents such as invoices are exchanged via e-mail, etc., are required to have their electronic data stored in a searchable form that satisfies “search requirements," thereby allowing data to be retrieved by transaction date, etc.

However, under the 2023 tax reform, on the premise that a taxpayer will respond to a request to download electronic data during a tax audit, then if the taxpayer "is able to respond to a request to present or submit a document created from electronic data output, organized by transaction date or other date, as well as by business partner", then electronic data storage which isn’t searchable is now permitted. In other words, even if invoices are exchanged by e-mail or other methods that fall under the category of electronic transactions, if they are properly managed in printed form, there is no problem even if they cannot be electronically searched by transaction date, etc., as long as they are stored as electronic data.

Specific Management

Specifically, with respect to "the state of being organized by transaction dates and/or other dates, and by counter-party,” the newly-released notice states that the management be done by one of the following methods:

  1. Organize the transactions by taxable period, by transaction date or other date, and then by counter-party;
  2. Organize by taxable period, by counter-party, and then by transaction date or other date; or,
  3. Organize by type of document in the same manner as #1 or #2.

Based on the organized output documents, it should also be possible to locate the necessary data in the electronically-stored data.

There is no specific time frame for outputting electronic data in written (‘hard copy’) form. However, it is advisable to output and organize the documents on a regular basis, so that they can be presented without delay at the time of a tax audit.

Deferral Measures

Under the 2023 tax reform, electronic transactions will not be required to comply with preservation requirements if "the tax commissioner (authorities) having jurisdiction  finds reasonable cause" for failing to meet preservation requirements, such as the  searchability conditions, and also "the taxpayer can respond to requests from the tax commissioner (authorities) having jurisdiction electronic data, and to present or submit the output documents during tax audits, etc.” In such cases, a new grace period  measure has been established where the electronic data can be simply saved without any preservation requirements.

However, even with this grace period, preservation of only the output documents is not permitted. Under the deferral/relief measure (宥恕措置), which will be abolished as of December 31, 2023, even if only the output documents are preserved, it will be treated as if electronic data is in fact preserved. However, it should be noted that the new deferral measures effective from January 1, 2024 require that the electronic data itself be preserved and made available for presentation, in addition to the presentation of the output documents.

[Main points]

  • Until the end of December 2023: Only output documents need to be preserved.
  • From January 2024: Even if the output document can be presented, the electronic data itself must be preserved. Preservation of only the output documents will not be acceptable.

In a Case Involving Entertainment Expenses, the Plaintiffs Won a Partial Victory


Regarding the treatment of the costs of food and beverages as entertainment expenses, etc., abstract items such as ‘for the purpose of networking’ are not deemed to be related to business. On May 12, the Tokyo District Court partially approved the plaintiffs’ claims in a case concerning whether or not payments for food and beverages, etc. spent by the representative of two companies engaged in the advertising business, etc., constituted entertainment expenses, etc.

Outline of the Case

The plaintiffs in this case were Company A and Company B, both small or medium-sized enterprises with capital of 100 million yen or less (up to 8 million yen per year in entertainment expenses is deductible), which operated advertising and restaurant businesses.

Mr. C was the representative director of both Company A and Company B. He had meals and drinks with photographer Mr. D, architect Mr. E, club manager Mr. F, bar manager Mr. G, and food & beverage producer Mr. H, and then treated the food and beverage expenses incurred as entertainment expenses of companies A and B.

In the tax audit, both companies amended their tax returns, stating that the expenditures did not fall under entertainment expenses; however, later they filed a request for correction on the grounds that they were still entertainment expenses.

A Portion of the Expenditures Fell under Entertainment Expenses

The Tokyo District Court first interpreted that in order for a corporation's expenditures for food and beverages to be considered entertainment expenses, the following condition must be met: the purpose of the expenditures must be specifically related to the company’s business, rather than being general or abstract.

In the present case, the court found that the food and beverage expenses with Mr. D (the photographer) and Mr. E (the architect) were entertainment expenses because they were specifically related to the businesses of companies A and B. On the other hand, the court ruled that food and beverage expenses with club manager Mr. F, bar manager Mr. G, and food & beverage producer Mr. H did not fall under the category of entertainment expenses.

The reason why the expenses with photographer Mr. D were approved as  entertainment expenses was that the plaintiffs had a business relationship in which they each ordered works by Mr. D when creating advertisements for several companies, and they continued to have a business relationship with Mr. D to the present day. Also apparently taken into consideration was the fact that the companies continued to have business relationships with architect Mr. E, from whom they had commissioned the interior design of restaurants, etc., and that the business dealings  with Mr. E continued at a rate of about 5 to 10 deals per year.

On the other hand, it was determined that the food and beverages consumed with club owner F, bar owner G, and food & beverage producer H were not allowable as entertainment expenses because there was no clear connection to the businesses of Company A and Company B, but merely an abstract need for Mr. C to expand his network.

  • The party to/for whom the expenditure is made must be related to the business, provided that the date and time of the food and beverage, etc. purchases related to such expenditure are specified.
  • The purpose of the expenditure is to maintain a close friendship with the counterparty and to facilitate the smooth progress of business relations.
  • The mode of expenditure must be for entertainment, reception, comfort, gift-giving, or other similar activities.

In examining the applicability of entertainment expenses, etc., the Tokyo District Court has interpreted that "unless there is a strict link between the entertainment expenses paid by a company for individual meals and drinks, etc., and the specific and individualized transactions and contracts that were subsequently made between the company and the party for whom the entertainment was provided, there is no business-relatedness”.

It is considered to be a key point that an abstract idea of simply expanding one's network of contacts is not judged to be related to work.

How to Consider the Source of Repayment of Loans


Money borrowed from a bank must be repaid with interest. When taking out a new loan, make sure that the source of repayment is clear.

Four Main Sources of Repayment

The clarity of the repayment source is an important item that is included in the approval documents circulated for loan approval. There are four main sources for repaying bank loans.

  1. Cash flow generated by making a profit in the business
  2. A large deposit to be received at a later date
  3. Deposits expected in the short term
  4. No repayment source
Source of funds (money) How funds are used Examples of Repayment Methods
Cash flow generated by making a profit in the business Equipment funds, long-term working capital Repayment in long-term installments
A large deposit to be received at a later date bridge/interim financing Lump-sum repayment near the time of the deposit
Deposits expected in the short term Seasonal funds, bonus funds, tax payment funds Repayment in installments over a short period of time
No repayment source Current operating funds No repayment (e.g., refinancing)

Cash Flow Generated by Making a Profit in the Business

This assumes that the source of loan repayment is cash generated from profits earned from business activities. As a simplified explanation, banks calculate a company's cash flow as: "net income + depreciation and amortization - repayment of loan principal”.

For example, if the financial results for the previous fiscal year show net income of 20 million yen, depreciation of 5 million yen, and repayment of principal already borrowed of 4 million yen, cash flow would be positive 21 million yen. If the annual repayment amount of the new loan is 21 million yen or less, the company is considered to have the ability to repay the loan, and is more likely to obtain financing.

A Large Deposit to be Received at a Later Date

There are cases where there is a large payment receipt schedule, such as sales proceeds, but there is a prior payment for the cost of sales. In this case, a loan is received with the scheduled payment receipt date set as the repayment date. This type of financing is called “bridge financing” or “interim financing”.

Deposits Expected in the Short Term

For example, if a clothing manufacturer manufactures winter clothing from June to September, builds up inventory, sells it from October onward, and generates sales proceeds from November to January, it will need funds from June to September and collect funds (revenues) from November to January. If a loan is taken out when the funds are needed and repaid when the funds are collected, the company’s cash flow will be smooth. This use of funds for loans is called “seasonal funding”. Although it is based on estimates because the dates & amounts of payments are not fixed, it is considered to be relatively certain, and the bank makes loans using these as the sources of repayment.

No Repayment Source

Recurring working capital, one of the uses of a loan, is calculated as "(accounts receivable + notes receivable + inventory) - (accounts payable + notes payable)". This is the amount of working capital needed as the amount that cannot be converted into cash, and continues to be held over as long as the business continues. It is required as long as the business continues and is considered to have no source of repayment.

The lack of repayment resources is not necessarily a bad thing. As sales increase, it is normal for accounts receivable and inventory to increase more than accounts payable. In this case, it is possible to negotiate an increase in the amount of short-term ongoing loans because the amount needed for recurring working capital will increase. Thus, clarifying the sources of such repayments and the basis for such repayments may make it easier to obtain a new loan.

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