Japan government tax reform proposals for 2013

Posted on 18th April 2013 by Trevor Reynolds in Uncategorized

The new government released its 2013 tax reform proposals, please find a broad outline of the main items below.

Corporation tax

Companies that met the requirements could benefit from a JPY200,000 tax credit for each additional employee hired. This credit will increase to JPY400,000 per employee under the proposals.

Salary increase incentive

Employers that increase salaries by at least 5% would be able to benefit from a tax credit of 10% on the increase in the salary amount (capped at 10% of the corporation tax liability) under the new proposals. This would apply for financial years that begin between 1 April 2013 and 31 March 2016.

Entertainment expense deduction for SMEs

Currently SMEs are allowed to take a tax deduction for 90% of the first JPY6 million of entertainment expenses. The proposal would increase this to 100% of the first JPY8 million of expenses.

Individual income tax

The current highest rate of income tax is 40% on taxable income over JPY18 million. A new 45% rate will apply to taxable income over JPY40 million from 2015. Combined with the employment income deduction cap which applies from 2013 onwards this measure will increase the cost of tax equalization arrangements for executives seconded to Japan.

Inheritance and gift tax

The proposal included amendments to the scope, basic exemption and rate of inheritance tax and gift tax. 

Scope:  Under the current law when a foreign national with no domicile in Japan, inherits or receives a gift from a person with domicile in Japan, only the properties located in Japan are liable to Japanese inheritance or gift taxes. The proposal will widen this scope in this situation so that all properties, regardless of location, will be subject to tax in Japan. Although ostensibly this amendment is to reduce the scope for inheritance tax planning for Japanese high net worth individuals, it also affects expats, senior executives and entrepreneurs living in Japan.

Basic exemption

Currently an exemption of the first JPY50 million plus JPY10 million per statutory heir is available against inheritance estates. The proposals will reduce this to JPY30 million plus JPY6 million per heir.

Tax rate

Under the current rules, heirs pay inheritance at a top rate of 50% if their share of the estate after the basic exemption is greater than JPY300 million, and 40% is if their share is between JPY100 million and JPY300 million.  The proposals will introduce a new top tax rate and additional bands as follows:  

100 million to 200 million 40%

200 million to 300 million 45%

300 million to 600 million 50%

Over 600 million 55%

In addition, the top rate of gift tax will increase from 50% to 55%.

Consumption tax

In our August 2012 bulletin we discussed a new Consumption tax bill which will raise the rate of consumption tax in Japan from 5 % to 8% from 1 April 2014 to 30 September 2015, and to 10% from 1 October 2015 onwards.

At the time the Government was considering measures to prevent the rate rise from affecting those with low incomes disproportionately. The main measure included in the proposal related to housing loan credits. The purchase of residential housing incurs consumption tax in Japan and so the rate increase has a large effect on the size of mortgage needed to purchase a house. Currently a taxpayer can take an income tax credit equal to 1% of the outstanding loan capped at a loan amount of JPY 20 million for normal houses and JPY 30 million for certified environmentally-friendly houses. The credit period  was due to expire at the end of 2013. The proposal extended this period to the end of 2017. In addition the maximum loan amount will be JPY 40 million and JPY 50 million respectively from 1 April  2014 if the rate increase remains in place.

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