2018 Tax Reform Proposals
On December 14 2017, Japan’s ruling coalition party (the Liberal Democratic Party ・the New Komeito Party) announced the 2018 Tax Reform Proposals (“Proposal”), which was approved by the Diet on December 22, 2017.
In this News, we will introduce the summary of revisions related to corporate taxation, international taxation, and individual income taxation in the Proposal.
Please note that the contents of the Proposal might be amended through the procedures of the Diet deliberations.
2. Corporate Taxation
From the viewpoint of wage increases and productivity improvement, the Proposal implies the revisions of tax credits. The main points are introduced below.
(a) Revision of tax credit for salary increases
Under the current law, the tax credit is only for the incentive to salary increases. In the Proposal, the new rule will add the requirement of a certain level of capital investment, under which a tax credit of 15% of salary increases will be allowed. Furthermore, if a company also meets the requirement of increased training costs, a tax credit of 20% of salary increases will be allowed (up to 20% of the corporation tax liability of the applicable year).
As for small-medium sized companies with meeting certain conditions, a tax credit at a maximum of 25% of salary increases will be available (up to 20% of the corporation tax liability of the applicable year).
(b) Establishment of taxation for promoting information collaboration
The new tax incentives will be introduced. If a company with the approval for the innovative data activation project under the premise of the Special Measures Act on Improvement of Productivity acquires new software or more equipment and puts them into use for business, the special depreciation (30% of the acquisition costs) or the special tax credit (5% or 3% of the acquisition costs) will be allowed.
(c) Restriction for special tax measures
If large-scale companies do not meet the requirements of average wage increases or domestic capital investment, R&D tax credit or certain other tax incentives will not be available.
3. Individual Taxation
The 2018 Tax Reform implies major revisions in individual taxation. The points are introduced below.
(a) Employment income deduction
Employment income deduction, a deductible amount as necessary expenses for salary earners, will be uniformly reduced by JPY100,000. The maximum amount of gross salary for employment income deduction will be set at JPY8.5 million, and the upper limit of the deduction amount will be lowered to JPY1.95 million.
(b) Basic deduction
As mentioned above, although the amount of employment income deduction is lowered, the amount of basic deduction will uniformly be increased by JPY100,000. However, if the total income exceeds JPY24 million, the amount of basic deduction will decrease gradually based on the amount of total income. If the total income exceeds JPY25 million, basic deduction will not be applicable.
4. International Taxation – Revision of PE Rules
Permanent Establishment (PE) is a significant factor in determining the scope of taxation for a foreign company or a non-resident individual (“non-resident”) in Japan. In accordance with the OECD Model Tax Convention, the following amendments will be made.
① A person who renders services for concluding contracts related to the transfer of the non-resident’ assets will be added to the so-called “Dependent Agent PE.”
② A person who primarily acts on behalf of one or more closely-related non-residents will be excluded from the scope of the “Independent Agent PE.”
③ A certain fixed place for specific activities such as storage, exhibition, and delivery will be excluded from the PE definition on the condition that such activities are preparatory or auxiliary for the non-residents’ businesses.
④ About the so-called “Construction PE,” in cases where the contract term is split for the purpose of avoiding the Construction PE status, the judgement will be made by aggregating the split terms.
In this News, we have mentioned the major points of revisions in the 2018 Tax Reform Proposals.
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.
2018 Tax Reform Proposals