What was decided, when, and by whom

The General Principles of the FY2006 Tax Reform is a document published by the Ministry of Finance on December 19, 2005. It is a government compilation of proposed tax changes for the following fiscal year. Rather than being the law itself, it is a document outlining the policy framework that serves as the basis for legislative bills.

At the beginning, the structural framework for this fiscal year is set. The layout entails implementing a full-scale transfer of tax sources from the income tax to the resident tax, abolishing the proportional tax reduction, and simultaneously taking necessary measures regarding corporate-related taxation, land and housing taxation, international taxation, and liquor and tobacco taxes. This is a year for shifting tax revenue shares between the national and local governments.

This article deals only with the content at the time the general outline was decided, and does not touch upon anything after that. The preceding and following fiscal years,Article on the 2005 General OutlineandArticle on the FY 2007 guidelinePlease also see.

Main pillars of the outline

The outline consists of the following eight chapters. The names of the chapters are in the left column. However, since the heading of the first chapter still contains errors from reading the original material, it is indicated by the name of an item that could be repeatedly confirmed within that chapter.

To an article that reads recent fiscal years in the same format,Key points of the FY2026 tax system revision outlineThere is.

What does the transfer of tax sources shift?

The largest item in this fiscal year is the transfer of tax sources. Even if the same person earns the same amount, a restructuring is carried out to reduce the income tax going to the national government and increase the resident tax going to local governments. From the perspective of the taxpayer, the main change is the breakdown of where the tax is paid, and the general outline stipulates revisions to how income tax rates are bracketed.

What reaches daily life is the amount after deductions. The general outline stipulates a revision to the calculation of amounts withheld at the source from salaries, etc., and a reduction in the tax rate for withholding at the source related to specific public pensions, etc. This revision applies to salaries, etc., and public pensions, etc., paid on or after January 1, 2007.

The transfer will not be completed all at once. The general framework stipulates that for fiscal 2006, as a provisional measure, the tax resource transfer will be implemented through the income grant tax.

The flat-rate tax reduction will be abolished.

A flat-rate tax reduction is a mechanism that reduces the calculated income tax amount by a certain percentage. The outline decides to abolish this. Along with the abolition, the special exceptions established for the calculation of the standard amount for estimated tax payments, the filing of tax returns, withholding, and year-end adjustments will also be phased out with set end dates.

The transfer of tax sources and the abolition of the flat-rate tax reduction are paired, and the net result varies from person to person. Because the guideline does not indicate the impact amount for each individual, this article also does not delve into specific figures.

The corporate tax system is restructured to align with the Companies Act.

Fiscal 2006 is the year to rebuild the foundation of corporate taxation in conjunction with the enactment of the Companies Act. The guidelines assign tax treatments to events occurring under the Companies Act, such as dividing dividend of surplus into dividends and capital refunds based on the source category, reducing the amount of stated capital, etc., rather than recording them as assets when a corporation acquires its own shares, and not generating tax liabilities in principle for shareholders who receive gratuitous allotment of shares.

Treatment of remuneration paid to corporate officers

The scope of executive compensation that can be included in deductible expenses is being redefined. In principle, deductible expenses include salaries paid regularly in the same amount at fixed intervals, salaries predetermined to be paid in a set amount at a specified time, and profit-based salaries paid by non-family corporations to executive officers performing operational duties, provided they have undergone prescribed procedures and disclosure.

On the other hand, for family-owned companies where the presiding executive and their relatives own the majority of the issued shares and occupy the majority of executive positions engaged in regular business operations, restrictions are established whereby the portion of the salary paid to the presiding executive that corresponds to the employment income deduction cannot be included in deductible expenses. Exceptions where this restriction does not apply depending on the income level are also provided.

A two-year measure to boost R&D and capital investment

Regarding research and development expenses, a special measure is established as a two-year time-limited provision to add 5 percent to the rate of the special tax credit related to the portion of research and development expenses exceeding comparative research and development expenses, applicable in each business year starting between April 1, 2006, and March 31, 2008. The same addition is applied to the system for strengthening the technological foundation of small and medium-sized enterprises.

In addition, a two-year time-limited measure will be established where businesses that file blue tax returns and acquire equipment or other assets that promote the strengthening of information infrastructure within the same period and use them for domestic business can choose between special depreciation or a special tax credit based on the standard acquisition cost of those assets.

Family business and small and medium-sized enterprise

Taxation on retained earnings of family companies will be revised to narrow down the determination of applicable companies by the number of shareholder groups, and to incorporate factors such as the equity ratio into the calculation of the retained earnings deduction amount. Measures will also be established to exempt small and medium-sized enterprises from taxation on retained earnings for business years in which they receive approval for business innovation plans and conduct their business in accordance with those plans.

In addition, other measures are listed, such as excluding certain food and beverage expenses from the system that denies the inclusion of entertainment expenses in deductible expenses, and setting an upper limit on the special provision for low-value depreciable assets for small and medium-sized enterprises.

Taxes on land and housing

Regarding land, a special measure is established as a two-year time-limited measure to reduce the registration license tax rates pertaining to the registration of transfer of ownership due to purchase and sale, and the registration of a trust of ownership. The reduced tax rates are not covered in this article for the reason written in the source at the end.

A new system is being established for seismic retrofitting of existing homes. If you seismically retrofit your home built under old standards within a designated area during a specific period starting from April 1, 2006, an amount corresponding to the cost can be deducted from your income tax for that year. To apply, you must attach a statement and other documents to your tax return.

In addition, the application deadlines for special provisions concerning funds for acquiring a housing unit and special provisions when an employee or similar person receives a loan for housing funds will be extended by two years.

Establishment of earthquake insurance premium deduction and treatment of donations

Of the six chapters, the one closest to household budgets is the establishment of the earthquake insurance premium deduction. By restructuring the conventional casualty insurance premium deduction, a system is created to deduct insurance premiums and the like for contracts targeting homes and household movables to prepare for damages from fires and other events caused by earthquakes, etc., from the comprehensive income amount for that year. Transitional measures will be put in place allowing those who have already concluded long-term casualty insurance contracts to apply the previous casualty insurance premium deduction. The maximum deduction amount is not covered in this article.

Regarding donations, the lower limit for the amount eligible for the donation deduction will be lowered. This is a review aimed at making even small donations eligible for the deduction. Among the requirements for certified NPO corporations, the calculation method for determining how much donations have been collected will also be restructured.

In addition, Chapter 6 includes the abolition of the system for public notice of tax returns, and enables withholding slips for employment income to be provided electronically with the consent of the individual. The latter applies to those issued on or after January 1, 2007.

Liquor tax and tobacco tax

Under the liquor tax, the classification of alcoholic beverages will be reorganized. The general outline rearranges them into categories based on whether they are sparkling, brewed, distilled, or a mixture of these, with tax rates set for each category. All of the category names are considered provisional.

The tobacco tax rate will be raised. Tax adjustments will also be made for manufactured tobacco that is already in distribution at the time of the increase. The increased tax rate and the timing of implementation are not covered in this article.

Revamp the inheritance tax payment in kind system

The largest volume in Chapter 8 is dedicated to payment in kind for inheritance tax. Payment in kind is a method of paying inheritance tax using the inherited property itself when it is difficult to pay in cash, and the outline completely revamps this from a procedural perspective.

First, we will establish the assets that cannot be used for payment in kind and those permitted only when no other suitable assets are available, thereby clarifying the scope. If the applied-for property falls under these categories, the tax office director will reject the application. Those whose applications are rejected may reapply once within the specified period.

Next, a deadline for the procedure is established. The types of documents to be submitted are determined according to the property, and if there are deficiencies in the entries, the head of the tax office may request corrections or submission. If these requests are not met, the application is deemed to have been withdrawn. A review period for the head of the tax office to grant or deny permission is also established, and if no decision is made within that period, payment in kind is deemed to have been permitted.

In addition, a system will be established whereby if a taxpayer's financial situation changes while they are in the process of paying by deferred payment and payment becomes difficult, they can switch to payment in kind, limited to within a specified deadline.

To determine if it relates to you

• If you receive a salary or public pension, please see Chapter 1. The calculation of the amount to be deducted will change.
• If you live in a home built under the old standards, please refer to Chapter 3. A tax credit for seismic retrofitting will be established.
• If you have fire insurance or mutual aid, please refer to Chapter 6. The earthquake insurance premium deduction is being reorganized.
• If you manage a company and pay salaries to your executives, please refer to Chapter 6. The forms of salary that can be included in deductible expenses are being revised.
• Please refer to Chapter 2 if your company spends money on research and development or capital investment. A series of two-year limited-time measures will be listed.
• Please refer to Chapter 4 if you have transactions or residency related to overseas. The scope of non-permanent residents and other matters will be revised.
• For those who have difficulty paying inheritance tax in cash, please see Chapter 8. The procedures for payment in kind will change significantly.

Source

• Ministry of Finance, "Outline of the Tax System Reform for FY2006" (December 19, 2005)
• The original source of this article is a PDF saved as an image, and the text was read using optical character recognition. Numbers and proper nouns are included only where matches could be confirmed in multiple places.