What was decided, when, and by whom

The FY2010 Tax Reform Outline was decided by the government and published on December 22, 2009, with the subtitle “Toward Establishing Taxpayer Sovereignty.” A distinctive feature is its lengthy discussion of the philosophy of tax reform before listing the year's changes.

The introduction identifies five changes in the surrounding environment, and Chapter 1 presents the reform perspective. Its starting point is this statement.

As expressed by “no taxation without representation,” taxation forms the foundation of parliamentary democracy, and its design must be acceptable to the sovereign public—that is, taxpayers.

The outline therefore adopts fairness, transparency, and public acceptance as its three basic principles. For how to read recent outlines, see Key points of the FY2026 tax system revision outline Please also see.

Main pillars of the outline

The outline comprises an introduction, five chapters, six appendices, and reference materials.

Chapter 4 opens by listing measures to be taken together.

Measures will jointly revise dependent deductions from the perspective of shifting from deductions to allowances, raise tobacco tax rates with an explicit public health focus, expand civic public-interest taxation supporting a new public sector, and review special tax measures and other taxes from taxpayers' perspectives.

Reading this alongside the preceding year's Outline of the FY2009 Tax Reform and the following year's FY2011 Tax Reform Outline show, when read alongside this one, how the structure changed that year.

Fairness, Transparency, and Public Acceptance: Screening Special Tax Measures

Chapter 2 begins with how tax reform is decided. It criticizes the previous separation between ruling-party and government tax commissions, with substantive decisions made by the party commission despite its lack of legal authority or responsibility. Their functions are consolidated into a new government Tax Commission composed of politicians, with proceedings streamed online.

Another pillar is reviewing special tax measures. All 241 national and 286 local policy tax measures offering relief for specific objectives will be screened and fundamentally reviewed over four years. In FY2010, the first year, 82 national and 90 local measures are reviewed, with 41 national and 57 local measures abolished or narrowed.

A system will also clarify actual use. A provisional Special Tax Measures Transparency Act is proposed to require schedules of amounts claimed for corporation tax incentives and report usage surveys to the Diet. Chapter 3 calls for an early Taxpayer Rights Charter and urgent review of the disparity between authorities' three-to-seven-year assessment periods and taxpayers' one-year correction claim period.

Revising Dependent Deductions: From Deductions to Allowances

Dependent deduction changes have the greatest impact on taxpayers. The outline explains that the same JPY380,000 income deduction can save a high-income taxpayer over JPY100,000 but a low-income taxpayer less than JPY20,000, favoring higher earners. Alongside the child allowance, deductions for children aged 0–15 are abolished. With effectively free high school education, the additional deduction for dependents aged 16–18 is also abolished.

The additional amount for a co-resident person with a special disability shifts from the dependent or spousal deduction to the special disability deduction. Ministries responsible for national health insurance premiums, childcare fees, and similar systems are to take appropriate measures regarding the effects.

The outline also looks ahead. The spousal deduction will be reviewed, and the employment income deduction needs changes such as a cap. Refundable tax credits, paying any unused credit in cash, are also considered.

Corporate Taxation: Group Transactions and Abolition of the One-Owner Company Rules

Abolishing the Special Closely Held Company System

A system had disallowed part of controlling owner-officers' remuneration at so-called one-owner companies. The outline notes that it addressed double deductions but faced criticism over its suitability, and abolishes it. It no longer applies to fiscal years ending on or after April 1, 2010, with fundamental measures to be considered in FY2011 reform.

Transactions Within Wholly Controlled Groups

Gains and losses on certain asset transfers between domestic corporations within a 100% group are deferred until the assets leave the group or another specified event occurs, when recognized by the transferor. Donations between such corporations are fully nondeductible to the donor and fully excluded from taxable income for the recipient.

SME relief is also restricted. The reduced rate, exemption from the special rate for specified family companies, and statutory bad-debt allowance rates for corporations with capital or contributions of JPY100 million or less will not apply to wholly owned subsidiaries of corporations with capital of at least JPY500 million and similar entities.

Increasing Tobacco Tax and Abolishing Provisional Rates

Tobacco tax rises from a public health perspective. To reduce consumption, rates are to increase over time, with a JPY3.5-per-cigarette tax increase in FY2010, implying a price increase of approximately JPY5. Combined national and local rates for manufactured tobacco other than former third-class products rise from JPY7,924 to JPY11,424 per 1,000 cigarettes. This applies from October 1, 2010, with tax on existing stocks also imposed.

The existing ten-year provisional rates for gasoline tax, local gasoline tax, and diesel oil delivery tax are abolished. However, current levels are temporarily retained: JPY53,800 per kiloliter for the two gasoline taxes combined and JPY32,100 per kiloliter for diesel delivery tax. Legislation will also allow suspension of the portion above ordinary rates if crude oil prices remain abnormally high.

The existing ten-year provisional rates for motor vehicle weight tax and automobile acquisition tax are also abolished. Temporary motor vehicle weight tax measures apply ordinary rates to electric vehicles and certain others, while maintaining eco-car relief. A global warming countermeasure tax will receive further consideration for FY2011 implementation.

Changes to Inheritance, Housing, and Donations

The inheritance tax special valuation rules for small residential and business land are revised. Land where heirs do not continue business use or residence through the inheritance tax filing deadline is excluded. Such land currently qualifies for a 50% reduction up to 200 square meters. The revision applies to small land acquired by inheritance or bequest from April 1, 2010.

Housing fund assistance, conversely, expands. The gift tax exemption for housing acquisition funds from lineal ascendants rises from JPY5 million to JPY15 million for gifts in 2010 and JPY10 million for gifts in 2011. Recipients must have total income of JPY20 million or less in the gift year, and the measure runs through December 31, 2011.

The minimum amount for the income tax donation deduction falls from JPY5,000 to JPY2,000, applying from 2010.

To determine if it relates to you

• If you support children under 16, see deduction revisions. The dependent deduction is abolished from 2011 for income tax and FY2012 for individual inhabitant tax.
• If you support children aged 16 to under 19, see the same section. The additional portion is abolished, leaving deductions of JPY380,000 for income tax and JPY330,000 for individual inhabitant tax.
• If you run a one-owner company, see corporate taxation. The controlling owner-officer remuneration disallowance no longer applies to fiscal years ending on or after April 1, 2010.
• If you expect to inherit residential or business land, see asset taxation. Eligibility depends on continuing business use or residence through the filing deadline.
• If you expect housing assistance from parents or grandparents, see the same section. The gift year and your total income that year are conditions.
• Donors, smokers, and vehicle owners should respectively see civic public-interest taxation, tobacco tax, and vehicle taxation. Effective dates differ by measure.

Source

• FY2010 Tax Reform Outline: Toward Establishing Taxpayer Sovereignty (December 22, 2009)