Relevant Period:This article introduces the FY2012 Tax Reform Outline as published in December 2011. The systems and planned effective dates reflect that time and do not describe current filing procedures.

What was decided, when, and by whom

The Outline of the FY2012 Tax Reform was decided by the government and published on December 10, 2011. Its cover shows the title and that date. The opening introduction explains the background.

Against this background, preparations for FY2012 tax reform have built on prior Tax Commission discussions and focused on urgent measures: taxation supporting growth strategy, fairness and appropriate taxation, local tax reform to strengthen revenues and resident self-government, and unresolved matters from FY2011 reform.

The final category concerns carrying over unfinished work. The outline explains that Diet deliberations on FY2011 reform achieved corporation tax rate reductions and certain other measures, but deferred other items. The most urgent of these would be addressed this year. 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 has three chapters: basic principles, main FY2012 initiatives, and FY2012 tax reform. Detailed amendments appear in Chapter 3, divided into eight fields.

Reading this alongside the preceding year's Outline of the FY2011 Tax Reform and the following year's Outline of the FY2013 Tax Reform shows which unfinished measures were carried forward.

Introducing a Cap on the Employment Income Deduction

The existing employment income deduction rises with employment receipts and has no ceiling. The outline introduces a maximum deduction of JPY2.45 million where annual employment receipts exceed JPY15 million. This applies to income tax from 2013 and individual inhabitant tax from FY2014.

Chapter 2 explains the reasoning. The deduction serves both as an estimated allowance for work expenses and an adjustment of tax burdens relative to other income. With employees now comprising approximately 90% of workers, the outline questions the continuing need for the latter adjustment.

Alongside the cap, the specified expense deduction becomes easier to use. Eligible expenses expand to include qualifications directly necessary for duties, such as attorney, CPA, tax accountant, or patent attorney qualifications, and work-related books, workplace clothing, and normally necessary business entertainment. These work-related expenses are capped at JPY650,000. The eligibility threshold falls from the full employment income deduction to half that amount where employment receipts are JPY15 million or less, or JPY1.25 million where they exceed JPY15 million.

Changing Retirement Pay Taxation for Officers and Similar Persons

Retirement income generally benefits from a measure that taxes only half the amount remaining after the retirement income deduction. The outline abolishes this halving for payments to officers and similar persons with service of five years or less in that capacity. These persons include corporate officers under the Corporation Tax Act, national and local legislators, and national and local public servants.

The stated reason is concern that officers appointed for a short period from the outset defer salary and receive large retirement payments to avoid tax through the halving rule. Ordinary employees' retirement pay is not covered.

The amendment applies to income tax from 2013 and individual inhabitant tax on retirement payments due on or after January 1, 2013.

Housing Fund Gifts and Joint Inheritance Tax Liability

Exemption Limits for Gifts of Housing Acquisition Funds

For gifts from lineal ascendants of housing acquisition funds, the existing JPY10 million exemption limit changes according to housing performance and the year of the gift, as follows.

Eligible homes are limited to 240 square meters or less, except for victims of the Great East Japan Earthquake, and the measure runs through December 31, 2014. The expansion and extension aim both to stimulate demand by transferring older generations' assets to younger people with greater spending propensity and to build a stock of energy-efficient, earthquake-resistant homes.

Cases Where Joint Payment Liability Is Released

The outline notes criticism that joint inheritance tax liability may be enforced long after inheritance. It therefore releases that liability after five years from the filing deadline or similar date, and where the principal taxpayer receives installment payment or tax deferral treatment. However, enforcement already requested at the five-year point may continue thereafter. This applies to inheritance tax with filing deadlines or similar dates on or after April 1, 2012.

Introducing a Tax for Global Warming Countermeasures

The global warming countermeasure tax, included but deferred in FY2011 reform, is pursued again. It adds a carbon-emissions-based surcharge to the existing petroleum and coal tax covering all fossil fuels. The surcharge is JPY760 per kiloliter for crude oil and petroleum products, JPY780 per tonne for gaseous hydrocarbons, and JPY670 per tonne for coal. Implementation begins October 1, 2012, with rates increasing in stages as follows.

The outline explains that spreading a modest burden broadly avoids excessive burdens on particular sectors and ensures fairness. Exemptions or refunds through March 31, 2014 apply only to the surcharge for specified uses, including heavy oil and diesel for coastal shipping and diesel for railways, agriculture, forestry, and fisheries.

Foreign Assets and Interest Paid to Related Parties

Introducing Foreign Asset Reporting

Residents holding foreign assets with an aggregate value exceeding JPY50 million on December 31 must submit a statement of foreign assets to the tax office by March 15 of the following year, showing asset types, quantities, values, and other required information.

Additional taxes vary according to whether a statement was filed. If income tax or inheritance tax relating to foreign assets is underreported or unreported and the assets were disclosed in a filed statement, an amount equal to 5% of the relevant tax is deducted from the ordinary additional tax for understatement or non-filing. At introduction, however, the five-percentage-point increase for non-submission or incomplete reporting applied only to income tax, not inheritance tax. This differs from the reduction covering both taxes. Non-submission and false statements also carry criminal penalties of up to one year's imprisonment or a fine of up to JPY500,000. The reporting system applies to statements due from January 1, 2014. Under the enacted implementation rules, criminal penalties applied to violations from January 1, 2015.

Introducing Earnings Stripping Rules

Measures also address tax avoidance through related-party interest payments excessive relative to income. If a corporation's net interest paid to related parties exceeds 50% of adjusted income, the excess is not deductible in the current year. Related parties include persons linked by direct or indirect ownership of at least 50%, persons in de facto controlling or controlled relationships, and third parties whose debts are guaranteed by such persons. Exemptions include net related-party interest of JPY10 million or less. The rules apply to fiscal years beginning on or after April 1, 2013.

To determine if it relates to you

• If employment receipts exceed JPY15 million, see the employment income deduction revision. A JPY2.45 million cap is introduced.
• If you personally pay qualification expenses or work-related book, clothing, or entertainment costs, see the specified expense deduction revision.
• If you expect to receive retirement pay within five years of becoming a corporate officer, see the retirement income taxation revision.
• If you expect housing fund gifts from parents or grandparents, exemption limits depend on the gift year and housing performance.
• If you face joint inheritance tax liability, review the newly specified cases for release.
• If you hold foreign assets exceeding JPY50 million on December 31, see the foreign asset reporting system.
• If your business uses substantial fuel, see the global warming countermeasure tax. Eligible exempt or refundable uses are listed.

Source

• Outline of the FY2012 Tax Reform (December 10, 2011)

Materials Consulted for the Correction

• National Tax Agency: Overview of 2012 Income Tax Amendments (Pages 9–10)