What was decided, when, and by whom

The Outline of the FY2014 Tax Reform is the government's outline approved by the Cabinet on December 24, 2013. Beneath the original title, it simply states “Cabinet decision of December 24, 2013.” The starting point was how to support the economy following the consumption tax increase decided the previous year. The preamble reflects that approach.

In light of current economic conditions and the aim of overcoming deflation and revitalizing the economy, measures will include ending special reconstruction corporation tax one year early and expanding private investment and consumption and regional economic activity. These supplement the investment tax incentives and expanded income growth incentives decided in “The Increase in Consumption Tax and Local Consumption Tax Rates and Related Measures” (Cabinet decision of October 1, 2013).

The outline has two parts. Part I contains measures decided in connection with the consumption tax increase, while Part II contains additional decisions. For how to read recent outlines, see Key points of the FY2026 tax system revision outline Please also see.

Main pillars of the outline

Together, the two parts contain 13 chapters. Their names and decisions are as follows.

The accompanying revenue estimates show total decreases of JPY447 billion in a full year and JPY581 billion in the first year. The largest decrease is JPY299 billion from introducing the productivity-enhancing capital investment tax incentive. The preceding year's Outline of the FY2013 Tax Reform and the following year's Outline of the FY2015 Tax Reform shows the priorities of this year's changes.

Ending Special Reconstruction Corporation Tax One Year Early

Special reconstruction corporation tax heads the corporate taxation chapter. The outline ends its taxation period one year ahead of schedule.

Treatment after the period ends is also specified. Special reconstruction income tax imposed on a corporation's interest and dividends thereafter is credited, together with the ordinary income tax on those payments, against corporation tax for each fiscal year. Any excess is refunded. Corresponding measures will be taken for corporate inhabitant tax.

Choosing Special Depreciation or a Tax Credit for Capital Investment

A central private investment measure is the new productivity-enhancing capital investment tax incentive. It applies when a corporation filing blue returns acquires and uses qualifying machinery, tools, furniture and fixtures, buildings, building attachments, structures, or software between the effective date of the Industrial Competitiveness Enhancement Act and March 31, 2017. Assets must qualify as productivity-enhancing equipment under that Act and meet minimum size thresholds.

The benefit is elective: special depreciation of 50% of acquisition cost, or 25% for buildings and structures, versus a tax credit of 4%, or 2% for buildings and structures. The credit is capped at 20% of current-year corporation tax. For assets acquired by March 31, 2016, taxpayers may instead choose special depreciation allowing full acquisition-cost depreciation together with ordinary depreciation, or a credit of 5%, or 3% for buildings and structures.

Minimum acquisition cost thresholds differ by asset: JPY1.6 million per machine or unit; JPY1.2 million for tools and for furniture and fixtures; JPY1.2 million for each building, building attachment, or structure; and JPY700,000 for software.

The special depreciation or tax credit for machinery and other assets acquired by SMEs and similar entities is extended by three years. Qualifying productivity-enhancing equipment can be depreciated up to acquisition cost, rather than the existing 30% special depreciation. Tax credits are 7% for SMEs and similar entities and 10% for specified SMEs and similar entities, increased from 7%.

Making Wage Increase Tax Credits Easier to Use

The income expansion tax incentive, a tax credit for increased employee payroll, is extended by two years and two requirements are relaxed.

The first is the required payroll increase. The existing threshold of at least 5% changes by applicable fiscal year as follows.

The second concerns average pay. The calculation base changes from pay to all domestic employees to pay to continuously employed employees, and average pay must exceed the comparison amount, rather than merely equal or exceed it. Pay to continuously employed employees means pay to domestic employees paid in both the applicable and preceding fiscal years who are general insured persons under the Employment Insurance Act.

Reducing the Maximum Employment Income Deduction in Stages

For individual income tax, the maximum employment income deduction will gradually fall. Both the employment receipts threshold at which the maximum applies and the maximum amount itself decline in two stages.

For individual inhabitant tax, the changes corresponding to 2016 income apply in FY2017, and those corresponding to 2017 onward apply from FY2018. The same chapter raises corporate defined contribution pension limits from JPY51,000 to JPY55,000 per month where no other corporate pension exists.

Deducting Half of Business Dining Expenses

The rules disallowing entertainment expense deductions are extended by two years and revised. Fifty percent of dining expenses included in entertainment expenses becomes deductible. However, this excludes expenses incurred exclusively to entertain the corporation's own officers, employees, and similar persons—so-called internal entertainment expenses.

Small and medium corporations already have a special deduction provision. It is extended by two years and made elective with the 50% dining expense deduction. Which is more advantageous depends on the spending involved.

Restructuring Vehicle Taxes and Revising Consumption Tax Practice

Reducing Automobile Acquisition Tax and Increasing Light Motor Vehicle Tax

Automobile acquisition tax rates fall for vehicles acquired on or after April 1, 2014. The rate for private vehicles excluding light motor vehicles drops from 5% to 3%, and for commercial and light motor vehicles from 3% to 2%. Eco-car acquisition tax relief also expands, with 75% reductions rising to 80% and 50% reductions rising to 60%.

Light motor vehicle tax, meanwhile, rises. Private passenger vehicles with four or more wheels increase from JPY7,200 to JPY10,800, and private freight vehicles from JPY4,000 to JPY5,000, applying to newly acquired new vehicles from April 1, 2015. Mopeds of 50 cc or less rise from JPY1,000 to JPY2,000 from FY2015. Private passenger vehicles with four or more wheels that are 13 years beyond their first inspection are taxed at JPY12,900 from FY2016.

Deemed Purchase Ratios Under Simplified Taxation and Eligible Duty-Free Goods

Consumption tax deemed purchase ratios under simplified taxation will change. Finance and insurance become Category 5 businesses, with the ratio falling from 60% to 50%. Real estate becomes Category 6, falling from 50% to 40%. This applies to taxable periods beginning on or after April 1, 2015.

The consumption tax exemption for foreign visitors, known as the tax-free shop system, will also be revised. Consumables are added, limited to JPY500,000 sold by one shop in one day. The amount must exceed JPY5,000, the goods must be packaged as prescribed, and the traveler must pledge to export them within 30 days of purchase. This applies to taxable asset transfers and similar transactions from October 1, 2014.

To determine if it relates to you

• Company managers planning capital investment should see the private investment and SME chapters. Minimum acquisition costs vary by asset type.
• Those planning wage increases should see the income expansion chapter. Required increase percentages vary by applicable fiscal year.
• Those with employment receipts exceeding JPY15 million should see the individual income taxation chapter. Deduction limits fall in two stages, for 2016 and for 2017 onward.
• Companies with frequent client dining should see the corporate taxation chapter. The 50% dining expense deduction and the small and medium corporation special provision are alternatives.
• Those considering replacing vehicles should see the consumption taxation chapter. Automobile acquisition tax and light motor vehicle tax change at different times.
• Finance, insurance, and real estate businesses using simplified consumption taxation should see the consumption taxation chapter. Business categories and deemed purchase ratios change.

Source

• Outline of the FY2014 Tax Reform (Cabinet decision of December 24, 2013)