What was decided, when, and by whom

The Outline of the FY2016 Tax Reform was approved by the Cabinet on December 24, 2015. Beneath the title, it simply states “Cabinet decision of December 24, 2015.” This was the year in which corporation tax rate reductions and the reduced consumption tax rate system moved forward together. The preamble explains the aims.

In light of current economic conditions, growth-oriented corporate tax reform and other measures will be implemented to secure a virtuous economic cycle, while a reduced consumption tax rate system will be introduced to address the impact of the consumption tax increase on low-income households. Tax measures will also address the declining birthrate, educational revitalization, regional revitalization, and reconstruction of international tax rules suited to global business models. Other measures will support reconstruction following the earthquake disaster.

The text comprises seven chapters, followed by appendices on the reduced tax rate system and transfer pricing documentation. For how to read the outline, see Key points of the FY2026 tax system revision outline Please also take a look.

Main pillars of the outline

The seven chapters and their decisions are as follows.

Estimated internal tax revenue decreases are JPY16 billion in a full year and JPY31 billion in the first year. Separately, introducing reduced consumption tax rates is estimated to reduce revenue by approximately JPY1 trillion, including approximately JPY800 billion in national revenue. Comparing this with the preceding year's Outline of the FY2015 Tax Reform and the following year's Outline of the FY2017 Tax Reform helps put this year's reforms in context.

Reducing the Corporation Tax Rate in Stages from 23.9%

The corporate taxation chapter begins with growth-oriented corporate tax reform. The corporation tax rate will fall from the current 23.9% to 23.4% for fiscal years beginning on or after April 1, 2016, and to 23.2% for those beginning on or after April 1, 2018. For ordinary corporations with capital exceeding JPY100 million, corporate enterprise tax's value-added component will rise from 0.72% to 1.2% and its capital component from 0.3% to 0.5%, while the income-based rate on annual income exceeding JPY8 million will fall from 6.0% to 3.6%. This expands size-based taxation. Reference materials show the combined national and local effective corporate tax rate falling from 32.11% in FY2015 to 29.97% in FY2016 and FY2017, and 29.74% in FY2018.

The reductions will be funded by broadening the tax base. The declining-balance method will be abolished for building attachments, structures, and mining buildings acquired on or after April 1, 2016. The productivity-enhancing capital investment tax incentive will also expire. The stages for reducing loss carryforward deduction limits established in the previous year's reform will be revised.

Introducing Reduced Consumption Tax Rates and Moving Toward Invoices

The reduced consumption tax rate system will be introduced on April 1, 2017. The qualified invoice retention system, commonly called the invoice system, will follow on April 1, 2021 as the input tax credit method for multiple tax rates. Until then, the existing invoice retention system will largely remain, with measures accommodating separate accounting by rate.

The transfers of taxable assets and similar transactions eligible for the reduced rate, provisionally called reduced-rate taxable transfers, shall be as follows, and the reduced rate shall be 6.24%, or 8% including local consumption tax.

There are two eligible categories: transfers of food and beverages, and transfers of newspapers published at least twice weekly under subscription contracts. Food and beverages means food under the Food Labeling Act, excluding alcoholic beverages under the Liquor Tax Act, and does not include restaurant services. As a transitional measure, invoices for taxable purchases of reduced-rate items must additionally indicate that the transaction qualifies for the reduced rate and show the total consideration separately for each tax rate.

Simplified calculations are permitted for businesses with taxable sales of JPY50 million or less in the base period. They apply to output tax from April 1, 2017 through March 31, 2021, and to input tax from April 1, 2017 through the end of the taxable period containing March 31, 2018. Once the qualified invoice system begins, retaining qualified invoices issued by registered issuers becomes a condition for input tax credits. Registration applications will be accepted from April 1, 2019. For a specified period after introduction, transitional measures permit a percentage of input tax credits on taxable purchases from tax-exempt businesses and similar suppliers.

Allowing a JPY30 Million Deduction When Selling a Vacant Home

The first new individual income taxation measure is a special capital gains deduction for vacant homes. An individual who inherits a home occupied by the deceased immediately before inheritance, described in the outline as the deceased's residential home, and its underlying land may claim the JPY30 million special deduction for residential property capital gains on certain disposals between April 1, 2016 and December 31, 2019.

Eligible homes are limited to those built on or before May 31, 1981, excluding condominium units, and occupied only by the deceased immediately before inheritance. Disposal must occur by December 31 of the year containing the third anniversary of the start of inheritance, and transactions with consideration exceeding JPY100 million are excluded. If the home is transferred intact, it must meet earthquake safety standards. Transfer of the land after demolition also qualifies.

The same chapter introduces special provisions for home renovations enabling three generations to live together. Eligible work adds a kitchen, bathroom, toilet, or entrance, resulting in multiple facilities in at least two of these categories. A tax credit of 10% of standard construction costs, capped at JPY2.5 million, is available. A deduction for switch OTC medicines is also introduced to encourage self-medication. Where qualifying medicine expenditure between January 1, 2017 and December 31, 2021 exceeds JPY12,000, the excess, capped at JPY88,000, may be deducted from total income and similar amounts. It cannot be combined with the existing medical expense deduction.

Replacing Automobile Acquisition Tax with an Environmental Performance Levy

Automobile acquisition tax will be abolished on March 31, 2017. Environmental performance components will instead be introduced into automobile tax and light motor vehicle tax, while the existing taxes become engine-displacement components. The taxable scope remains the same as automobile acquisition tax, the tax base is acquisition cost, and the exemption threshold is JPY500,000. The measures apply to vehicles acquired on or after April 1, 2017.

Rates vary by environmental performance. Electric and plug-in hybrid vehicles and certain others are exempt, with rates of 1% and 2% depending on fuel efficiency standards, and 3% for vehicles outside those categories. For commercial vehicles, the 1% and 2% categories will temporarily become 0.5% and 1%, respectively. The 3% category will temporarily be 2% for commercial and light motor vehicles. The greening incentive will be extended by one year.

Requiring Three Types of Multinational Documentation and Increasing Additional Taxes

For international taxation, transfer pricing documentation rules will be established in response to BEPS Action Plan recommendations. Country-by-country reporting requires domestic corporations and similar entities that are ultimate parent entities to report revenue, profit before tax, taxes paid, and other required information for each country where the group operates. The master file requires domestic constituent entities and similar entities to report the group's organizational structure, business overview, financial position, and other required information. Both must be provided through e-Tax within one year from the day following the ultimate parent's fiscal year-end. Groups with consolidated revenue below JPY100 billion in the preceding fiscal year are exempt. Documents necessary to determine arm's-length prices, known as the local file, must be prepared by the final return filing deadline and generally retained for seven years.

Additional tax rules will be revised as part of tax administration measures. For amended returns filed after notice of an investigation but before anticipating a correction or assessment, additional tax for understatement, previously 0%, becomes 5%, or 10% on the portion exceeding the greater of the timely filed tax amount and JPY500,000. Additional tax for non-filing rises from 5% to 10%, or 15% on tax payable exceeding JPY500,000. A further ten percentage points apply if additional tax for non-filing or heavy additional tax for the same tax category was imposed within the preceding five years. A credit card tax payment system will also be introduced.

To determine if it relates to you

• Company managers should see the corporate taxation chapter. The rate reductions occur in two stages, in April 2016 and April 2018.
• Businesses handling food, beverages, or newspapers should see the consumption taxation chapter. Two tax rates will apply from April 1, 2017.
• Businesses with taxable sales of JPY50 million or less should also see that chapter. The simplified calculation periods differ for output and input tax.
• If an inherited family home is vacant, see the individual income taxation chapter. Conditions apply to its construction date, disposal deadline, and sale price.
• Companies with overseas subsidiaries should see the international taxation chapter. Consolidated revenue of JPY100 billion is the threshold for reporting obligations.
• If you are considering replacing your car, see the consumption taxation chapter. April 2017 is the transition point for abolishing automobile acquisition tax and introducing the environmental performance levy.

Source

• Outline of the FY2016 Tax Reform (Cabinet decision of December 24, 2015)