What was decided, when, and by whom

The Outline of the FY2017 Tax Reform was approved by the Cabinet on December 22, 2016. It forms the basis of tax reform bills to be submitted to the following year's ordinary Diet session and serves as the government's blueprint for what will change in that fiscal year and how.

The opening of the outline states the aims for the year.

To strengthen Japan's economic growth potential, the spousal deduction and special spousal deduction will be revised to create a system in which people need not adjust their working hours for tax reasons. To promote a virtuous economic cycle, the R&D tax credit and income expansion tax incentive will also be revised, and investment promotion tax incentives for SMEs will be expanded.

This is followed by measures to reform liquor tax to restore fairness in tax burdens across alcoholic beverages, revise controlled foreign company rules to address international tax avoidance, and establish various provisions for tax responses to disasters.

For adjacent years, see FY2016 and FY2018, and for the most recent developments, FY2026 please see the article.

Main pillars of the outline

Restructuring the Spousal Deduction and Special Spousal Deduction

The changes to the spousal deduction and special spousal deduction affect many households. As the opening states, the aim is to create a system in which people need not adjust their working hours for tax reasons.

For the special spousal deduction, the eligible spouse's total income range was expanded to over JPY380,000 and up to JPY1.23 million (previously over JPY380,000 and below JPY760,000). The deduction is JPY380,000 if the resident taxpayer's total income is JPY9 million or less and the spouse's total income is JPY850,000 or less, and then decreases in stages.

At the same time, an income ceiling was imposed on the taxpayer claiming the deduction. Neither deduction is available where the resident taxpayer's total income exceeds JPY10 million. Below that ceiling, deduction amounts decrease across three bands: total income of JPY9 million or less, over JPY9 million and up to JPY9.5 million, and over JPY9.5 million and up to JPY10 million. The income tax spousal deduction was set at JPY380,000 for those with income of JPY9 million or less and JPY130,000 for those with income over JPY9.5 million and up to JPY10 million.

The changes apply to income tax for 2018 onward and individual inhabitant tax for FY2019 onward.

Exempting Transfers of Virtual Currency from Consumption Tax

The consumption taxation chapter introduced an amendment concerning what are now called cryptoassets. The outline states it in one short sentence:

Transfers of virtual currencies defined in the Payment Services Act shall be exempt from consumption tax.

This amendment means the transaction of selling virtual currency itself is not subject to consumption tax. It applies to transfers of assets and other transactions and taxable purchases made domestically by businesses on or after July 1, 2017.

The outline also provides transitional treatment. When calculating input tax credits using the individual attribution method for virtual currency acquired before the amendment, the purchase is classified as a taxable purchase required exclusively for transfers of taxable assets and similar transactions. Furthermore, if a business held virtual currency worth at least JPY1 million excluding tax on June 30, 2017 and the quantity held on that date exceeded the average daily quantity held from June 1 through June 30, no input tax credit would be allowed for consumption tax on the taxable purchases corresponding to the increase.

For a more detailed discussion of this issue, see Selling crypto assets does not incur consumption tax And, The crypto asset tax system was created this way. Please also see.

Moving R&D, Wage Increases, and Capital Investment Forward Together

R&D Tax Credit

The tax credit for total R&D expenses was restructured from a rate of 8% to 10% based on the R&D expense ratio to a rate determined by the percentage increase or decrease in R&D expenses. The standard maximum is 10%, with a temporary two-year measure raising it to 14%. The scope of R&D expenses was expanded to include costs of developing new services provided for consideration.

Income Expansion Tax Incentive

For corporations other than SMEs and similar entities, the requirement that average pay exceed the prior year's amount was replaced by a requirement for an increase of at least 2%. The credit is 10% of the increase in employee payroll plus 2% of a specified amount. For SMEs and similar entities, the additional credit component where the increase is at least 2% was set at 12%.

Capital Investment by SMEs

The enhanced SME investment promotion tax measures were restructured as the SME Management Strengthening Tax System, covering all tools, furniture, fixtures, and building attachments. SMEs and similar entities with certified management improvement plans that acquire and use eligible equipment between April 1, 2017 and March 31, 2019 may choose either special depreciation up to the acquisition cost or a tax credit of 7% of acquisition cost (10% for specified SMEs and similar entities).

Revising the Liquor Tax Rate Structure in Stages

The tax rate structure itself was revised to address large differences in tax burdens among alcoholic beverages. Per kiloliter, rates would change from JPY220,000 to JPY155,000 for effervescent alcoholic beverages and from JPY140,000 to JPY100,000 for brewed alcoholic beverages.

The changes would not take place all at once. Implementation begins on October 1, 2020, with three stages for effervescent alcoholic beverages—October 1, 2020, October 1, 2023, and October 1, 2026—and two stages for brewed alcoholic beverages, on October 1, 2020 and October 1, 2023.

Alcoholic beverage definitions were also revised. Beer may include fruit and certain flavorings up to 5% of the malt weight, and the minimum malt ratio is reduced to 50% (currently 67%). So-called new-genre beverages will be classified as happoshu from October 1, 2023.

Shifting Controlled Foreign Company Rules from Tax Rates to Substance

The controlled foreign company rules tax income accumulated in overseas subsidiaries by including it in the Japanese parent company's income. This year's revision substantially changed the initial assessment.

The tax burden ratio threshold previously used to narrow the scope was abolished. Instead, the business, substance, management and control, local business, and unrelated-party tests were collectively renamed the economic activity tests. Foreign related companies failing any applicable test would be subject to entity-level income inclusion. The assessment focuses on whether the business has substance.

Exemptions were also provided to reduce administrative burdens. Entity-level income inclusion does not apply if the foreign related company's tax burden ratio is at least 20%. However, the exemption threshold rises to at least 30% for companies lacking substance, companies with a high ratio of passive income to assets, and companies headquartered in jurisdictions uncooperative in tax information exchange. The rules apply to foreign related companies' fiscal years beginning on or after April 1, 2018.

Asset Taxation and Disaster Response

Foreign Assets and Inheritance Tax

For Japanese-national heirs and similar recipients living abroad, the condition for excluding foreign assets from inheritance tax was changed to require that neither the deceased or transferor nor the heir or recipient had a domicile in Japan within ten years before inheritance (previously five years). Meanwhile, temporary residents holding a status of residence are taxed only on Japanese assets. Gift tax follows the same treatment, applying to property acquired on or after April 1, 2017.

Fixed Asset Tax on High-Rise Condominiums

Buildings exceeding 60 meters in height—super-high-rise buildings under building standards legislation—with residences on multiple floors were defined as residential super-high-rise buildings. When allocating fixed asset tax among unit owners, the floor area of each unit is adjusted using a floor-specific exclusive floor area correction rate. The rate is 100 for the first floor and increases by 10 divided by 39 for each higher floor. Real estate acquisition tax is adjusted on the same basis. The rules cover buildings newly subject to tax from FY2018.

Tax Measures for Disasters

Disaster provisions appear across the individual income, asset, corporate, and consumption taxation chapters. For tax administration, the deadline extension system for disasters and similar events allows the Commissioner of the National Tax Agency to specify the eligible group and extended deadline.

To determine if it relates to you

• If you have adjusted working hours because of a spouse's earnings, note that eligibility for the special spousal deduction now extends to spouses with total income of up to JPY1.23 million.
• If your own total income exceeds JPY9 million, note that deductions decrease in stages and become unavailable above JPY10 million.
• Businesses trading virtual currencies should check the consumption tax exemption for transfers from July 1, 2017 and the transitional measures concerning holdings as of June 30, 2017.
• Companies conducting ongoing R&D, companies raising wages, and SMEs planning capital investment should consider the three systems in the corporate taxation chapter together.
• Companies with overseas subsidiaries need to review the rules for fiscal years beginning on or after April 1, 2018, as conclusions previously based on tax rate levels may change under the economic activity tests.
• If you are considering inheritance or gifts to family members abroad, review the changes to tax liability in the asset taxation chapter.
• If you are considering purchasing a high-rise condominium, check whether the floor-level adjustment applies, together with the date of the purchase contract.

Source

• Outline of the FY2017 Tax Reform (Cabinet decision of December 22, 2016)