What was decided, when, and by whom

The Outline of the FY2018 Tax Reform is the government's outline approved by the Cabinet on December 22, 2017. Beneath the original title, it simply states “Cabinet decision of December 22, 2017.” The opening explains what is to be changed.

In light of diversifying work styles, individual income taxation will be revised to support people working in a broad range of ways. To overcome deflation and revitalize the economy, tax measures will encourage wage increases and productivity improvements, as well as capital investment by regional SMEs. The business succession tax system will be expanded to facilitate generational transitions at SMEs, and an international tourist tax (provisional name) will be introduced to promote tourism. The allocation criteria for local consumption tax will also be fundamentally revised to build a local tax and fiscal foundation supporting communities. Other measures include revisions to international taxation, promotion of electronic tax procedures, and revisions to tobacco tax.

The three major changes are restructuring deductions, introducing time-limited special measures for SME succession, and creating a new tax on people departing Japan. For how to read the outline, see Key points of the FY2026 tax system revision outline Please also see.

Main pillars of the outline

There are seven chapters. Their names and the decisions in each are as follows.

The accompanying estimates of revenue changes (internal taxes) total an increase of JPY159 billion in a full year and a decrease of JPY1 billion in the first year. Reading this alongside the preceding year's Outline of the FY2017 Tax Reform and the following year's FY2019 Outline of Tax Reform helps put this year's reforms in context.

Reducing the Employment Income Deduction by JPY100,000 and Increasing the Basic Deduction by JPY100,000

The central individual income taxation measure is a shift between deductions. The employment income deduction will be reduced uniformly by JPY100,000, with the employment income threshold at which the maximum deduction applies reduced to JPY8.5 million and the maximum deduction reduced to JPY1.95 million. Conversely, the basic deduction will be increased uniformly by JPY100,000. For many employees, the decrease and increase offset one another.

However, the basic deduction will not increase equally for everyone. It will taper for individuals whose total income exceeds JPY24 million and be unavailable to those whose total income exceeds JPY25 million. The revised amounts are JPY480,000 for total income of JPY24 million or less, JPY320,000 for income over JPY24 million and up to JPY24.5 million, and JPY160,000 for income over JPY24.5 million and up to JPY25 million.

Treatment of Pensions and Employment Income

The public pension deduction will also be reduced uniformly by JPY100,000, with a maximum deduction of JPY1.955 million where public pension receipts exceed JPY10 million. It will be reduced by a further JPY100,000 where total income other than pension income exceeds JPY10 million but does not exceed JPY20 million, or by a further JPY200,000 where it exceeds JPY20 million. Meanwhile, an income adjustment deduction will be introduced for certain people with employment receipts exceeding JPY8.5 million, including those with dependent relatives under age 23.

Reducing the Special Blue Return Deduction from JPY650,000 to JPY550,000

The special blue return deduction for those recording transactions according to regular bookkeeping principles will be reduced to JPY550,000 (currently JPY650,000). It will remain JPY650,000, however, where the journal and general ledger are maintained and retained electronically, or the final return and related documents are submitted through e-Tax by the deadline. These revisions apply to income tax for 2020 onward and individual inhabitant tax for FY2021 onward.

Introducing Time-Limited Special Business Succession Tax Rules

The largest asset taxation measure is the introduction of special provisions for deferring gift and inheritance taxes on unlisted shares and similar assets.

Where a special successor (provisional name) acquires unlisted shares in a specially certified succession company (provisional name) by gift, inheritance, or bequest (collectively, “gift or inheritance” in section 1 below) from a person who held representative authority over that company, payment of the entire gift or inheritance tax corresponding to the taxable value of all such shares acquired shall be deferred until the successor's death or another prescribed event.

All acquired shares qualify, and the entire corresponding tax amount is deferred. A specially certified succession company is a company that submits a special succession plan to its prefecture between April 1, 2018 and March 31, 2023 and obtains certification under the Act on Facilitation of Succession of Management of Small and Medium Sized Enterprises.

Requirements will also be relaxed. Failure to satisfy the employment maintenance requirement under the existing business succession tax system will not cause the tax deferral to end. Furthermore, where certain requirements indicating changes in the business environment are met and shares are transferred or the company is dissolved after the special succession period, the difference from tax recalculated using the value at that time will be exempted. The provisions apply to gifts, inheritances, and bequests between January 1, 2018 and December 31, 2027.

Closing Two Inheritance Tax Loopholes

The first concerns the special provisions for small residential and business land. The special treatment of specified residential land for people who do not live in an owner-occupied home will exclude those who, within three years before inheritance, lived in a home in Japan owned by a relative within the third degree or a specially related corporation, and those who previously owned the home in which they lived when the inheritance began. Land first used for a leasing business within three years before inheritance will also be excluded from qualifying leased business land.

The second concerns general incorporated associations. When a director of a specified general incorporated association or similar entity dies, the entity will be deemed to have acquired by bequest an amount calculated by dividing its net assets by the number of family-related officers at the time of death, and will be subject to inheritance tax. Specified general incorporated associations and similar entities are those meeting requirements such as having family-related officers account for more than half of all officers immediately before inheritance begins.

Reducing Taxes for Companies That Raise Wages and Invest in Equipment

For corporate taxation, the income expansion tax incentive will be restructured. A corporation filing blue returns may claim a credit of 15% of the increase in payroll in fiscal years beginning between April 1, 2018 and March 31, 2021 if average pay increases by at least 3% and domestic capital investment is at least 90% of total depreciation expenses. The rate is 20% if education and training expenses increase by at least 20%. For SMEs and similar entities, it is 15% if pay increases by at least 1.5%, or 25% if pay increases by at least 2.5% and requirements such as a rise of at least 10% in education and training expenses are met. The credit is capped at 20% of current-year corporation tax.

A measure working in the opposite direction will also be introduced. During the same period, large companies that satisfy neither an increase in average pay over the comparison amount nor domestic capital investment exceeding 10% of total depreciation expenses will be unable to claim the R&D tax credit and certain other tax credits for that fiscal year. Companies that neither raise wages nor invest will be excluded from these incentives.

There is also a measure targeting capital investment itself. Where SMEs and similar businesses acquire certain machinery and equipment listed in a certified plan for introducing advanced equipment expected to improve labor productivity by an annual average of at least 3%, the fixed asset tax base for the first three years will be the asset value multiplied by a rate between zero and one-half prescribed by municipal ordinance.

Introducing a JPY1,000 Tax per Departure

A key consumption taxation measure is the introduction of an international tourist tax (provisional name). It applies to departures from Japan by international ships, aircraft, and similar transport.

The international tourist tax (provisional name) rate shall be JPY1,000 per departure.

There are three exempt cases: transit passengers departing within 24 hours after arriving by air; people aboard international ships, aircraft, or similar transport that called at Japan due to weather or other reasons; and children under age two. In principle, international transport operators collect the tax and remit it to the national government by the end of the second following month. It applies to departures on or after January 7, 2019.

Tobacco tax will also change. Combined national and local tobacco tax rates will increase from JPY11,424 to JPY14,424 per 1,000 cigarettes in three stages, on October 1, 2018, October 1, 2020, and October 1, 2021. A separate category for heated tobacco products will also be established within manufactured tobacco for smoking.

Switching Large Corporations from Paper to Electronic Returns

Digitization is central to improving the tax administration environment. Large corporations will be required to provide the information required in their final, interim, and amended corporation tax and local corporation tax returns through e-Tax. Large corporations here means domestic corporations with capital or contributions exceeding JPY100 million at the start of the fiscal year, mutual companies, investment corporations, and specified purpose companies. A similar obligation will apply to consumption tax. This applies to fiscal years beginning on or after April 1, 2020.

For employees, the relevant change is digitization of year-end tax adjustment procedures. For life insurance premium deductions, earthquake insurance premium deductions, and the housing loan tax credit, electronically recorded information bearing the issuer's electronic signature may be provided instead of paper deduction certificates or year-end loan balance certificates. This applies to declarations submitted on or after October 1, 2020.

To determine if it relates to you

• People with employment receipts exceeding JPY8.5 million, non-pension income exceeding JPY10 million, or total income exceeding JPY24 million are among those whose burden increases through the shift in deductions.
• Blue return filers need electronic bookkeeping or e-Tax filing to retain the JPY650,000 deduction.
• Owners of unlisted companies considering succession should check the submission period for special succession plans.
• Owners of rental property and those wishing to leave their home to children who do not own a home should review the special provisions for small residential and business land.
• Those whose general incorporated association's directors are family members should review inheritance taxation of specified general incorporated associations and similar entities.
• Those handling accounting for corporations with capital exceeding JPY100 million should review mandatory electronic filing.

Source

• Outline of the FY2018 Tax Reform (Cabinet decision of December 22, 2017)