On January 29, 2013, the Japan Cabinet Office's Tax Commission submitted its 2013 tax reform proposal. The tax reform proposal will be submitted to Diet (Japan’s bicameral legislature) in February 2013 for review. The highlights are as follows:
(1) Special depreciation for production equipment/tax credit:
(Effective for tax years beginning April 1, 2013 through March 31, 2015)
• Corporations can elect special accelerated depreciation of 30% of the acquision cost or a tax credit of 3% of the acquisition cost (capped at 20% of corporate tax liability) for machinery and equipment used for domestic manufacturing production facilities.
• Small to medium-sized enterprises engaged in the distribution, retailing service; or agriculture industries with capital of 30 million yen or less are allowed either special depreciation of 30% of the acquisition cost or tax credit of 7% of the acquisition cost (capped at 20% of the corporate tax liability).
(2) Tax credits for increased salaries (Only blue form filer)
(Effective for tax years April 1, 2013 through March 31, 2016)
• If the total amount of salaries paid to domestic employees increased by 5% compared to the prior year, the national tax credit is equal to 10% of the increased amount of the tax liability (20% in the case of SMEs).
(3) Tax credits for R&D expenditure
(Effective for tax years April 1, 2013 through March 31, 2015)
• The maximum tax credit would be increased to 30% from 20% of tax liability.
(4) Tax credits for increased employment (Only blue form filer)
(Effective for tax years April 1, 2013 through March 31, 2014)
• The creditable amount would be increased to 400,000 yen from 200,000. The tax credit is equal to the increased number of the employees multiplied by 400,000 yen with limitation of 10% (20% in the case of SMEs).
(5) Taxation for SMEs entertainment expense:
(Effective from April 1, 2013)
• Under the 2013 Tax Reform Proposal, the deductible limit of entertainment expenses for SMEs would be increased from 5.4 million yen to 8 million.
Individual Income Tax
(1) Increase in the tax rate:
• The tax rate for the highest tax bracket would be increased to 45% from 40% over 40 million yen. When combined with the surtax and local tax, Japan’s top tax rate will be close to 56%.
(2) Withholding tax rate for dividends from listed stocks:
(Effective until December 31, 2013)
• The withholding tax rate for dividends from listed stocks would be reduced to 10.147% (7% national tax, 0.147% special reconstruction income tax, and 3% inhabitant tax) from 20.315% (15% national tax, 0.315% special reconstruction income tax, and 5% inhabitant tax).
It would be effective until December 31, 2013, and the normal rate of 20.315% will be applicable thereafter.
(3) Japanese Individual Savings Account (ISA)
(Effective from January 1, 2014)
• The tax exemption for dividends and capital gains arising on small investments in listed stock will be amended as follows:
(A) Investment term: maximum 5 years tax deferral;
(B) Exempt investment amount: 1 million yen per annum;
(C) Total exempt investment limit: 5 million yen (1 million yen multiplied by 5 years)
(4) The Offshore Assets Reporting Form, effective beginning in 2013, is now defined to require reporting based on the location of the security holding, not the location of the issuing company of the security. Under this change, domestic securities managed by an account established with an overseas office of a financial institution would be treated as overseas assets, while foreign securities managed in an account established with a Japanese office of a financial institution would be excluded from the scope of the reporting.
(1) Transfer Pricing:
• The berry ratio would be adopted to determine the profitability of the company by dividing the company's gross profit by its operating expenses.
(2) Earnings stripping rules:
• Currently, if both the thin capitalization rules and the earnings stripping rules are applicable in the year, only the larger of the disallowed amounts is applied to prevent double taxation of the same interest payments.
Under the 2013 Tax Reform Proposal, the rules would be reviewed.
(3) Foreign Tax Credit:
• If income of a Specified Foreign Subsidiary (SFS) is not taxed in the SFS’s home country, such non taxable foreign source income is not included in foreign source income for calculating the foreign tax credit limitation. Under the 2013 Tax Proposal, if the income is taxed in a country in which the head office is not located, such foreign source income will not be treated as non taxable, and thus allowed to be included in foreign source income for purposes of the credit limitation calculation.
Inheritance and Gift Tax
Changes to inheritance and gift taxes are included in the proposed tax reform. These include expansion of the scope of taxable property, integrated gift and inheritance tax systems, and a tax regime to facilitate succession of businesses.
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