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Japan Includes Tax Reforms In 2013 Budget

The first full-year budget for 2013/14 approved by the new Japanese Cabinet furthers Prime Minister Shinzo Abe's primary aim of stimulating the economy through public works spending, but also includes reforms to individual, corporate and investment taxation.

The overall size of the budget is put at JPY92.6 trillion (USD1 trillion), to be mainly financed by the issuance of new government bonds in the amount of JPY42.85 trillion and by tax revenue estimated at JPY43.1bn.

Much has been made of the fact that next year's tax revenue will be greater than bond issuance for the first time in four years, but it is also recognized that something will have to be done, sooner rather than later, about the continued rise in Japan's public debt and its servicing costs (that will amount to JPY22.2 trillion in 2013/14).

In addition, with Japan's rapidly ageing population, social security expenditure in 2013/14 is expected to rise by 10.4% to reach JPY29.1 trillion, and will account for nearly one-third of budget spending, while the projected spending on public works projects to stimulate economic growth, the Prime Minister's so-called 'Abenomics' policy, will increase in 2013/14 for the first time in four years, up 15.6% from the previous year to some JPY5.3 trillion.

There is little reliance on tax cuts within the 'Abenomics' economic stimulus plan, and the budget does not contain any measures to ease the effect of planned sales tax increases that are intended, in the next fiscal year, to begin fiscal deficit containment by raising around JPY13.5 trillion annually. Consumption tax should still increase from its present rate of 5% to 8% in April 2014, then to 10% in October 2015, while there is no movement towards the lower tax rates that have been suggested for necessities, such as food.

In fact, the tax reform package approved by the Cabinet at the same time as the overall budget also includes increased taxes for the wealthiest taxpayers by the introduction of a new 45% personal income tax rate band for those earning over JPY40m. The current highest marginal income tax rate is 40% on taxable incomes over JPY18m.

Inheritance taxes will also be increased by reducing the basic deduction by 40%, from the current amount calculated as 'JPY50m plus JPY10m multiplied by the number of statutory heirs' to 'JPY30m plus JPY6m multiplied by the number of statutory heirs,' and by raising the top tax rate to 55% from 50%.

However, the tax reforms also include some corporate tax breaks and investment incentives. For example, companies that make further investment in production facilities in Japan are to be given a tax incentive through a special depreciation allowance of 30% or a tax credit of 3% for the acquisition cost of the relevant production facilities, or of 7% for small and medium-sized enterprises (SMEs) making investments in the agricultural, forestry and fisheries, commerce, and service sectors.

There is also an increase to the maximum allowable tax deduction for research and development spending to 30% (from 20%) of a company's corporate tax liability, as well as a new tax cut for business entertaining by SMEs (of up to JPY8m annually).

The government will also introduce a Japanese version of an individual savings account to allow investment of up to JPY5m without taxation for 10 years, and will extend the period of the current tax credit relating to housing loans for four years, from January 1, 2014 to the end of 2017, and raise the maximum amount of deductions to JPY5m for eligible houses (long-term quality and low-carbon houses) and to JPY4m for other houses acquired during that period.


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