Trade policy review report by the secretariat

4.3  Measures Affecting Production and Trade

4.3.1  Taxes

1.1.  Total tax revenue in Japan in FY2013 was ¥46,953 billion with the biggest contributions from income tax (33% of the total), consumption tax (23%), and corporation tax (22%) suggesting that the tax base is quite narrow although the total for income tax includes capital gains tax (Table 3.11).

1.2.  For FY2013 and 2014, the Ministry of Finance has made or proposed a number of changes to the taxes:

• 
  Introducing a new 45% (plus an additional 10% for local taxes) marginal rate for individual income tax for incomes over ¥40 million;
  
• 
  Introducing a tax exemption for small investments (new investment of up to ¥1 million per year) in special accounts for 10 years;
  
• 
  Extending and improving tax incentives for housing;
  
• 
  Increasing inheritance tax by reducing deductions and raising the highest marginal rate to 55% while encouraging earlier transfers and business succession;
  
• 
  Encouraging investments by corporations through relaxed capital allowances and tax credits for production facilities, energy-related facilities, and research and development spending; and
  

• 
  Abolishing the special corporate tax of 10% one year ahead of schedule. The special corporate tax was introduced at the start of FY2012 for reconstruction after the Great East Japan Earthquake and was abolished end-FY2013.⁹⁵
  

Table 3.18 Tax revenue, FY2009-13

(¥ billion)

	2009	2010	2011	2012	2013 Revised estimate
Income tax	12,913,887	12,984,351	13,476,192	13,992,487	15,530,813
Corporation tax	6,356,407	8,967,688	9,351,426	9,758,311	10,493,718
Inheritance tax	1,349,778	1,250,439	1,474,381	1,503,946	1,574,336
Consumption tax	9,807,541	10,033,311	10,194,597	10,350,429	10,829,301
Liquor tax	1,416,756	1,389,290	1,369,318	1,349,638	1,347,000
Tobacco tax	822,383	907,671	1,031,547	1,017,942	1,037,548
Gasoline tax	2,715,189	2,750,101	2,648,399	2,621,915	2,574,263
Liquefied petroleum gas tax	12,324	11,888	11,301	10,713	10,265
Aviation fuel tax	79,266	74,931	46,247	49,360	52,188
Petroleum and coal tax	486,791	501,932	519,103	566,946	599,473
Promotion of power resources development tax	329,277	349,166	331,379	328,049	328,292
Motor vehicle tonnage tax	635,112	446,541	447,754	396,894	381,356
Customs duty	731,880	785,881	874,227	897,230	1,034,379
Tonnage tax	8,851	9,512	9,681	9,829	9,972
Other	63	70	177	42	122
Stamp revenue	1,067,572	1,024,021	1,046,873	1,077,676	1,126,069
Total for general account	38,733,076	41,486,794	42,832,602	43,931,407	46,952,947

Source: FY2011 and FY2012 Survey of the Settled Amount of Tax and Stamp Revenues. Viewed at: http://www.mof.go.jp/tax_policy/reference/account/h21.pdf , http://www.mof.go.jp/tax_policy/reference/account/h22.pdf , http://www.mof.go.jp/english/tax_policy/account/h2011e.pdf , http://www.mof.go.jp/english/tax_policy/account/h2012e.pdf , and http://www.mof.go.jp/english/tax_policy/account/h2013e.pdf.

1. Income tax

1.3.  There are six brackets for income tax with a top rate (including inhabitants tax) of 40% on taxable income over ¥18 million. A new bracket of 45% for taxable income of more than ¥40 million is to be introduced for 2015. However, about 80% of taxpayers are in lower tax bands and pay a marginal rate of 10% or less.⁹⁶

1.4.  Income tax covers ten different categories of income: interest; dividends; real estate; business; employment; retirement; timber; capital gains; occasional; and miscellaneous. However, income from capital gains, interest, and dividends are taxed at 20% while retirement income and income from timber are also treated differently. Income from all ten categories is included under income tax.

4.3.1.2  Corporation tax

1.1.  Corporation tax is charged on worldwide income for domestic corporations (defined as those whose head office is located in Japan – which, under the Commercial Code, means all companies incorporated in Japan). Foreign companies are subject to corporation tax or withholding tax on income from within Japan.

1.2.  The corporation tax rate on corporate incomes was reduced from 30% to 25.5% in FY2012, although it has been reported that when other taxes (see local taxes below) are added the total effective tax rate on corporations is about 34.62%. However, only about 30% of corporations have taxable profits.⁹⁷

1.3.  An enterprise that undertakes to maintain specified bookkeeping records and documentation and gains approval from the Director of the District Tax Office can file a blue return that entitles it to several concessions including:

• 
  The right to carry forward tax losses for nine years (increased from seven years in April 2012) or carried back to the previous year;
  
• 
  The authorities may correct the corporation's estimate of income only when errors are found when the accounts are examined. In making corrections to a tax return, the authorities must provide detailed reasons in writing; and
  
• 
  Special taxation measures such as special depreciation and tax credits as set out in the Special Taxation Measures Law.
  

4.3.1.3  Corporation tax-based incentives

1.1.  Tax incentives are used in Japan to encourage investment in specific areas and in specific activities (research and development). In general the tax credit of 8-10% of spending on specified R&D can be counted against corporation tax up to a limit of 20% of corporation tax payable (30% for FY2013-2014) with higher credits available if R&D spending has increased compared to the previous three years. There are also tax incentives to encourage global enterprises to establish R&D subsidiaries or regional headquarters in Japan by reducing taxable income from approved activities by 20%.

1.2.  In addition, for FY2011-2015 incentives are available for creating employment, for FY2013-2017 for increasing wages and, for FY2013-2016, for purchases of machinery and equipment under certain circumstances.

1.3.  In addition, where qualified companies implement the relevant projects in designated Comprehensive Special Zones for International Competitiveness⁹⁸, they may qualify for preferential treatment of either:

• 
  specially recognized capital allowances (50% of acquisition price of equipment (25% for buildings)) or tax credits (15% of acquisition price of equipment (8% for buildings)) calculated based on the price of assets/buildings acquired between 1 August 2011 and 31 March 2016; or
  
• 
  a 20% deduction for five years in taxable income from certain business activities conducted based on plans approved by the Prime Minister between 1 August 2011 and 31 March 2016; while
  
• 
  other incentives exist for Comprehensive Special Zones for Local Revitalization.⁹⁹
  

1.4.  Following the 2011 Great East Japan Earthquake, a variety of measures were introduced in severely damaged areas to encourage reconstruction which included tax credits of 10% of salaries plus employee expenses, special capital allowances or tax credits on acquired assets, and a five year exemption from corporation tax for new enterprises.¹⁰⁰

1.5.  The Act on Special Measures Concerning Taxation of 1957 (last amended in 2014) also includes a variety of tax incentives which include accelerated capital allowances, tax credits, and reduction in taxable income for enterprises in international strategic comprehensive special zones, reduced taxation for income from research and development for approved enterprises and other measures to reduce tax for enterprises in specified areas.

4.3.1.4  Consumption tax

1.1.  Consumption tax is charged on the value added principal for asset transfers (defined as sale or lease of assets or services), that is, tax paid on purchases is deducted from tax received for sales and the balance paid to the State. In April 2014, the tax was increased from 5% to 8% and the government intends to increase it again to 10% in April 2017. The tax is charged at the point of transferring goods and providing services or, for imports, when cargo is retrieved from a bonded area. For domestic transactions, an enterprise is required to make an annual transfer to the State of the balance between consumption tax paid on inputs and charged on sales. There are relatively few non-taxable transactions – mainly medical, nursing, and educational services as well as financial transactions – and there are provisions for exemptions for small enterprises (taxable sales of ¥10 million or less). In addition, there are several types of transactions that are exempt from consumption tax including exports, international aviation, and international transport services.¹⁰¹

4.3.1.5  Local taxes

1.1.  Local taxes payable by enterprises include:

• 
  Inhabitant taxes, which are prefectural and municipal taxes comprised of a per capita rate and a corporate tax rate, where;
  
  • 
    The per capita rate is computed and levied without regard for income of the enterprise; and
    
  • 
    The corporate tax rate is assessed based on the corporation tax paid by the enterprise in the current fiscal year (from 1 October 2014) at 3.2-4.2% for a prefecture, and 9.7-12.1% for a municipality;
    
• 
  Enterprise tax which may be charged by prefectures based on taxable income, paid in capital and value added up to the rates set out in Table 3.12;
  
• 
  Business office tax for companies with premises larger than 1,000 m² and/or more than 100 employees in certain cities at ¥600 per m² and 0.25% of total employee remuneration; and
  
• 
  Fixed assets tax of 1.4% of the value of fixed assets.
  

Table 3.19 Maximum rates of enterprise taxes

	Tax base	Rate (%)	Rate (%) From 1 Oct. 2014
Capital less than ¥100 million	Net income	5.30	6.70
Capital greater than ¥100 million	Net income	2.90	4.30
	Value added	0.48	0.48
	Paid in capital	0.20	0.20
Electricity, gas supply, and insurance companies	Gross receipts	0.70	0.90

Source: Authorities.

4.3.1.6  Excise duties

1.1.  Total revenue from all excise duties (Table 3.13) contributed approximately 12% to total tax revenue in FY2013 where gasoline and liquor taxes contributed more than other excise duties combined (Table 3.11). In general, excise duties are charged at point of shipment from the place of manufacture or from the bonded area, although there are provisions for payment at the end of the month following shipment/withdrawal or even later if the tax-payer provides a security. Exports are exempt from excise duties.

Table 3.20 Excise duties

Duty		¥
Liquor tax	(¥/kl)
Sparkling alcohol drinks	220,000
Low malt beer (25-50% malt)	178,125
Low malt beer (less than 25% malt)	134,250
Other	80,000
Fermented liquor	140,000
Refined sake	120,000
Wine	80,000
Shochu, etc.	200,000	plus 10,000 per 1% alcohol over 20%
Whisky, brandy, spirits	370,000	plus 10,000 per 1% alcohol over 37%
Blended liquor	220,000	plus 11,000 per 1% alcohol over 20%
Sake compound	100,000
Mirin	20,000
Sweet wine or liqueur	120,000	plus 10,000 per 1% alcohol over 12%
Powdered liquor	390,000
Tobacco taxes
General rate
Tobacco tax		5,302 per 1,000 cigarettes
Special tobacco tax		820 per 1,000 cigarettes
Reduced rate (for 3^rd grade tobacco)^a
Tobacco tax		2,517 per 1,000 cigarettes
Special tobacco tax		389 per 1,000 cigarettes
Gasoline tax		48,600 per kl
Liquefied petroleum gas tax		17.5 per kg
Aviation fuel tax		18,000 per kl
Petroleum and coal tax
Crude petroleum		2,540 per kl
Natural gas		1,600 per tonne
Coal		1,140 per tonne
Local gasoline tax		5,200 per kl
Motor vehicle tonnage tax^b
3 year inspection certificate
Passenger vehicles	Private	12,300 per 0.5 tonne or part thereof
Light motor vehicles	Private	9,900
Motorcycles	Private	5,700
	Business	4,500
2 year inspection certificate
Passenger vehicles	Private	8,200 per 0.5 tonne or part thereof
Trucks over 2.5 tonnes	Private	8,200 per tonne or part thereof
	Business	5,200 per tonne or part thereof
Trucks under 2.5 tonnes	Private	6,660 per tonne or part thereof
	Business	5,200 per tonne or part thereof
Light motor vehicles	Private	6,600
	Business	5,200
1 year inspection certificate
Passenger vehicles	Private	4,100 per 0.5 tonne or part thereof
	Business	2,600 per tonne or part thereof
Trucks over 2.5 tonnes and buses	Private	3,300 per tonne or part thereof
	Business	2,600 per tonne or part thereof
Trucks under 2.5 tonnes	Private	3,300 per tonne or part thereof
	Business	2,600 per tonne or part thereof
Light motor vehicles	Private	3,300
	Business	2,600
Motorcycles	Private	1,900
	Business	1,500
Vehicles not needing inspection certificate
Two wheeled	Private	4,900
	Business	4,100
Other	Private	9,900
	Business	7,800
Promotion of power-resources development tax		375 per 1,000 kW/h

a The reduced rate of tobacco tax applies to a limited number of brands of 3^rd grade cigarettes (MOF online information. Viewed at: http://www.mof.go.jp/tax_policy/summary/consumption/127.htm [November 2014]), all of which are owned by Japan Tobacco.

b Motor vehicle tonnage tax is payable at each inspection.

Personal cars and motorcycles: the first inspection at 3 years and at 2 year intervals thereafter.

Personal light trucks: inspection every 2 years.

Personal trucks: the first inspection at 2 years with an inspection each year thereafter.

Business cars: an inspection every year.

Special vehicles: an inspection every 2 years.

Source: Ministry of Finance, Tax Bureau (2014).

4.3.1.7  Tax treaties

1.1.  Japan has, or is a party to, 62 tax conventions applicable with 85 jurisdictions, including other signatories to the Convention on Mutual Administrative Assistance in Tax Matters (Table 2.4).