Japan: Highlights of 2013 tax reform

Overview 

On March 29, Japanese parliament approved and passed the “2013 Tax reform bill”. The tax reform bill is focused on the tax reduction measures under which the tax revenue is estimated to decrease by JPY 150 billion according to Japan’s Ministry of Finance. 

Below are the highlights of some of the essential tax incentives available for domestic companies (the incentives are also applicable to foreign companies if they satisfy certain requirements): 

Tax incentive for increased salary payment 

This tax incentive is introduced in order to stimulate economic growth through higher employment and consumption. According to the tax measure, a 10% increase in salary payment to domestic employees other than directors and related persons, compared to the previous year’s salary, will be allowed to enjoy the tax credit (with a limitation of 10% of the tax liability before the credit) within the tax period starting from 04/01/2013 through 03/31/2016. 

Tax incentive for SMEs – widened deduction limitation bracket for entertainment expense 

Currently, the deductable amount for entertainment expense is capped to JPY 5,400,000, aiming to restrain the deductable amount of lavish or extravagant expenses such as business-related entertainment expense in order to maintain internal reserves as well as healthy cash flow. However, the deductable limitation bracket will be widened (increased from the current JPY 5,400,000 to JPY 8,000,000) in view of consumption enhancement. This incentive is only applicable to small and medium-sized enterprises (SMEs). Companies with year-end capital of JPY 100 million or above are not allowed to enjoy this incentive. 

Tax incentive for investment in new production facilities and equipment 

As an economy growth strategy to reinforce Japan’s industrial competitiveness, the tax rule is introduced to allow company to claim a special accelerated depreciation or a tax credit for its investment in new production facilities and equipment. If a company meets certain conditions, then it can claim for either a special accelerated depreciation of up to 30% of the newly acquired machinery and equipment’s cost or a tax credit of 3% of the acquiring cost (with a limitation of 20% of the corporate tax liability before credit). The incentive will be effective for tax period commencing from 04/01/2013 through 03/31/2015. For newly established company, the incentive will not be applicable in the first fiscal year.