Convergence of Japanese
GAAP with IFRS
Selected Topics
from the 2006 Tax Reform Act
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OKAMOTO & COMPANY
International Accounting Office
/ Hanato Tax Accountant Office
Hirakawacho Daiichi Seimei Building 1F,
1-2-10 Hirakawacho, Chiyoda-ku Tokyo Japan 102-0093
TEL +81-3-5276-0900
FAX +81-3-5276-0950
E-mail:info@okamoto-co.com
Selected Topics from the 2006 Tax Reform Act |
With the recovery of the Japanese economy on the way, the 2006 Tax Reform Act has looked for new sources of revenue in the age of a declining birth rate, aging population, and globalization. The possible reduction of employment deductions and the increase in the consumption tax rate are currently hot topics being considered. The following summary does not cover all aspects of the Act, but lists the topics we felt you would be of most interest to our clients.
Directors' Bonuses
Deductions for performance based bonuses were non-deductible in the past, however, under the new Act, if the following conditions are satisfied,
they will be considered deductible:
Directors' Salaries
Non-family corporation.
Directors are engaged in the operation of the company's business.
Compensation is recognized as an expense for accounting purposes in the year when the tax deduction is claimed.
Compensation that is appropriately determined by the benefit committee and which is disclosed in the financial statement report.
Disclosed in the Securities Report, et al.
Compensation which meets other specific requirements.
If a notice to the Tax Office stating the amount and timing of additional salaries to be paid is submitted in advance,
the entity can also deduct this amount.
Directors' Compensation in a Family-owned Corporation
If certain directors and related persons own more than 90% of the total issued shares, and if such directors and related persons
make up a majority of the group of managing directors, an employment deduction of the managing director's salary cannot be tax deductible from corporate taxable income.
Meeting and Entertainment Expenses
Special taxation measures for meeting and entertainment expenses will be extended for two more years.
Specifically, unless the meals are with company personnel a rule will be implemented where expenses under 5,000 per person will be allowed.
Family Corporation
The definition of a family corporation will change.
In the past, the top three shareholding groups (i.e. includes related individuals and corporations) were reviewed to determine whether the group holding,
directly and/or indirectly, exceeded 50%. Only the top shareholding group is now considered.
Revision of income tax
1. Change in individual income and inhabitant tax rates
In order to transfer a portion of tax revenue from the national government to the local government,
the individual income and inhabitant tax rates will shift as shown. The applicable from the 2007 calendar year,
2. Special tax reduction
The special tax reduction will be abolished from 2007 for income tax and 2007 for inhabitant tax (tax on 2006 income).
3. Housing loans for home acquisitions
Special tax treatment that applies when salaried workers take out loans for home acquisitions will be extended for two years.
4. Definition of non-permanent resident
Under the current tax law, the definition of a non-permanent resident is someone who has no intention to live in Japan permanently
and has lived in Japan for less than five years. Under the new rule, a non-permanent resident will be defined as a resident who does not have Japanese nationality
and has lived in Japan for less than five years in the last ten years.
This amendment is applicable after April 1, 2006.
5. Tax credits for housing loans
The tax creditable amounts for housing loans will be gradually reduced for acquisition of houses in 2006 or later as follows:
Thin Capitalization Rule：
(1) Certain bond repurchase obligations can be excluded from the definition of debts from overseas controlling shareholders.
In this case, the debt-equity ratio will be reduced from 3:1 to 2:1. This rule applies to fiscal years ending on or after April 1, 2006.
(2) The Thin Capitalization Rule will also now apply to:
| 1. | loans from third parties, but guaranteed by the overseas controlling shareholders, |
|
| 2. | loans from third parties in which bonds from its overseas controlling shareholders are held as security, | |
| 3. | any combination of 1 and 2 above. |
New Japan-United Kingdom Tax Treaty:
On February 2, 2006, The United Kingdom and Japan signed a new income tax treaty. As a result, withholding tax rates will be reduced as follows:
| Dividends： | within group companies - from 10% to 0% or 5% | |
| other companies - from 15% to 10% | ||
| Interest： | from 10% to 0% or 5% | |
| Royalties： | from 10% to 0% |
The limitation on Benefit (LOB) conditions must be satisfied to obtain the above tax enefit. The new tax treaty will go into force for taxable transactions on or after January 1, 2007.
Submission of Statement of Business：
The Company is now required to attach a "Statement of Business" to its
corporate income tax returns from the fiscal years beginning on or after
April 1, 2006.
Acceptance of postmark dates：
Postmark dates on or before the due date will be now considered valid for certain tax application forms. This new rule is applicable for forms posted on or after April 1, 2006.
Late filing penalties：
(1) Penalty tax for the late filings:
The penalty for the late filing will be 15% for corporate income taxes for liabilities up to 500,000 yen and 20% for the portion in excess of 500,000 yen.
However, if the return filed within two weeks after the due date, and the tax is paid timely, the penalty will be waived.
These rules will apply for returns with a due date on or after January 1, 2007.
(2) Penalty for the late payment of withholding tax:
If the national withholding tax is paid within one month after the due date, if there has been no history of late payment within the past year,
the penalty will be waived. This waiver will apply for withholding taxes with a due date on or after January 1, 2007.