APAC Tax Matters: November 2012

Japan

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  • Update on Japanese consumption tax rate increase

Update on Japanese consumption tax rate increase

On 10 August 2012, the Japanese Diet passed bills for reform of social security and other taxes, including “Consumption Tax Reform”, which was promulgated on 22 August 2012. The Consumption Tax Reform will become effective on or after 1 April 2014, unless otherwise specified.

Key features the Consumption Tax Reform

Two-phase tax increase

The consumption tax rate will be increased pursuant to the following two-phase schedule:

  • Phase One - From 5% to 8% on 1 April 2014
  • Phase Two - From 8% to 10% on 1 October 2015

Temporary measures

The 5% tax rate will still be applied to the transfer of assets after 1 April 2014 if such transfer is pursuant to a construction contract that was concluded before 1 October 2013.

Consumption taxpayer status for newly established companies

Under the current consumption tax regime, a newly established company would generally be exempt from consumption tax for the first two fiscal years1 if the company’s registered capital is less than JPY 10 million (USD 128,000).

Under the Consumption Tax Reform, a newly established company will be subject to consumption tax for the first two fiscal years, regardless of its registered capital, to the extent that a controlling person (e.g., a company holding more than 50% of equity interest of the newly established company), or a related company, has taxable sales in Japan exceeding JPY 500 million (USD 6.4 million). This treatment becomes applicable to companies established on or after 1 April 2014.

Flexible clause

The Consumption Tax Reform includes a vague flexible clause that states that the expected consumption tax rate increase may be suspended if the comprehensive economic condition is not appropriate for the tax hike. The bill does not define when a “comprehensive economic condition” is not appropriate for the consumption tax increase.

Implications

The expected increase in consumption tax rate will require proper adjustments in a company’s accounting and other systems in order to reflect the rate change. These adjustments may be rather costly and time consuming. In addition, persons who plan to establish a new company after the Consumption Tax Reform should take into account the possibility that no exemption may be possible. For these reasons, it is critical for business entities to monitor developments and take necessary action in order to be prepared for the Consumption Tax Reform.


1 According to the 2011 tax reform, for fiscal years beginning on or after 1 January 2013, the exemption period may be shortened from two years to one year, only applicable to the first year, if a newly established company generates more than JPY 10 million taxable sales during the first 6 months of the inception year.

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