Preventing Consumption Tax Refund Schemes through Tax System Reform
Introduction
Consumption tax refund schemes involving individuals purchasing residential property for rental as investments are scheduled to be prevented by the tax reform of 2020. Let’s look at the details.
The Mechanism of Consumption Tax Refunds
While consumption tax is not levied on transfers of land, it is levied on transfers of buildings. So buyers must pay large sums of consumption tax on buildings to sellers when purchasing investment property.
The amount of consumption tax owed is calculated by subtracting the consumption tax amount one paid from that which was received. If the person paid more than they received, they will be eligible to get a consumption tax refund.
However, the full amount paid is not deductible; rather, the amount, after the taxable sales ratio is multiplied, is allowable for deduction. Therefore, the higher the ratio, the greater the deduction.
Consumption tax for payment/refund
＝(received consumption tax - paid consumption tax) × taxable sales ratio ?
Taxable sales ratio
＝taxable sales ÷ (taxable sales amount＋exempt sales＋nontaxable sales)
If the property purchased as an investment is used as an office rental property, that’s not a problem. Even if it’s for a residential property, because residential rent is not taxable, no taxable sales result. This is because, in accordance with the formula above, since the numerator is zero, the taxable sales ratio is also zero.
Overview of Consumption Tax Refund Schemes
In this situation, the taxable sales ratio must be increased in order to receive a consumption tax refund. However, basically rent for residential property is not recorded as taxable sales.
Therefore, certain individuals thought of schemes involving vending machines and gold bullion. Such schemes aim to maintain high taxable sales ratios by generating “taxable sales” which don’t result from the rental of residential property, by sales of drinks in vending machines, or else through the continuous buying and selling of gold bullion - the value of which doesn’t fall significantly.
While sales by vending machine will not result in large amounts of taxable sales, repeated gold bullion transactions make it possible to record large amounts of such sales. The goal is to receive a refund of a large portion of the consumption tax paid when obtaining property as investments.
Content of the Reform
In order to prevent such schemes, it has been decided that in principle purchase tax credits will no longer be applicable to taxable purchases of residential property. This is a drastic revision that purchase tax credits are not to be applied to residential property, regardless of the taxable sales ratio.
We can read this as a strong message from the government that purchasers of residential property will not receive consumption tax refunds.
This revision is due to be applied to acquisitions of residential properties from October 1, 2020.
Treatment of “香典“Koden and “弔慰金”Choikin
Introduction
When an officer or employee of one’s company’s dies, in Japan there are many cases where the bereaved are given “香典” (koden) or “弔慰金“ (choikin), both of whichmean “condolence gifts”*. What procedures are required to include those in employee benefits?
* Both “koden” and “choikin” are often translated as “condolence money/gifts” in English.
What’s the Difference Between “Koden” and “Choikin”？
“ “香典” (koden) refers to money and/or gifts the relatives and acquaintances of the deceased offer when a person dies, and its original meaning may be understood as money/gifts to the bereaved to reimburse a portion of the expenses for the funeral, etc. On the other hand, “弔慰金“ (choikin) is a word referring to money and/or gifts an employer offers in good faith and consideration, to express his/her condolences when an employee dies.”
The above was verified in a court ruling on December 10, 1997. In other words, even when comparing the two, it is not easy to clearly differentiate them.
The Necessity of Preparing Company-Specific Rules
In order to treat koden and choikin as benefits, it’s required to determine through company-specific regulations regarding congratulatory/condolence monetary payments how both are to be handled.
The Act on Special Measures Concerning Taxation classifies welfare expenses and entertainment/social expenses, providing a prerequisite that they are not subject to being included as/corresponding to social expenses - that is, “expenses paid following a prescribed reference”.
In reality, even if there are no company-specific rules, we don’t think that koden and choikin would be immediately identified as entertainment expenses. However, nothing will be lost by preparing relevant company rules. If after the rules are established, such payments are made in accordance with those rules, there is seemingly little chance of the payments being deemed entertainment expenses.
On the other hand, koden paid on behalf of customers/clients do correspond to entertainment expenses. Also, as both koden and choikin are exempt from consumption tax, attention is required when registering them.
There are many cases where the inclusion of koden intaxable sales gets pointed out in tax audits.
What is the Maximum Amount of Choikin?
When the employee’s death wasn’t a result of an employment-related cause, choikin often are paid for an amount equivalent to six months’ usual salary, excluding bonus, at the time of death in accordance with a company regulation concerning congratulatory/condolence monetary payments.
Such regulations are in line with National Tax Agency Notice 3-20 on Inheritance Tax, which established that choikin needn’t be included in retirement allowances; many companies apply it.
However, this is just a regulation under the Inheritance Tax Act, and no Corporation Tax Act regulations stipulate a limit as to the amount of choikin. Even if such a monetary payment were found to be excessive, the overpayment amount would be treated as part of the executive retirement allowance. Therefore, it would be judged if the overall allowance was too high by adding the choikin amount to the rest of the retirement allowance.
Additionally, there appear to be no past judgements or court precedents where choikin paid based on National Tax Agency Notice 3-20 on Inheritance Tax were denied under the Corporation Tax Act.
Practical Matters Regarding the Employment of Non-Japanese Workers
Introduction
A lot of companies are deciding to employ foreign workers recently, due to the labor shortage. However, due to a lack of know-how in this regard, there is sometimes confusion as to how to begin. Below we will describe points to note regarding recruitment methods and employee selection.
Recruitment Methods
There are various recruitment methods for foreign workers. In addition to recruiting methods aimed at Japanese workers, other possibilities include: contacting employment service centers which specialize in employing foreign workers, and/or universities with many foreign students; effective outreach to reliable foreigner communities; and recruitment companies that are good at recruiting foreign workers. Employment service centers for foreigners are public employment offices run under the auspices of the Ministry of Health, Labor and Welfare which provide job counseling and placement services for non-Japanese students, as well as foreign specialists or technical experts who hold corresponding visa status. An important benefit of the offices is that they are managed by the national government, so no cost is incurred by those utilizing their services.
Confirmation Items for Application Document Selection
Regarding document selection, it is important to check the following points in addition to the usual selection criteria for a Japanese national:
1. Confirm residence card
2. Check educational background/career
3. Verify Japanese language ability
4. Check status regarding whether they have dependents, etc.
Confirmation of the applicant’s residence card is an important prerequisite. Legal residence status is essential to work in Japan. Also, please don’t forget to check at the Immigration Services Agency if the residence card is still valid; it is possible to verify there if the card has been forged.
※Please confirm if the residence card is valid.
Regarding language ability, there are a lot of cases where foreigners can speak Japanese, but cannot write it. If the main language at work will be Japanese, the person’s Japanese literacy needs to be checked in advance. Additionally, it is required to confirm beforehand if they hope to live in Japan with family members who are currently residing abroad.
Important Points in Interviews
In the interview, it is recommended that you check his/her manner of speaking in both Japanese and the person’s native language. Even though most foreigners have a tendency to speak in a standard way when using Japanese as a foreign language, how they communicate in their mother tongue may better reveal the environment in which a person grew up, or their character.
If possible, it would be desirable that a person fluent in the interviewee’s native language also interviews them. Furthermore, it would be wise to confirm their Japanese literacy via a written examination as well as an interview, if it is expected that there will be aspects of the job involving the writing of Japanese, such as in e-mails. In addition, it is essential that hiring requirements and a job description are defined clearly, as there are some non-Japanese who won’t do work which isn’t included in the job description beforehand.
It may be confusing when considering whether to employ non-Japanese workers for the first time. Please confirm the necessary points in advance, to improve the chances of success.
Employment Service Center for Foreigners
Please scan the QR code below to see Employment Service Center for Foreigners’ website.
