2022 Tax Revision Package Finalized
Introduction
The Liberal Democratic Party (LDP) and the Komeito Party decided on January 10 on their tax revision plan for fiscal year 2022. Support in the tax code for corporations which raise workers’ wages - which is considered to be a centerpiece of the Kishida administration’s policies - will be fundamentally revised, for the second year in a row following the fiscal 2021 revision.
The Deduction Rate for the Housing Loan Deduction Revised for Individual Income Tax
Regarding the housing loan deduction, the applicable period will be extended for four years until December 31, 2025, and revisions will be made to: the limit on the year-end balance of housing loans; the deduction rate; and the deduction period, for those who acquire a house and live in it from 2022 to 2025. (See the list below.) In addition, the income requirement for application will be lowered to 20 million yen or less (currently it is 30 million yen or less). As for the housing loan deduction itself, the board of audit had already pointed out that even though the borrowing interest rate has been below 1%, a full 1% of the outstanding balance could be deducted as a housing loan deduction - resulting in the so-called “backwardation” problem. Therefore, the deduction became a target of this revision.
| Year(s) of residence | Borrowing limit | Deduction rate | Deduction period | |
|---|---|---|---|---|
If a newly-built house |
2022・2023 | 30 million yen | 0.7% | 13 years |
| 2024・2025 | 20 million yen | 10 years | ||
If a certified residence |
2022・2023 | 50 million yen | 13 years | |
| 2024・2025 | 45 million yen |
Tax Deduction Rate for SMEs to be Increased to a Maximum of 40% by Strengthening the Tax System for Wage Increases
With regard to the tax system to promote income growth for small and medium-sized enterprises (SMEs), which is called “the tax system for wage increases," the applicable period will be extended for one year, and the tax deduction rate will be increased as follows. This makes the maximum deduction rate 40%.
- If salaries and wages paid to employees increase 2.5% or more compared to the previous year, 15% will be added to the tax deduction rate.
- If education and training expenses increase by 10% or more compared to the previous year, 10% will be added to the tax deduction rate.
The increases in salaries and training expenditures can be included in expenses as deductible expenses, so by adding them, it is possible to receive a tax deduction of up to 40% of the salary increases. This key revision is a centerpiece of the Kishida administration's goal to increase employee income.
Moreover, depreciable assets with acquisition costs of 100,000 yen or less that are lent out will be excluded from the list of assets eligible for the system of deductibility of the acquisition costs of small-sum depreciable assets. Likewise, assets which are lent out are excluded from ① the deduction system for lump-sum depreciable assets and ② the special provision for SMEs, etc., on deductibility of the acquisition costs of small-sum depreciable assets.
It is thought that the exclusions are intended to contain schemes aimed at saving on taxes (deferring taxation) by acquiring inexpensive assets such as drones and LEDs, whose acquisition costs are fully deductible, and then lending them to external parties.
Other changes include a review of who is required to submit a statement of assets and liabilities, and a partial revision of the invoice system for consumption tax. The revised electronic transaction system is also under review, so that will be featured in another article.
‘Forgiveness’ Measures in the Revised Electronic Transactions System
Introduction
From January 1, 2022, it {has been} mandatory to store electronic data related to information about electronic transactions in a way that satisfies storage requirements such as search requirements, etc. However, certain forgiveness/’safe harbor’ measures were examined, in consideration of various businesses’ systems.
’Forgiveness’ Measures Until 2023
For electronic transactions until December 31, 2021, electronic data such as invoices can be output and stored in written form. The tax revision of 2021 abolished this measure, and after that date, mandated storage of electronic data in a way to meet search requirements, where storage in printed document format would not be admitted for electronic transactions.
We have covered this revised electronic transaction system many times here. However, even with less than a month to go before the implementation, there were still some people who said that they were not aware of the revised system or that they could not prepare in time. At the 7th “Expert Meeting on Improving the Tax Payment Environment”, held by the Government Tax Commission on November 17, there was a request to consider measures such as forgiveness measures from the perspective of preparation time.
On November 29, at the Liberal Democratic Party's Tax System Study Council, the Economy, Trade and Industry Division raised a request for revision to the electronic transaction system, stating that "From the perspective of promoting the further computerization of tax procedures such as tax returns and tax payments, necessary improvements should be made to the system regarding the storage of electronic transactions under the Electronic Bookkeeping Act and the digitization of tax audits, etc., in order to contribute to reducing the administrative burden on companies.”
As a result, according to the tax reform for fiscal year 2022, there will be forgiveness measures for electronic transactions during the two-year period from January 1, 2022 to December 31, 2023, which will allow the preservation of electronic transactions even if the original preservation requirements cannot be met due to unavoidable circumstances. As the revised electronic transaction system will come into effect at the beginning of 2022, it seems that the government intends to amend the ministerial ordinance and take measures within this year.
With this amendment, it is expected that electronic transactions on or after January 1, 2022 will effectively be allowed to be saved in written form as before.
Request at the Time of a Tax Audit
This ‘safe harbor’/forgiveness measure has a requirement that the tax office director recognizes that there are unavoidable circumstances that prevented the preservation of documents in accordance with the preservation requirements. Some people are wondering whether they need to apply to the head of the related tax office before the revised electronic transaction system starts - i.e. within this year - but it seems that no prior application is required for the application of this measure. Therefore, there is no need to carry out any particular procedures before the end of the year.
If, at the time of a tax audit, the company has not been able to save electronic data in a way that satisfies the storage requirements, the company may request the application of the measure on the grounds that it was unavoidably difficult to do so. At this point, it is unclear how to prove that it was unavoidably difficult, but basically, it seems such a request will be accepted.
Of course, at the moment, this is a forgiveness measure until December 31, 2023, and after that, it will be necessary to save the data in electronic format. There is a possibility that further such extensions will be set up after two years, but since the ‘safe harbor’ measure is set for two years, it is natural to think that there will be no further extensions. It will be necessary to take steps to respond appropriately to the situation during the two-year period.
Preparation for the Invoice System
Introduction
Applications for registration of invoice issuers started to be accepted from October 1. The following is a summary of what needs to be done to prepare for the transition to the invoice system.
What You Need to Prepare, as a Seller
The official name of the invoice system is the "Qualified Invoice Retention Method” (適格請求書保存方式) , and it will start on October 1, 2023. Companies and individuals other than those with a fiscal year ending in September will have to comply with the invoice system from the middle of the fiscal year. The invoice issuer is obliged to issue the invoice with the registration number, and save a copy of the invoice; the business that has made the purchase is required to keep the accounting books and the invoice issued by the invoice issuer to receive the purchase tax credit (a mechanism to deduct the consumption tax paid from the consumption tax received). The invoice can be used by the buyer as a tax credit. An invoice can be said to be a golden ticket for the buyer to reduce the amount of consumption tax paid, and the seller is required to deliver a proper invoice, and save a copy of the invoice.
Application for Registration as an Invoice-Issuing Business
In order to issue an invoice, your company needs to be registered as an invoice-issuing business by the director of the tax office. In principle, if you apply by March 31, 2023, you will become an invoice-issuing business from the start of the invoice system. If there are "difficult circumstances" that prevent you from submitting the registration application by March 31, 2023, there are certain forgiveness measures, but it is important to remember to submit the application.
Decisions on the Methods of Delivery and Storage of Invoices
There have been cases where applications for registration that have already been submitted have been required to be re-applied due to omissions or errors. For example, when selling products, consider what to use as an “invoice” (an invoice, delivery note, receipt, etc.) and how to deliver the invoice (paper delivery or electronic invoice provision), and if necessary, make system modifications to the cash register, accounting, and order-taking systems. You must also consider how to store copies of invoices delivered, and data.
In addition, the invoice must contain the following: ① the name and registration number of the invoice issuer; ② the date of the transaction; ③ the content of the transaction; ④ the total amount of consideration and the applicable tax rate for each tax rate category; ⑤ the consumption tax amount for each tax rate category; and ⑥ the name of the entity receiving the document.
Modification of Cash Registers, Accounting and Order Receiving Systems, etc.
The method(s) of delivering and storing invoices is one of the factors that will determine how much system modification will be required. System modification is also an opportunity to review one’s whole operations for efficiency.
Also, before the start of the invoice system, it is possible to deliver the documents containing the information to be included in the invoice, and provide the data. Even if the registration number is included in the invoice before the start of the system, it will not affect the requirements of the purchaser for the purchase tax credit.
In addition to this, it is essential to provide employee training about the invoice system. It is recommended to decide who will be in charge of this matter within the company, and who will respond to inquiries from business partners.
