Regarding Subsidies for Invoice-Compliant Software

Introduction

It is likely that many companies will be introducing new systems or modifying existing systems in preparation for the invoice system. This section will explain the tax treatment of subsidies for invoice-compliant software. The Small and Medium Enterprise Agency has been accepting applications for IT introduction subsidies since the end of March this year. A subsidy of up to 3.5 million yen is available for the purchase of invoice-compliant accounting software, etc.

Overview of IT Introduction Subsidies 2022

Under IT Introduction Subsidies 2022, which are available to small and medium-sized enterprises (SMEs), the cost of purchasing software and other items compatible with invoices will be subsidized as part of the "Digitalization Infrastructure Introduction Category”.

Up to 3.5 million yen will be subsidized for software with certain functions. The 16th deadline was November 28, the 17th deadline was December 22, 2022, and the final (18th) deadline for grant applications is scheduled for January 19, 2023.

Compressed (Summarized) Bookkeeping is Eligible

The IT Introduction Subsidies 2022 (Digitalization Infrastructure Introduction Category) falls under the category of government subsidies, etc. Therefore, if the subsidy is used to introduce (acquire) a new accounting system, etc., it is eligible for the summarized bookkeeping system for government subsidies, etc.

By applying summarized bookkeeping, tax deferral will be allowed on the said subsidy. In addition, in conjunction with summarized bookkeeping, it is also possible to enjoy the tax benefits of the exception for deductibility of small depreciable assets for SMEs, etc.

For example, let us assume that your company has installed invoice-compliant accounting software costing 600,000 yen and have received a subsidy of 400,000 yen - equivalent to 2/3 of the gross amount. In this case, by applying summarized bookkeeping, the acquisition cost of the invoice-compliant accounting software would be 200,000 yen (= 600,000 yen - 400,000 yen).

Since the acquisition cost is 200,000 yen - which is less than 300,000 yen - the entire amount can be included in deductible expenses, thanks to the special exception for deductibility of small depreciable assets for SMEs, etc.

Capitalization of Added Functionality

The treatment of cases where a new system is introduced with subsidies to support invoicing is as described above. On the other hand, if an existing system is upgraded without receiving a subsidy, the upgrade cost can be expensed as a repair cost.

Note, however, that expenses for adding new functions or improving functions unrelated to the invoice system are required to be capitalized as "capital expenditures”, rather than being expensed.

Normally, when new functions are added to an existing system, they must be capitalized as "capital expenditures." However, since the system modifications associated with the introduction of the invoice system are necessary modifications to comply with the revision of the Consumption Tax Act, the modifications can be treated as repair expenses if the modified portions are clearly indicated in the job order or other documentation. (This is the same treatment as for the introduction of the ‘reduced tax rate system’).

Invoices for Taxi Use

Introduction

When the invoice system is introduced, if a taxi is owned by a tax-exempt business, the passenger will not be able to receive a credit for the consumption tax on their fare. This will result in a difference in the tax burden on users even if they pay the same fare.

It is said that there are many tax-exempt operators in the taxi industry. How can we distinguish between drivers of tax-exempt businesses and those of taxable businesses?

Summary

Under the invoice system for consumption tax that will be introduced in October 2023, consumption taxes paid on transactions with tax-exempt businesses will, in principle, no longer be deductible as purchase tax credits. This means that the amount of consumption tax paid by one’s company will increase.

Some companies are refraining from using restaurants which are owned by tax-exempt businesses for business entertainment, etc. How will the taxi industry, which is considered to have many tax-exempt businesses, respond to the invoice system?

After the invoice system begins, will there be situations where tax-exempt taxis won’t be utilized? It will be interesting to see.

Private Taxis also Become Taxable Businesses

According to the Japan Federation of Hire-Taxi Associations, which is comprised of corporate taxi companies, taxi companies that operate in corporate form are most likely to be taxable businesses in terms of sales size. If the company is incorporated, it probably has several taxi drivers, and it is not unusual for such a company's sales to exceed 10 million yen.

These taxi companies are taking steps to register invoices, and it appears that system modifications, etc. are underway to enable them to issue simplified invoices (not requiring passengers’ addresses), which are permitted in the taxi industry. Therefore, if you use a major taxi company, you will probably receive a simplified invoice.

On the other hand, one of the reasons why there are many tax-exempt businesses in the taxi industry is the existence of private taxi companies, or "individual taxis”. Private taxi operators are often tax-exempt due to the size of their sales, and they may well choose not to register for invoicing. However, taxis are frequently used for business purposes, and depending on whether or not invoices are issued for different taxis, it could become a great burden and require a lot of effort on the part of administrative departments. It will also likely be a reason that mistakes occur.

In this regard, according to a national taxi association, a general incorporated association of private operators in the taxi business, in consideration of its users, the association is basically proceeding with guidance towards uniformly registering invoices with private taxi operators.

Even so, the circumstances of individual businesses vary, and ultimately it is up to each operator to decide whether or not to register for invoices. It is assumed that there will continue to be a certain number of individual tax-exempt businesses that do not register invoices.

Even if an invoice is registered, care must also be taken to ensure that documents that meet the requirements for a simplified invoice are delivered.

Also Clearly Indicated by Indicator Lights

According to the Japan Private Taxi Association, they are considering, for example, putting a sign on the taxi's indicator light to let people know at a glance whether the taxi is invoice-registered or not. If this is done, users will be able to choose a taxi based on whether it is invoice-registered or not, but will a day come when we have to think about such a thing while trying to catch a taxi?

Regarding Interest Rates on Bank Loans

Introduction

When applying for a loan from a bank, one of the things you need to be concerned about is the interest rate. How can you ensure that the interest rate is as low as possible? Getting a loan with a low interest rate is important, because it is a cost-saving measure.

What are Fixed and Variable Interest Rates?

Interest rates on loans are classified as either fixed or variable. Fixed interest rates remain the same until the loan is paid off. Variable/Floating interest rates fluctuate during the course of the loan until it is fully repaid.

Loan notes usually have a repayment period of one year or less, and because of the short repayment period, fixed interest rates are the norm. For loans on deed, whether the interest rate is variable or fixed is determined through negotiations with the bank, and is stated in the loan agreement. Fixed and variable interest rate options are available for loans on deed.

Loans on deed are frequently at variable interest rates. However, if the borrower requests it, the financial institution may be able to work out a fixed interest rate schedule for them. Some loan programs have a fixed interest rate that is determined from the beginning.

It is difficult to say whether fixed or variable interest rates are more advantageous, because it depends on how interest rates will change in the future. It is impossible in advance to know for certain how interest rates will change.

Please note that if you choose a fixed interest rate, you may be charged a penalty if you make early repayments in the future.

On Obtaining Financing at the Lowest Possible Interest Rates

Does your company negotiate prices when you purchase goods or raw materials from suppliers, or when you order work from subcontractors? You may have a policy of not negotiating on price; however, if you normally do negotiate on price, then you probably should also negotiate on ‘price’ (interest rates) when seeking loans from banks.

Interest rates on loans, with the exception of some institutional loans, are determined through negotiations between the borrowing company and the bank. If your company has never negotiated interest rates with a bank before, you may have always received loans with high interest rates set by the bank.

If companies are aware of and negotiate interest rates, they can get lower rates and thereby reduce their interest payments. The first step in getting a lower interest rate is to negotiate the rate when applying for a loan.

The key to negotiating interest rates is whether you have other options. If your company's performance is such that you can obtain loans from other banks, you will naturally be in a stronger position. The best way to achieve this is to become a company that banks want to lend to.

On the other hand, if the company's performance or financial condition is poor, and it is difficult to obtain a loan from a bank, it may be awkward to negotiate interest rates.

Even in such cases, it will be very important to insist that the bank cooperate with you by offering a lower interest rate, as you are likely cutting costs in order to improve your business.

While an extreme demand may give a bad impression, we think it is important in the medium to long term to try to ‘resist’ to some degree, rather than just agreeing to the interest rate proposed by the banker.