Beware of Withholding Errors in Compensation Paid to Tax-exempt Businesses

Introduction

The invoice system has started, but will it affect the amount of withholding tax deducted from remuneration paid to tax-exempt businesses? For the six years from the start of the system until the end of September 2029, a certain percentage of purchases from tax-exempt businesses will be eligible for tax credits due to the application of transitional measures. Then, what will happen to the amount of withholding tax?

No Change in the Concept of Withholding Tax

As a general rule, certain remuneration and fees, such as speaking fees and fees for tax accountants, are subject to withholding tax on the taxable amount including consumption tax, etc. However, if the invoice prepared by the speaker or tax accountant clearly distinguishes between the main price (i.e., the remuneration, etc.) and the consumption tax amount, etc., only the main price can be subject to withholding at source. In principle, the price includes tax; however, in special cases, the price excludes tax.

The above treatment remains unchanged under the invoice system. “Invoices” herein do not necessarily need to be invoices issued by invoice-issuing firms. Invoices and delivery slips issued by other entities, such as tax-exempt businesses, are also acceptable.

The Amount Recorded as an Expense and the Amount Subject to Withholding Don’t Match.

Under the Consumption Tax Law, if the invoicing party is a tax-exempt business, then under the invoice system, the purchase tax credit for the paying party is limited according to the transitional measure period.

For the first three years after the start of the system, 80% of the amount equivalent to purchase tax is eligible for tax credits; then for the following three years, 50% of the amount equivalent to purchase tax is eligible. Note, however, that after the six-year transitional measure expires, none of the equivalent amount will be eligible for a tax credit.

For corporate income tax purposes, taxable income must be calculated by including the portion not eligible for the purchase tax credit in the "amount of consideration”. Regardless of the portion ineligible for the purchase tax credit, if the invoice issued by the billing party clearly distinguishes between the main unit price and the consumption tax amount, only the main unit price stated on the invoice will be subject to withholding at the source.

For example, a payer pays a tax-exempt speaker, Mr. A, 55,000 yen (including tax) for a lecture for December 2023.

The payer then applies the transitional measure under the Consumption Tax Law to deduct 80% of the amount equivalent to the purchase tax on the remuneration fee paid to Mr. A.

In this situation, under the Corporate Tax Law, the remaining 20%, or 1,000 yen, which is the portion of the fee not eligible for the purchase tax credit, is included in the compensation fee to calculate taxable income, and the following journal entry should be recorded:

Compensation paid: 51,000 yen / Bank (or Cash): 55,000 yen
Prepaid consumption tax: 4,000 yen

If the invoice issued by Mr. A, a tax-exempt ‘business’, clearly distinguishes between the main ‘unit price’ of 50,000 yen and the consumption tax amount of 5,000 yen, then the withholding at source would be on the main ‘unit price’ (50,000 yen) - not 55,000 yen, which is the tax-inclusive price.

In this case, the payer will record the compensation paid as 51,000 yen when posting the journal entry, but will not record the amount subject to withholding at source as also being 51,000 yen.

Since the invoice clearly separates the main ‘unit price’ and the consumption tax amount, withholding tax is to be withheld on the main unit price of 50,000 yen, as stated on the invoice.

The Purpose of the Condominium Assessment Notice is Published

Introduction

The National Tax Agency has released "The Purpose of "Regarding the Valuation of Unit Ownership Property for Residential Use"", which explains the Circular (Notice) issued on October 6 stipulating a new property valuation method for condominiums. We would like to look at the concept of the new valuation method for condominiums which is applicable to inheritances & gifts on and after January 1, 2024. The following is a brief overview of the new valuation method.

Subject (Building) is Registered Separately

Under the new valuation method, the inheritance tax assessed value of a single condominium unit is calculated by multiplying the value assessed under the previous method by the “condominium unit ownership valuation correction rate” (区分所有補正率).

The "condominium unit ownership valuation correction rate" to be applied will be determined according to the "valuation deviation rate, etc.”, based on factors such as the age of the condominium, the total number of floors, and the number of floors on which each condominium unit to be evaluated is located.

The "condominium unit ownership valuation correction rate" will, at a minimum, raise the inheritance tax assessed value of a single condominium unit to an amount equivalent to 60% of its market value (theoretical value).

The "condominium unit ownership valuation correction rate" applies only to registered condominiums. Even if a building can be registered as a condominium unit building, if it is not registered as a condominium unit building at the time of taxation (such as when inherited or donated), it does not fall under this category and is not subject to the "condominium unit ownership valuation correction rate".

Applies to Units that have "Residence" Included in their Registry

From the scope of condominium-owned buildings to which this Notice applies, "those with two or fewer floors excluding the basement floor, and "those with three or fewer exclusive use areas, all of which are used for the residence* of the condominium owner or his/her relatives" are excluded.

Therefore, even if the property is condominium property, low-rise condominiums and duplexes are not subject to the "condominium ownership correction rate". The Notice also clarifies that business tenant properties and single-family rental condominiums are also excluded, because they differ significantly from residential properties in terms of their liquidity and other factors.
*Residential use: A person's own home that is used as the person's place of residence.

Properties Which Aren’t Subject to the New Valuation Method

Properties that will not be subject to the new valuation method include the following cases:

• Buildings not registered as condominium unit buildings at the time of taxation
• Business tenants
• One-owner rental condominiums
• Low-rise apartment complexes (two or fewer stories)
• Two-family homes

However, if a room is structurally capable of being used primarily for residential purposes, it is subject to the "condominium unit ownership valuation correction rate" even if it is actually used as an office during the taxable period. The "correction rate" will be applied even if the property is actually used as an office at the time of taxation.

New Valuation Method

The assessed value of a condominium unit for inheritance tax purposes = the value of the right to use the site + the value of the condominium unit ownership (assessed value of fixed assets X 1.0 X the condominium unit ownership valuation correction rate)

Valuation Level	Classification to be Applied - Ownership valuation correction rate	Impact on Assessed Value for Inheritance Tax
Over 1.0	Valuation deviation rate	Reduction
0.6 or more, up to 1.0	Not applicable	No impact
Less than 0.6	Valuation deviation rate x 0.6	Increase

Use of “Rolling over a loan”(折り返し融資)

Introduction

Have you heard of "rolling over a loan(折り返し融資)?" You may be able to ease cash flow difficulties by taking advantage of such financing.

What is " Rolling over a loan "

The term "rolling over a loan“ is like the turnaround point of a marathon race: when half of the loan amount has been repaid (i.e. when half the payment term has elapsed), a new loan of the same amount and term is obtained and the old loan is simultaneously repaid in advance with the new loan. In other words, the actual amount of financing is one-half of the (original) loan amount.

Let's look at a concrete example. A loan amount of 30 million yen is provided, the term is 5 years, and the loan is to be repaid in 60 equal installments of 500,000 yen each month. The loan is being repaid as agreed, so after 2 years and 6 months, the loan balance is 15 million yen, half of the initial amount.

At this point, the borrower applies for a loan with the same initial loan amount of 30 million yen, a 5-year term, and 500,000 yen per month x 60 equal principal repayments. The new loan is applied for on the condition that the balance of the old loan (15 million yen) be repaid with the new loan. The loan is approved, and the new loan of 30 million yen is executed, while the 15 million yen remainder of the old loan is simultaneously repaid.

Therefore, cash on hand will increase by 15 million yen, by “a new loan of 30 million yen - repayment of the old loan's 15 million yen".

Advantages of " Rolling over a loan "

The biggest advantage rolling over a loan s the high likelihood that the loan will be approved. This is because the borrower has a "repayment record" of having successfully repaid the loan for half of the original loan term.

The new loan is for the same amount and term as the original loan, so the scheduled monthly payments remain the same. If there is no significant change in the company's situation, the loan is likely to be approved. Even if the company's situation has deteriorated slightly, a "track record" of steady repayment for half of the original loan term is valuable.

For example, Japan Finance Corporation (JFC)'s "National Life Service” (国民生活事業) emphasizes the track record of repayment because it is not possible to check the real-time movements of deposits and withdrawals in and out of a deposit account. So this is an opportunity to receive a rolling over a loan.

It is when a company's situation is difficult that it is most necessary to secure cash on hand, so if this is the case, be bold and apply for a "turnaround loan”. On the other hand, if your company's situation is better than when you originally received the loan, you should definitely negotiate for a "turnaround loan” with an increased loan amount.

Disadvantages of “Rolling over a loan”

There are no particular disadvantages to " rolling over a loan," but there are costs associated with the stamps affixed to a loan agreement for a loan on deed. After the initial loan is paid off in five years, the stamp tax to be paid will be larger than for that first loan for the same amount.

It is also important to note that "turnaround financing" is contingent on making an early repayment of the old loan. Please make sure that there is no penalty for early repayment.

Financial institution representatives are busy, and are unlikely to proactively offer "turnaround loans" to clients who have already repaid half their loans via their long-term operating formula. Please understand that "turnaround financing" is something that your company should approach your financial institution(s) about.