Treatment of Tax Effect Accounting for the New Corporate Surtax for Defense Spending
Introduction
The tax reform of 2025 will newly establish a special corporate surtax for defense spending, which will not directly affect corporations with a fiscal year end in March for the fiscal year ending March 31, 2025, but there are some points to be noted if tax effect accounting is applied.
What is the Special Corporate Surtax for Defense Spending?
The revised tax law submitted to the Diet on February 4, 2025 provides that a special corporate surtax for increased defense expenditures will, for the time being, be imposed on the base corporation tax amount for each fiscal year. Since the surtax is to be imposed in each fiscal year beginning on or after April 1, 2026, it will not affect for tax purposes the fiscal year ended March 31, 2025 for corporations having fiscal years ending in March.
Overview of Special Corporate Surtax for Increased Defense Spending
| Subject to taxation | Base corporate tax amount for each taxable year (corporate tax amount before various deductions) |
| Standard of taxation | Taxable standard corporate tax amount (with a basic deduction of 5 million yen) |
| Amount of tax | Taxable standard corporate tax amount x 4% tax rate |
| Taxable year | Each fiscal year beginning on or after April 1, 2026 |
| Final tax return, etc. | Submittal of tax return within two months from the day after the end of each taxable year |
In consideration of small and medium-sized enterprises, etc., the special corporate surtax for defense is imposed on the amount obtained by deducting the basic deduction amount of 5 million yen from the standard corporate tax amount. Therefore, if the corporate tax amount is less than 5 million yen, no such special surtax is imposed.
Treatment of Application of Tax EffectAccounting
In tax effect accounting, deferred tax assets and deferred tax liabilities are calculated based on the method stipulated in the tax laws enacted by the Diet for the company’s date of closing its books. The Accounting Standards Board of Japan (ASBJ) states that if the revised tax law is enacted by March 31, 2025, there will be significant changes in the application of tax effect accounting for companies whose fiscal year ends on that date. Specifically, when calculating deferred tax assets and deferred tax liabilities for temporary differences expected to be eliminated in fiscal years beginning on or after April 1, 2026, it will be necessary to reflect the impact of the special corporate surtax for defense spending.
This surtax is not explicitly listed as a tax in Paragraph 46 of the Tax Effect Application Guidelines, but is imposed as an additional tax on corporate income tax. In addition, it is considered to fall under the category of corporate income tax and other taxes that are imposed on amounts related to profits. Therefore, if the revised tax law is enacted, the statutory effective tax rate should be calculated based on the formula below, which is consistent with the intent of the tax effect application guidelines. After the enactment of the revised tax law, we plan to revise the corporate accounting standards, etc. corresponding to the establishment of the special corporate surtax for defense spending.
Why You Should Consider the Impact of the Special Corporate Surtax for Defense
The special corporate surtax for defense spending is a new tax that is intended to address the increase in defense expenditures, and will be an additional tax burden for companies. The introduction of this new tax will change the future tax burden rate, which must also be taken into account in tax effect accounting. Especially for large or highly-profitable companies, the expected increase in tax burden may affect their business plans and investment decisions.
Statutory effective tax rate ＝
{Corporate tax rate ×（１＋Local corporate tax rate + Special corporate surtax for defense spending + Residence tax rate）} + Corporate tax rate + { Corporate（standard rate）x Special corporate enterprise tax rate }
１+ Corporate tax rate + {Corporate（standard rate）× Special corporate enterprise tax rate }
Introduction of Two-step Authentication for Direct Payment of Local Taxes
Introduction
Along with the March 24 update of the PCdesk system, which is eLTAX-compatible software, some procedures for utilizing direct payment of local taxes will be changed.
What is Direct Payment?
Direct payment is a procedure to pay national and local taxes electronically by direct debit from a savings account in the taxpayer's name immediately or on a specified date after submitting a tax return, etc., via e-Tax or eLTAX. Many people use direct payment because it is convenient and eliminates the need to go to the counter of a financial institution.
To use this service, a special notification form must be submitted in advance to the tax office with jurisdiction over the tax payment location, but it is possible to make a lump-sum payment to any prefecture or municipality (for local taxes) from your office or home PC. You can also use this service even if you do not have an Internet banking subscription.
System Update with eLTAX
Along with the March 24 update of the PCdesk system for eLTAX-compliant software, the procedures for using direct payment of local taxes will be partially changed.
Specifically, the following measures will be implemented: "support for enabling cancellation of direct payment by a specified due date," "support for two-step verification of direct payments," and "support for two-step verification when changing or adding an e-mail address”.
Of these, it is the "support for two-step verification of direct payments" that needs attention. Some practitioners have expressed concern about this. What are the details?
In "support for two-step verification of direct payments”, in order to enhance security, the taxpayer needs to perform two-step authentication with a one-time password when making a direct payment. The one-time password will be sent to the selected e-mail address among the registered e-mail addresses (up to 3) linked to the user ID.
In some cases, only the e-mail addresses of the accounting firms that provide tax advisors are registered, and in other cases, the e-mail addresses of the taxpayers themselves (e.g., the person in charge of the company) who operate the direct payment system are not registered. In practice, eLTAX is used only by accounting firms, and the taxpayers themselves do not have many opportunities to use it.
In such cases, the one-time password will not be delivered to the person in charge of direct payment. It is necessary to check the registered e-mail address again, and add or change the e-mail address as necessary, so that the one-time password will be delivered to the person in charge, etc.
The Flow of Direct Payments after the System Update
After the system update, direct payments of local taxes will follow the process below:
- Select the direct method on the payment method selection screen
- Select "Make payment now" or “Make payment after specifying payment date”
- Select the e-mail address to be notified of the one-time password
- Confirm the one-time password sent to the selected e-mail address
- Enter that password on the one-time password input screen displayed on PCdesk
- The payment procedure will then be complete.
Impact of Tax Reform on the Special Spousal Deduction
Introduction
The 2025 tax reform proposal does not directly mention the revision of the special exemption for spouses. Although the special exemption for spouses itself will not be changed, it is expected to be affected by the tax reform in regards to the annual income ’wall’.
What is the Current Special Exemption for Spouses?
Under the current system, a special exemption for one’s spouse is available to a taxpayer whose own total income is 10 million yen or less, and whose spouse's total income is between 480,001~1,330,000 yen and is not eligible for the spousal exemption. The amount of the exemption varies in stages, depending on the total income of the spouse and the total income of the taxpayer him/herself.
Changes due to the 2025 Tax Reform
The main changes to the special exemption for spouses scheduled to be made as a result of the 2025 tax reform are the following two points.
- The spouse’s total income borderline, between the spousal deduction and the special exemption for a spouse;
- The maximum annual employment income of the spouse who can use the full amount of the deduction.
First, (1) the total income of a spouse, which is the borderline between the spousal deduction and the special exemption for spouses, will be affected by the revision of the total income of spouses earning the same income as a result of the 2025 tax reform. Under the current system, a spouse who is eligible for the special exemption for spouse is a spouse who is not a spouse eligible for the exemption. A spouse eligible for the exemption is assumed to be one in the same household, with a total income of 480,000 yen or less.
In other words, under the current system, the boundary line is 480,000 yen of total income. If the spouse’s total income is 480,000 yen or less, the spouse is eligible for the spousal deduction; if their income is between 480,001~1,330,000 yen, the spouse is eligible for the special exemption.
After the revision, the total income requirement for a spouse in the same residence will be revised to 580,000 yen or less, so the boundary line will be 580,000 yen or less of total income. The total income range for a spouse who is eligible for the special spousal exemption will be modified to between 580,001 yen~1,330,000 yen. The upper limit of 1,330,000 yen is not expected to change.
The Maximum Annual Employment Income of a Spouse for Whom the Full amount of the Spousal Deduction is Available
Secondly, (2) the maximum annual salary income of a spouse who can use the full amount of the deduction is affected by the revision of the minimum deduction for employment income from 550,000 yen to 650,000 yen due to the 2025 tax reform.
Currently, if the taxpayer's own total income is 9 million yen or less, and their spouse's total income is between 480,001~950,000 yen, the full amount of the special spousal exemption is 380,000 yen. The maximum amount of the full deduction available is 950,000 yen when the spouse's total income is considered, with the spouse's annual salary income being 1.5 million yen.
After the revision, the minimum deduction for employment income will only be increased to 650,000 yen, with the scope of the spouse's total income eligible for the special spousal exemption not seeming to change. Therefore, the maximum amount available in full will remain unchanged at 950,000 yen for the spouse's total income, but their annual salary income will change to 1.6 million yen.
- Boundary between the spousal deduction and the special spousal exemption for a spouse increased from 480,000 yen to 580,000 yen of a spouse's total income.
- Full amount of special exemption for spouse (380,000 yen)
