Tax Treatment of Osaka/Kansai Expo 2025 Ticket Purchase Expenses
Introduction
Tickets for the Osaka-Kansai Exposition have been on sale since November 2023. What tax treatment is appropriate when a company incurs expenses for the purchase of Expo admission tickets? We will explain the specific accounting treatment and points to keep in mind when filing tax returns.
In Principle, Treated as Sales Promotion Expenses
When a company provides only admission tickets to business partners for the purpose of sales promotion, etc., the cost of purchasing such admission tickets is treated as sales promotion expenses, etc. - not as ‘entertainment expenses, etc. ’ In addition, when an employee is asked to visit the exhibition as a recreational meeting/event, the purchase cost of the admission ticket, as well as transportation and accommodation expenses for the visit, are considered to be employee benefit expenses. The same treatment applies if the visit includes family members of the employee.
The Osaka-Kansai Expo is a national project designed to promote interactive cultural exchange, and to disseminate Japan's cutting-edge technology. The act of a company purchasing admission tickets and delivering them to its business partners is different in nature from the act of inviting a person to attend a theater, etc., and is not considered an entertainment expense.
Given the nature of the Exposition, there are cases where admission tickets are widely distributed to subcontractors, sub-subcontractors, or customers of group companies in order to promote sales and advertising by enhancing the image of the gifting company. In such cases, the purchase costs would be considered as sales promotion expenses or advertising expenses.
However, caution should be exercised when a parent company issues admission tickets to employees of its subsidiaries or affiliates. This action may be regarded as the parent company bearing the cost of employee benefits on behalf of the subsidiaries’ and/or affiliated companies‘ own employees that should be borne by the other entities themselves. As a result, such acts may be treated as donations to the subsidiaries/affiliates; therefore, care is required.
Admission Ticket Purchases are Consumption Tax "Exempt"
Next, we will discuss the treatment of consumption tax. Admission tickets to the Expo fall under the category of "item stamps, etc." under the Consumption Tax Law. So taxable purchases for consumption tax purposes are recognized not at the time of purchase, but rather at the time when the tickets are actually exchanged for goods or services.
Therefore, when an admission ticket purchased for the purpose of sales promotion is delivered free of charge to a business partner, it is not a taxable purchase at the time of purchase. In addition, when the tickets are delivered free of charge to the customer, they are "non-taxable" because they do not meet the requirements for consumption taxation. The tickets are treated as "non-taxable" at the time of purchase, and also "non-taxable" at the time of delivery. If an admission ticket is delivered to a customer/client and used by them, the purchaser is not entitled to a tax credit for the purchase.
If Admission Tickets are Distributed to Employees, Tax Credits are Applied when the Tickets are Used
Similar to tickets purchased for sales promotion purposes, admission tickets purchased for employee benefit purposes are "non-taxable" at the time of purchase. However, in the case of employee benefit programs, since the user of the tickets is the company's own employees and not its suppliers, the tax credit can be applied at the time the tickets are used by the employees. By setting up a system to receive after-the-fact reports on the actual use of admission tickets by employees, it is possible to accurately apply the tax credit for purchases.
[Practical considerations]
- Clearly distinguish the purpose of admission ticket purchases, and do not confuse sales promotion purposes with employee benefit purposes.
- In the case of employee benefits, a method of proving actual use by the employee should be established in advance to facilitate later tax audits, etc.
- When a parent company purchases admission tickets for its subsidiary's employees, appropriate cost-sharing arrangements must be made based on capital and business relationships.
Handling of LED Replacement Costs
Introduction
The Fifth meeting of the Conference of the Parties to the Minamata Convention on Mercury (COP-5)* was held in Switzerland in the fall of 2023. At this meeting, an agreement was reached to phase out the manufacture, import, and export of fluorescent lighting for general lighting purposes by the end of December 2027. The transition from fluorescent lights to light-emitting diodes (LEDs) will further accelerate in the future. Accordingly, the tax treatment of the costs of transitioning to LEDs has become an important issue.
*COP-5: https://minamataconvention.org/en/meetings/cop5
“Repairs" or "Capital Expenditures?"
Consider the issue of replacing lighting fixtures used by a company at its place of business or other location. How should expenditures for replacing conventional fluorescent lights with LEDs be treated for tax purposes?
In practice, the question often arises as to whether such expenses are deductible as "repair costs" under the Corporate Tax Law, or whether they should be capitalized as "capital expenditures" and be subject to depreciation. “Repair costs" refer to expenses required to restore an asset to its original condition, or to maintain it. In principle, such expenditures are deductible for that fiscal year.
On the other hand, expenditures that increase the value of an asset or extend its useful life fall within the category of "capital expenditures”. In this case, as a general rule, such expenditures are recorded as fixed assets, and expensed through depreciation. So then which category does the replacement of fluorescent lights with LEDs fall under?
”Repair Expenses” in Question-and-Answer Cases Published by the National Tax Agency
LEDs generally have superior energy-saving performance compared to fluorescent lights. They also have longer service lives. Therefore, "functional improvement" and "extension of usable period" are considered to be recognized in many cases. Therefore, it is difficult to uniformly recognize the expenditures as repair expenses. In some cases, they may qualify as capital expenditures.
However, there is an important statement in the “Question-and-Answer Cases Concerning Corporate Taxes" published by the National Tax Agency (NTA). It refers to the replacement of fluorescent lights with LEDs in lighting fixtures. If the replacement is done for the purpose of repair or improvement, and if the amount incurred is deemed to be reasonable, the cost can be treated as a repair cost. Therefore, if the replacements with LEDs are done within the scope of normal repairs such as maintenance of assets and measures against aging, it can be handled as a repair cost, which is an important point in practice.
Caution when Making Large-Scale Changes, or Updating Full-Scale Lighting Systems
On the other hand, caution should be exercised for larger-scale renovations. Large-scale LED conversions that span an entire building or multiple floors may be handled differently. The same applies to full-scale updates of lighting systems, including changes in lighting arrangements. If the project involves a significant improvement in performance or a dramatic improvement in convenience, it is more likely to be treated as a capital expenditure. In such cases, careful attention should be paid to the accounting treatment.
Criteria for Determining Whether “Repair Expenses” or “Capital Expenditures”
The treatment of expenses related to the replacement of fluorescent lights with LEDs depends on the purpose, content, and scale of the replacement. Some expenses are considered "repair expenses”, while others are considered "capital expenditures”.
Referring to the Q&A examples provided by the NTA, as a general rule, if the expense is within the scope of maintaining the current state, or the amount is within the normal range, it can be treated as a repair expense. However, if it involves large-scale renewal or substantial functional improvement, it may be treated as a capital expenditure. Appropriate tax treatment in line with the actual conditions of the transaction, as well as proper accounting treatment and preservation of necessary documents, will provide peace of mind in the event of a later tax audit, etc.
What is a Married Couple Joint Life Credit?
Introduction
(In Japan,) most financial institutions require creditor group life insurance as a prerequisite for obtaining a mortgage loan.
In recent years, as the number of dual-earner households has increased, the option of "married couple joint life credit plans“ has been attracting attention, and it was recently reported that this option is becoming popular.
Creditor group life insurance (abbreviated as “danshin”) is applicable (usable) in the event of the death or severe disability of a mortgage borrower. In such cases, the life insurance company pays the mortgage-lending financial institution the amount of the outstanding loan balance on behalf of the policyholder.
In ‘paired loans’, which are often used by dual-income couples, the husband and wife, etc., are each enrolled in a creditor group life insurance plan. However, only the borrower who dies or becomes severely disabled is eligible for mortgage forgiveness. The remaining debtor is usually not exempt from their remaining loan balance. This means that the remaining spouse must continue to repay his or her own loan, while the household income has declined.
A New Form of Creditor Group Life Insurance (Danshin) - Married Couple Joint Life Credit Plan
The "married couple joint life credit plan" structure has been gaining popularity in the past few years. A married couple joint life credit plan generally carries a higher interest rate than a creditor group life insurance plan (danshin) at the time of a paired loan. However, if one of the borrowers dies or becomes incapacitated, the balance of the other borrower's mortgage will be reduced to zero yen due to the insurance benefit. As a result, the mortgage is then treated as having been paid off.
With regard to such married couple joint life credit plans, attention focuses on the tax treatment in the event of the death or severe disability of one of the borrowers. The insurance benefit paid to the said (deceased or disabled) borrower is exempt from taxation. On the other hand, there was a view that the full payment of the mortgage balance related to the other debtor could be considered to be temporary income, as if he/she received an economic benefit.
| Paired loan (Each stand-alone debt) | Married couple's joint life insurance policy | |
| Debtors | Husband (primary debtor) Wife (primary debtor) | Husband (primary debtor) Wife (joint debtor) |
| Loan balance 20 million yen | Husband: 10 million yen Wife: 10 million yen | Liabilities: 20 million yen |
| In the event the husband died or became disabled | Husband: Balance 10 million yen → 0 yen Wife: Balance 10 million yen (remains) | Husband and wife: Balance 20 million yen → 0 yen The couple's loan is paid off. |
| In the event the wife died or became disabled | Husband: Balance 10 million yen (remains) Wife: Balance 10 million yen → 0 yen | usband and wife: Balance 20 million yen → 0 yen The couple's loan is paid off. |
Changes due to the 2025 Tax Reform
Since the tax treatment of married couple joint life credit plans varies depending on the contractual terms, this article assumes a general case.
In the above table, consider the case where the husband, the primary debtor, dies while still repaying the mortgage. The wife's portion of the repayment which is forgiven due to the mortgage having been jointly-owed by the husband and wife is classified as temporary income, and subject to income tax. Conversely, if the wife dies, and the balance of the husband's mortgage is forgiven, it would likewise be considered temporary income.
On the other hand, it is different if the wife's (husband's) mortgage is forgiven because she (he) has become severely disabled. In this case, the full amount of the payment would be exempt from taxation. There are cases in which the spouse of a person who has suffered a physical disability, or others, receive insurance benefits.
There is a notice that states that insurance payments based on disability are also exempt from taxation. It is believed that the same concept applies to married couple joint life credit plans.
