Tax Revenue 2020

National Tax Revenue in 2020

Japan’s National tax revenue in fiscal year 2020 was about $549 billion (JPY60.82 trillion).

Japanese National tax revenue

As opposed to the expectation of most people, the entire revenue exceeded the budget about by 10%, largely thanks to a Corporation tax increase, turning out to be larger than expected as a result of firm business earnings despite the coronavirus pandemic.

Consumption tax became the largest contributor to overall tax revenue in the year through March, JPY21 trillion, reflecting the full effect of the 2% tax rate increase from 8% to 10% in October 2019.
Next to Consumption tax, Income tax contributed JPY20 trillion including withheld amount of JPY16 trillion.
Largely lagging behind those two major tax items, Corporation tax generated JPY10 trillion, followed by Inheritance tax and Gasoline tax each of them amounting to approximately JPY2 trillion.

Aside from the National tax, Japan also has the Local tax revenue totaling to JPY38 trillion in fiscal year 2020, including Individual Inhabitant tax amounting to JPY13 trillion, Fixed asset tax of JPY9 trillion and others.

For fiscal 2021 through next March, the government expects the National tax revenue of 57.45 trillion yen.

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Tax Revenue 2021

National Tax Revenue in 2021

Japan’s National tax revenue in fiscal year 2021 was about JPY67 trillion.

Japanese National tax revenue

As opposed to the expectation of most people, the entire revenue exceeded the budget about by 5%, thanks to increases of revenue in major tax items, turning out to be larger than expected as a result of firm business earnings despite the coronavirus pandemic.

Consumption tax was par on Income tax as the largest tax item among tax revenues in the year, respectively amounting to JPY21 trillion.
Next to those two major tax items, Corporation tax contributed JPY13.6 trillion a 20% increase from the year 2021.
Largely lagging behind those three major tax items, Inheritance tax and Gasoline tax generated JPY2.7 trillion and JPY2.0 trillion respectively.

Aside from the National tax, Japan also has the Local tax revenue totaling to JPY38 trillion in fiscal year 2021, including Individual Inhabitant tax amounting to JPY14 trillion, Fixed asset tax of JPY9 trillion and others.

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Consumption tax invoice system in Japan

What is the invoice system to be launched in Japan?

In Japan, a consumption tax invoice system is scheduled to be introduced on October 1, 2023.

Japan’s consumption tax is a value-added tax, but currently it is not based on the so-called invoice method, but on the bookkeeping method.

When the invoice system is launched, invoice issuers are required to register and must include mandatory information on the invoice, such as the registration number, applicable tax rate, and consumption tax amount.

Who will be affected by the introduction of the invoice system?

The main affected parties by the introduction of the invoice system are current tax-exempt business entities and business partners of tax-exempt business entities. Please refer to another article for a detailed explanation of consumption tax-exempt business entities.

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(1) Registration as a qualified Invoicing business entity will disqualify you from being a tax-exempt business.

Even after the introduction of the invoice system, there are no plans to change the criteria for qualifying as a tax-exempt business entities. Therefore, tax-exempt business entities will remain tax-exempt if they do nothing.

On the other hand, a business entity cannot issue a qualified invoice without registering as a qualified invoicing business entity.

It is possible for a tax-exempt business entity to register as a qualified invoicing business entity, but in this case, the business entity is assumed to be subject to consumption tax, so once registered, it is no longer a tax-exempt business entity and its consumption tax burden will increase.

(2) Affects transaction partners with tax-exempt business entities.

From the perspective of a business entity that purchases from a tax-exempt business entities, it is not possible to receive a qualified invoice and therefore cannot claim the purchase tax credit for that transaction. In other words, the burden of the consumption tax equivalent of the transaction will increase.

Due to this situation, it is expected that a transaction partner will pressure the tax-exempt business to register as a qualified invoicing business entity, or in some cases, change the supplier to a registered business entity.

Tax-exempt business entities should comprehensively consider whether to register, not only for their own tax advantages, but also in relation to their business partners.

(3) No significant impact on taxable businesses

For current taxable business entities, the impact is not so great, except for the transactions with tax-exempt business entities mentioned above.

There is not much change from the current situation if we pay attention to the items on invoices and the paperwork involved in transactions with tax-exempt business entities.

In addition, even after the start of the invoice system, the simplified taxation system can still be selected if the requirements are met, thus reducing the administrative burden in addition to the tax benefits.

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What kind of tax incentives do SMEs have in Japan?

Under the Japanese Corporate Tax Law, various tax incentives are available for small and medium-sized enterprises (SMEs).

The definition of SMEs is explained in another article.

This article deals with the popular tax benefits available to SMEs.

Reduced corporate tax rate

The basic corporate tax rate is 23.2%. For SMEs, a lower rate of 19% is applied to an annual income of JPY 8 million or less.

Tax losses carry-forward

Tax losses carried forward are incurred in the fiscal year beginning within 10 years prior to the start of the current fiscal year and are deducted in order from oldest to newest.

For SMEs, deductions of tax losses carry-forward are allowed up to the amount of taxable income for the fiscal year, and for non-SMEs, the maximum amount is 50% of the taxable income for the fiscal year.

However, even for non-SMEs, there may be exceptional measures due to the influence of the coronavirus, and the deduction limit may exceed 50%.

Tax losses carry-back

If a SME that generated income in the previous fiscal year and paid corporate tax has a loss in the current fiscal year, it can apply the loss in the current fiscal year to the income in the previous fiscal year and have the corporate tax paid in the previous term refunded.

Carryback of tax losses is generally available for one year for national corporation tax purposes, and it does not apply to local taxes.

Tax losses carry-back also has exceptional measures for coronavirus, which may be available to non-SMEs.

Entertainment Expenses

Entertainment expenses are expenses paid for entertainment and gifts to business partners and customers including prospective customers.

SMEs can deduct the entire amount of entertainment and gifts expenses of JPY 8 million or less per year. On the other hand, non-SMEs can only deduct 50% of entertainment expenses (excluding gifts).

Fixed assets and investment incentives

Several tax incentives are available to SMEs to encourage investment. Many of these incentives are available in the form of additional depreciation or special tax credits.

For example, if SMEs purchase or produce qualifying machinery equipment and software that meets certain requirements, they can choose between a 30% increase in depreciation or a 7% tax credit on the asset.

Another tax incentive for SMEs is that depreciable assets with an acquisition cost of less than 300,000 yen are eligible for immediate expensing of the entire amount (however, the annual total is limited to 3 million yen). As a general rule, non-SMEs must record depreciable assets of 100,000 yen or more as fixed assets and depreciate them over their legal useful lives.

Tax incentives associated with policy perspectives on job growth

In addition, there is also a tax incentive that allows SMEs that increase the amount of salaries paid to their employees by 1.5% or more from the previous fiscal year to deduct 15% of that increase from their corporate tax amount.

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The definition of SME is related to the status of the parent company.

Many foreign corporations have subsidiaries in Japan. These companies are often small, especially shortly after establishment, and are often small and medium-sized enterprises (SMEs) under tax law.

SMEs are entitled to various tax advantages, as described in a separate article.

So what exactly constitutes SMEs under Japanese tax law?

In fact, although different definitions are given for each specific tax measure, generally, corporations with capital of 100 million JPY or less are considered to be small to medium size enterprises (SMEs).

However, a company whose parent company has a capital of JPY 500 million or more and 100% direct or indirect control with that parent company is not a SME, even if its year-end capital is JPY 100 million or less.

Thus, for example, if a company with a capital of 400 million yen owns 100% of a company with a capital of 100 million yen, this subsidiary would qualify as a SME, but if a company with a capital of 500 million yen owns 100% of a company with a capital of 10 million yen, this subsidiary is not a SME.

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