Tax hike may induce firms to use more temp workers

Companies don't get same break on levy with full-time ranks

by Tomoko Otake

Staff Writer

In what could be an unintended consequence, the sales tax hike set for next April may tempt companies to replace their regular workers with “haken” temporary workers, some tax law experts say.

This could mean the ranks of the nation’s nonregular workers, which have grown in recent decades and now make up a third of the workforce, could swell further. As of 2010, the number of temporary workers dispatched by employment agencies stood at 2.71 million.

Under the consumption tax law, companies are currently allowed to deduct the 5 percent tax from the costs of goods and services they buy from suppliers, which include payments to temp agencies, because theoretically the costs include the tax.

For example, if a company replaces its 100 regular full-time employees receiving an annual salary of ¥4 million each with 100 workers dispatched by a temp agency for ¥4 million each, the manpower cost would be ¥400 million. Of this, ¥20 million would be considered the 5 percent consumption tax paid by the temp agency, thus saving the company ¥20 million in taxes.

When the tax rate goes up to 8 percent in April, and then to 10 percent in October 2015, “there’s a possibility” that employers will try to replace more of their regular employees with temps — effectively putting the sales tax burden on the temp agencies, said Yoshikazu Miki, a professor of tax law at Aoyama Gakuin University.

In theory, beginning in April, suppliers of goods and services are supposed to add the 8 percent consumption tax onto the prices that they charge buyers. But amid the tough economic environment, temp agencies might find it difficult to add the tax to the final bill for fear of losing price competitiveness, Miki said.

“Prices are constantly fluctuating (between buyers and sellers),” he said. “The premise that all businesses are supposed to add the tax to their prices is not in sync with reality.”

But a Finance Ministry official, who declined to be named, denied such a scenario could occur, saying the government has recently introduced a law to ban companies from pressing tax burdens on their suppliers.

“Government ministries have the right to inspect companies (suspected of abusing the consumption tax law) and to issue orders to improve their practices,” the official said. “If that doesn’t work, the Fair Trade Commission can take action, even publicizing companies” guilty of unscrupulous practices.

Still, some experts predict that the tax increase will contribute to a rise in the number of temp workers.

“From the point of view of companies, the benefits of (switching from full-timers to) temp workers are threefold: you can terminate their contracts as you like, deduct the sales tax from the cost for them, and that you don’t have to pay them bonuses,” said Seibei Yamashita, a lawyer and tax litigation expert. “I think the planned rise of the sales tax to 8 percent will lead to increased business for temp agencies.”

  • gnirol

    Why are these studies always done too late to have an effect on the wording of the law, which could perhaps have been modified to prevent this “unintended consequence”? The degree of short-sightedness among politicians and their circle in countries around the world is astounding. The tax could have been raised in small increments every two years and reached 8% next April and no one would have noticed.

  • MM333

    Unless I am missing something, it’s not very logical for the employer to do this whatever the consumption tax rate might be.

    If you are the company, you are now transferring 4,000,000 to the Temp Agency rather than the employee but now you will also receive an input tax credit of 8% on this amount. Does this mean that your new Temp Staff are still receiving the full 4,000,000? Of course not. Even if the temp agency commission is 0% (which it surely won’t be) your temp staff would only ever receive 3,703,703 at most since the agency would have to pay 8% consumption tax on the “sales” of services performed by the temp staff.

    A.) If a Company hires a Regular Employee:

    Payment to Employee- 4,000,000
    ______________________________________
    Total Spending by Employer- 4,000,000
    Total Received by Employee- 4,000,000

    Alternatively

    B.) If a Company hires Temp Staff:

    Employer’s Payment to Temp Agency- 4,000,000
    Less: Consumption Tax Refunded to Company @8%- (296,297)
    ______________________________________
    Total Net Spending by Employer- 3,703,703

    Therefore,

    Amount Received by Temp Agency- 4,000,000
    Less: 8% Consumption Tax Paid to Govt by Temp Agency- (296,297)
    ______________________________________
    Net Amount Received by Temp Agency- 3,703,703
    Less: Amount transferred by Agency to Temp staff,
    after keeping, say, 10% agency profit- (3,333,332)
    ______________________________________
    Total Profit of Temp Agency- 370,371

    *Total Received by Employee- 3,333,332
    *Total Spent by Employer- 3,703,703
    *Total Profit of Temp Agency- 370,371

    With Temp Staff the employer is paying 3,703,703 but the employee is actually only working for 3,333,332 (assuming a 10% agency commission). It’s basic economics that you get what you pay for, so the employer can’t pay someone much less than 4,000,000 and expect to attract the same level of skills and experience worth 4,000,000. Assuming that you are not switching to a temp agency to circumvent labour laws or employment contracts, but solely to save 8% on salary costs, why not just keep your regular workers but pay them 8% less? Again, I don’t see how the consumption tax can influence the market in skilled labour in any meaningful way.

    • Mark Garrett

      Your math is sound, as is your logic, however, you’ve left out the most important ingredient which is the mindset of Japanese.

      First of all, your premise goes on the assumption that employers care about getting what they pay for. They don’t. Secondly, Japan’s traditional company culture coupled with the current economic situation isn’t one where employees will be demanding higher wages for their skills. Basically they just bend over and take what the company is willing to give them (I know that sounds a bit crude but it’s the closest description to what happens).

      I’ve witnessed this firsthand as my wife worked for Yamaha Motor Company for three years full-time as temp staff. She worked the same hours as regular workers, was required to attend nomikais and other company functions along with regular employees, etc. However, she didn’t receive any bonuses, did not receive the same health care, and had to renew her contract every three months. Finally, with no end in sight she moved on, but wouldn’t have if I hadn’t insisted.

      Hopefully this will change in the future but in the short term it will probably only exacerbate the problem. At some point it may finally reach a tipping point where temp staff decide enough is enough. Unfortunately they don’t make policy. Politicians with golden parachutes provided by company management do.

  • midnightbrewer

    That finance ministry official is full of crap. The government rarely polices companies for bad practices and there are no penalties to punish the companies with, anyway. It’s not going to be one or two companies, either; it’s going to be thousands. As the beginning of the article points out, we’re already up to 30% of the workforce being temporary and nothing’s being done about it now. A lot of those temporary workers work for the government, too. Why? To cut costs. And the government isn’t punishing itself for burdening the dispatch companies.

  • Mark Garrett

    ” If employers in Sweden can get back 25% of salaries paid, why isn’t every company in Sweden employing workers as a temp worker?”

    I’m not going to research it to find out for certain, but if I had to guess, I would say that they more than likely have laws in place that prevent companies from doing so. It doesn’t seem that difficult to just implement a maximum time limit. What Japanese companies have done is abuse the intent of this system using a loophole and then persuaded policymakers to ignore it.