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Ruling bloc approves tax reform plan for ’14

by Ayako Mie

Staff Writer

To stave off some of the negative impacts of the expected consumption tax hike to 10 percent in October 2015, the Liberal Democratic Party-New Komeito ruling bloc said Thursday the levy should be reduced on certain daily necessities.

But the coalition stopped short of specifying when the reductions would kick in or what necessities would qualify.

The reduction decision was included in the 2014 annual tax revision guideline, which is designed to shore up the economy and spur capital spending to keep Prime Minister Shinzo Abe’s “Abenomics” economic policies on track, and brace for the 3 percentage point consumption tax hike in April.

The LDP had been reluctant to agree to reduce taxes on necessities, arguing no fiscal resources had been tapped to offset the revenue shortfall amid ballooning welfare costs. But New Komeito was insistent that lower-income people whose livelihoods will be hit hard by the sales tax hikes, the one set for April and the as-yet finalized rise in 2015, need a break.

The parties found middle ground by not mentioning whether the lower levy on daily necessities would be introduced before or after October 2015. The ruling camp will decide on the details over the next 12 months, including specific items eligible for the break.

They will also mull the accounting methods necessary to enhance transaction transparency. Europe employs an invoice system to log the amount of consumption tax, but Japanese business circles are averse to this system, arguing it complicates clerical work. New Komeito has proposed a simpler system, but the LDP has not made a final decision.

Other tax revisions include breaks for companies to shore up capital spending, which has declined as the economy slumped.

The new tax guideline would allow companies to log 50 percent of expenses on business meals as deductions. With the step, the ruling bloc hopes to spur executives to socialize, and thereby spend, more.

Under the current system, all business meals worth more than ¥5,000 per person are taxed except for those of small and midsize enterprises. Tax-free socializing expenses by smaller entities, however, are currently capped at ¥8 million a year.

As for the corporate tax, the administration said this month it will terminate the corporate tax surcharge designed to expedite reconstruction of the disaster-stricken Tohoku region one year early.

To dodge criticism that Abenomics is only benefitting big business and has not resulted in wage hikes, the tax revision guideline would impose a heavier burden on high-income earners.

Currently the cap on income tax breaks applies to people whose annual income is less than ¥15 million. But the new system will apply the income tax break cap to people drawing an annual salary exceeding ¥12 million in 2016 and expand that to people who make ¥10 million a year in 2017.

The nation’s median annual after-tax income ranges between ¥2 million and ¥4 million, accounting for about 35 percent of salaried workers, while people who make more than ¥10 million account only for 3.8 percent.

People who buy new cars after the sales tax hike to 8 percent will receive breaks in the automobile acquisition tax to shore up spending.

The tax will be lowered from the current 5 percent to 3 percent for standard-size cars and the rate for minicars will be lowered from the current 3 percent to 2 percent.

The auto acquisition tax will be completely scrapped when the sales tax is hiked to 10 percent. But an estimated ¥190 billion loss in tax revenues will be offset by raising the minicar tax by almost 150 percent starting in April 2015. Taxes for older standard-size cars will also be raised depending on their fuel-efficiency.

The guideline also levels out cash-rich and cash-poor municipalities. The government will redistribute to poor municipalities a combined ¥580 billion out of the ¥2.5 trillion collected by local authorities in the form of corporate residential tax, the guideline said.