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.”
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