Fall Newsletter (No.22) as of
Tax Reform Update
In this newsletter, our focus will be on individual income tax and individual inhabitant tax matters because there was little change from the corporate tax perspective.
Limitations on Employment Income Deductions
Upper limits have been applied to the employment income deduction for salaried employees with gross employment income in excess of 15 million yen. This is because (1) employment income deductions are not directly correlated to gross employment income (including bonuses) and (2) there are upper limits or fixed deductions adopted by other major countries. Specifically, for individuals with gross employment income in excess of 15 million yen, their employment income deduction will be capped at 2.45 million yen. This revision is effective from 2013 for individual income taxes and from 2014 for individual inhabitant taxes.
Itemized deduction becomes more attractive. Historically, when the total amount of itemized deductions (i.e. commuting allowance, relocation expenses, training expenses, qualification expenses, home traveling expenses) for salaried employees exceeded the employment income deduction amount mentioned above, there was a provision that allowed the excess amount to be added to the employment income deduction and deduct this added amount from gross employment income. However, the provision applied to limited cases. This revision was intended to mitigate the effect from the tax increase caused by the ceiling applied on the employment income deduction and also made to provide more tax benefits for those selecting the itemized deductions over employment income deduction, through broader scopes and eased criteria. This revision is also effective from 2013 for individual income tax and from 2014 for individual inhabitant taxes.
Severance Pay to Directors
For severance paid to directors serving less than five years, the calculation of taxable retirement income has changed. Prior to this revision, retirement benefits after the retirement income deduction was multiplied by a further 50%. Under the new rule, this 50% can no longer be applied. This revision is effective from 2013 for both individual income taxes and individual inhabitant taxes.
(Severance pay – Retirement income deduction) × 50%
= Taxable retirement income
Severance pay – Retirement income deduction
= Taxable retirement income
Special Reconstruction Income Tax from the 2011 Disaster
In December 2011, a special reconstruction income tax was introduced to provide the necessary financial resources to finance the reconstruction from the Great East Japan Earthquake. An additional 2.1% is to be added to the income tax rates withheld from salaries which are to be paid from January 1, 2013 through December 31, 2037. In the same manner, an additional 1,000 yen is also to be added to individual inhabitant taxes on per capita basis (”jyuminzei kintowari”) from 2014 through 2023.
New Reporting on Stock Options and Other Share-Based Compensation
As explained in the last April newsletter, from 2012, a new information return will be required to be submitted for Japanese branches and domestic subsidiaries with 50% or more of their capital owned by foreign parents. Specifically, when local directors or employees exercise their rights based on stock options or similar share-based compensation schemes, a special information return should be submitted to the national tax offices by March 31 of the following year. The return must be accompanied by individual statements for each individual and for each share-based compensation contract.
Change in Social Insurance Rates and Revision of Labor Laws
Change to the Welfare Pension Insurance Rates
The new Welfare Pension Insurance Rates which are effective from September 2012 are as follows:
Employer contribution – from 8.206% to 8.383%
Employee contribution - from 8.206% to 8.383%
The percentage is to be increased by 0.177% each year until it reaches 9.15% in 2017
Increase in Overtime Premium Rates
The Japanese Labor Standards Act was revised and went into effect on April 1, 2010 with the objective of reducing work hours, ensuring the health of workers, and to produce a society with a balance between work and life. According to this revision, if an employer requires a worker to work overtime the statutory limit of 45 hours per month the employer must make an effort to set the overtime premium rates above 25% and pre-define the overtime premium rates in the labor-management agreement. The overtime premium rates must be stipulated in the 36 (“saburoku”) employee-employer agreements.
Revision of the Japanese Labor
Due to a revision of the Japanese Labor Contract Act in August 2012, rules for the fixed-term employment contract have been established. When a fixed-term employee has repeatedly renewed and engaged in the contract for more than five consecutive years, the employer must convert the contract to an employment contract without fixed-term in situations where the employee makes a request.
Okamoto & Company Obtains ISAE 3402 Type 1 Report
In August 2012, we have successfully obtained a Type 1 ISAE 3402 report for our payroll outsourcing services. We are one of the few bilingual payroll providers in Japan who have obtained this report. This report (or often referred to as certification) was issued by an independent auditor in accordance with the International Standard on Assurance Engagements established by the International Auditing and Assurance Standards Board. As we continue to strive to become the premier provider of bilingual accounting services in Japan, we have decided to proceed further and seeks a Type 2 report. This is a demonstration to our commitment to quality service and improved reliability.
ISAE 3402 is the international standard on assurance developed by the International Federation of Accountants to evaluate the effectiveness of internal controls at a service organization relating to the user entities’ internal controls over financial reporting. This is the equivalent to the Statement on Standards for Attestation Engagements No. 16 (SSAE 16, formerly SAS 70) issued by the American Institute of Certified Public Accountants and the Auditing Standards Committee Report No. 18 (No.18 report) issued by the Japanese Institute of Certified Public Accountants.
A Type 1 report is an assurance report on internal controls in which an independent service auditor evaluates the fair presentation of its description of an organization’s system and the effectiveness of the design of internal controls to achieve the control objectives as of a specific date. A Type 2 report not only includes design effectiveness, but the operating effectiveness of the controls throughout a specified period.
Vacation Days Tracking
Starting early next year, a new portal site will be available where your employees in Japan can log in, request and receive authorizations on vacation time from their superiors via e-mail transmissions, and track your remaining vacation days. Calculations of vacation days will be in accordance with the basic requirements specified in the Japanese Labor Standards Act. This will be free of charge for our clients for whom we already perform payroll services. For those interested, please inform your in-charge.
Custom Interfacing with Our Web-Based Accounting System (CONTADor)
Do you have trouble uploading our accounting data into your system? If so, please approach your in-charge to see if it is possible to modify the outputs (trial balances, journal entries, etc.) in CONTADor to accommodate your specific needs. We currently have interfaces for popular systems such as Oracle, Cognos, CODA and Microsoft Dynamics GP (formerly Great Plains).
Originally developed in 2006, the system is a cross-platform application which can be accessible from various kinds of computers and smart phones. The system operates on an Apple server and is highly resistant against windows viruses and malwares. The system has a RAID1 mirroring real-time backup and all transactions are encrypted with 128 bit SSL.
Office Manager Seminar
We will be holding a seminar to highlight the topics of the 2012 tax reform and change in social insurance rates and revision of labor laws. Also, we will invite Mr. Ichiro Otsuka, a lawyer from Tokyo Roppongi Law & Patent Offices to speak on the importance of corporate secretarial compliance from the perspective of compliance with recent laws and regulations. If you are interested in participating, please send an e-mail to the following e-mail address by noon of Thursday, October 4, 2012.
Date: Monday, October 15, 2012, 1:30 pm – 4:00 pm Place: Training room at Okamoto & Company (Please see below URL for our map