Fall Newsletter (No. 40) as of
Tax Relief for Certain COVID-19 Situations
Directors’ compensation reductions
Some corporations may be considering reducing directors’ compensation due to a significant decline in earnings and cash flow problems as a result of the COVID-19 pandemic. If changes in directors’ compensation are made after the resolution of annual shareholders meeting, deductible expenses for corporate taxes are restricted. However, if it falls under the “extraordinary revision” or “revision due to financial decline,” this will become a deductible expense.
If compensation is reduced as a result of the COVID-19 pandemic, they will likely fall under the definition of “due to financial decline.” The NTA FAQs offer the following two situations.
(1) Business results decline drastically, there are difficulties in paying rent and salaries, and a reduction of directors’ compensations is inevitable considering the relationship with banks and shareholders.
(2) Even though the historic quantitative indicators such as sales are not yet deteriorating, there is no prospect of a recovery in the business environment, For example, a significant decrease in tourism demand. It is inevitable that the future business and financial conditions would significantly worsen.
However, subsequent revisions of directors’ compensations to return to original levels as the business situation improves during the same fiscal year would not be applicable for the extraordinary revision. The recovered increased portion would be disallowed as a deductible expense.
Tax residency requirements
If the issuance of the residency certificate to be attached to the application form for income tax treatment by foreign governments is difficult due to the COVID-19 pandemic, the options below, which can prove the non-resident is a resident of the treaty country, are permitted until the pandemic calms down.
(1) Withholding agents copy the original residency certificate (issued within about 1 year) and attach to the application form for income tax treatment (If the tax office requests the latest certificates, original certificates must be mailed.)
(2) If the non-residents are part of a group company, the withholding agents can explain “The income earner is from an affiliate company of the payer and it is obvious that [individual name] is a resident of XXX country. “As a result of a delay in the issuance of the tax residency certificates, the original certificate will be mailed later” should be indicated on the form and submitted to the tax office.
Individual Income Taxes
As we explained in the 2019 Fall Newsletter, withholding income taxes have been amended in January 2020.The primary topics of concern are explained below:
Reduction of employment income deductions
The amount of the employment income tax deductions will decrease across the board by 100,000 yen.
The upper limit of annual gross salary, which is a condition for obtaining the deduction, will be lowered from the current 10 million yen to 8.5 million yen. At the same time, the maximum deduction will be reduced from 2.2 million yen to 1.95 million yen.
Increase of the basic deduction
Currently, 380,000 yen is deducted from individual incomes without exception. The amount of the basic deduction will increase up to 480,000 yen based on applicable requirements.
Tax treatment for parents and those who provide elderly care
A special deduction for income adjustments has been enacted in order to reduce the increased tax burden for those involved in parenting and living with handicapped family members. The individual income tax deduction for individuals whose annual gross salary are above 8.5 million yen will increase as a result of these amendments. For individuals with an annual gross salary in excess of 8.5 million yen (up to 10 million yen), an amount equivalent to 10% of the annual gross salary shall be permitted as a deduction (150,000 yen, maximum). Conditions for the applicable individual are:
(1) Her/himself is severely physically disabled
(2) S/he has dependents who are under 23 years old
(3) S/he lives with a severely physically disabled spouse or dependents
To apply for a basic deduction or a special deduction during the year-end adjustment process, an “Application for basic exemption, and application for exemption for spouse and application for exemption of amount of income adjustment” must be submitted to your employer in advance.
Tax treatment for unwed mothers and widows
In the past, mothers who divorced and became a widow because of a death of their partners were able to claim a widow deduction, however, unwed mothers could not. Furthermore, there was differing treatment in deductible amounts between single men and single women. In order to realize equal tax treatment to all single-parent families, the following tax revision became effective:
|Bereaved||Divorced||Unwed single mother|
|Personal income||≦Y5 m||Y5 m>||≦Y5 m||Y5 m>||≦Y5 m|
|Dependents||Yes||Children||Y350 k||N/A||Y350 k||N/A||Y350 k|
|Other Dependents||Y270 k※||N/A||Y270 k※||N/A||N/A|
The deduction is only applicable for those that were legally married.
For employment income earners, this applies from year-end tax adjustments for 2020. It is also applicable for monthly withholding income taxes from January 2021
Upper limit changes to the standard monthly remuneration for welfare pension insurance
From September 2020, the upper limit of the standard monthly remuneration for welfare pension insurance has increased with another grade (31st grade, 620,000 yen)
|Grade||Standard Monthly Remuneration||Monthly Remuneration||Monthly welfare pension insurance premium|
|Amount||Employee’s portion(50% each)|
|31st||620,000 yen||Between 605,000 yen and 635,000 yen||113,460 yen||56,730 yen|
|32nd||650,000 yen||635,000 yen and more||118,950 yen||59,475 yen|
Change in insured period calculation
The method of calculating the insured period required to receive unemployment benefits has changed. In principle, the total insured period must be at least for 12 months in the two years prior to the date of leaving the job in order to receive unemployment benefits. Effective August 1, 2020, months with 11 or more working days and also months with 80 or more working hours can be counted as one month in evaluating eligibility.
Unemployment benefits period
The unemployment benefit restriction period for those who left their jobs after October 1, 2020 has been shortened to two months. When applying for unemployment benefits due to voluntary retirement, the payment was made after a 7 day waiting period from the date of submission of the statement of unemployment plus an additional 3 months for the benefit restriction period. From October 1, 2020, the benefit restriction period shortened to two months. However, this is limited to two out of last five years. If there are three retirements within the past five years, the benefit restriction period for the third retirement will be three months.
COVID-19, Sickness and Injury Benefits, and Workers’ Accident Compensation
The Ministry of Health, Labor and Welfare released the Q&A below regarding the payment of sickness and injury benefits for COVID-19.
The Ministry of Health, Labor and Welfare also released a circular notice and the Q&A below regarding workers’ accident compensation for COVID-19.
In the Q&A, if an infected employee worked in a workplace where multiple infections were confirmed, he/she would be compensated through workers’ accident compensation insurance.
Labor Management for Work from Home
Various work styles such as work from home is likely to remain in the future, which was triggered by measures intended to prevent the spread of COVID-19. Here is a summary of typical action items and issues that HR managers face:
・Clarify rules for overtime and holiday work, and not forcing overtime work (*)
・Judging from productivity when work from home and work in the office, review work descriptions and assignments. Eliminate unnecessary work so employees are implicitly forced to work overtime.
・Support employees’ mental well-being (eliminate feeling of isolation, make opportunities to consult with others)
・Allow employees to take time off during working hours and allow work after working hours (“slide system”). Allow employees to change the starting and ending working times
・Implement plans with staggered working hours and telecommuting, and plans that also include a slide system.
(*) Please use this opportunity to confirm whether the method of applying for overtime is described in the work rules and whether the description in the work rules is consistent with actual operations.
For some companies, there are types of occupations that allow working from home and those that cannot. It is important to offer a balance between occupations and minimize inequality.
・Offer monthly home allowance (to cover communication and utility costs)
・Offer communication expenses and utility expenses allowance in the following month payroll according to the number of working days from home
・Abolish prepayments or monthly commuting allowances (commuter pass) and pay the commuting allowance in the following month based on the actual number of work days in the office (or pay a daily commuting fee according to the number of working days in the office if the employee works in the office for less than XX days a month and offer a monthly commuter pass if he/she works in the office for XX days or more, etc.)
Commuting expenses are not required to be paid by law, so the company should decide whether or not to pay it. In addition, it is considered a disadvantageous change for employees to unilaterally abolish the fixed commuting allowance. It is essential that employees agree with such change in advance after a thorough explanation.
NTA’ Year-End Adjustment Application
On October 1, 2020, the NTA released a web-based year-end adjustment software as a tool for the digitization of the year-end adjustment procedure described in the 2018 tax reform. We determined that the evaluation and preparation period was insufficient to adopt this software from this year. From next year onward, we plan to review a wide range of offerings from other software vendors, and select best digital solution to fit our needs, including expansion of EPS functions. Thank you for your understanding.
Year-end adjustment software (National Tax Agency):
Amendment of Law Regarding “Power Harassment”
On June 1, 2020, the Labor Measures Comprehensive Promotion Act (a law to prevent power harassment) came into effect. This requires employers to implement employment management policies against power harassment in the workplace. At the same time, measures to prevent sexual harassment and pregnancy discrimination are being strengthened. However, there will be a grace period for SMEs until March 31, 2022.
Mr. Ichiro Otsuka will speak in detail during the office manager seminar.
OC & Associates K.K.
OC & Associates Tax Co.
OC & Associates HR Co.
Kioicho Building 17F
3-12 Kioicho Chiyoda-ku, Tokyo 102-0094
TEL +81-3 (5276) 0900
Office Manager Seminar (Webinar)
We will be holding our annual seminar to highlight the topics of the latest tax and payroll developments. We will again invite Mr. Ichiro Otsuka, a lawyer from Tokyo Roppongi Law & Patent Offices. He will speak on power harassment. If you are interested in participating, please send an email to the following email address by Thursday, November 5, 2020. The seminar will be held in the form of a Zoom Webinar.
Date: Tuesday, November 10, 2020, 1:30 pm – 3:30 pm
Location: Virtual (we will send a zoom link to participants.)
This newsletter is for private circulation only. Although care has been taken in the preparation of this document, contents have been highly summarized and it may contain errors and/or ambiguities for which we cannot be held responsible. If you are concerned about a specific issue, we recommend you seek professional advice. The material contained in this newsletter may not be reproduced in whole or in part by any means, without the permission of OC & Associates K.K., OC & Associates Tax Co. or OC & Associates HR Co.