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OC & Associates Newsletter No.24 (May 31, 2013)

IFRS in Japan

Ever since the official announcement of Work Plan on February 24, 2010, the staff of U.S. Securities and Exchange Commission (SEC) kept announcing that they would make a decision as to whether IFRS should be incorporated into the financial reporting system for U.S. issuers in 2011. However no conclusion was drawn during 2011 and the official announcement of the Final Staff Report called "Work Plan for the Consideration of incorporating IFRSs into the Financial Reporting System for U.S. Issuers" (Final Report) was released a couple of months later on July 13, 2012. The Final Report consisted of summarized issues up to date without including any clear decision as to how and when IFRS should be incorporated into the U.S. financial reporting system.
For the first time in four months, the joint meeting of the plenary and the Planning and Coordination Committee of the Business Accounting Council (joint meeting) was held at the Financial Services Agency to provide explanations and a question-and-answer session regarding the Final Report on October 2, 2012.
After the change of government, the first joint meeting was held on March 26, 2013. Reports were made on the application status of IFRS in Canada and Korea, along with reports by the Japan Economic Federation (JEF) outlining the immediate action on IFRS. According to the report from the JEF, only eight companies have publicly announced the voluntary adoption. However according to the media report, the number of voluntary adoptions (including intention of adoptions) reached approximately 60 companies at the end of February 2013, in which approximately 40% of the top 50 market capitalized companies (market capitalization of approximately 75 trillion yen) have publicly announced or are considering adoption. Proposals were also made for the facilitation of voluntary adoption of IFRS in the meeting.
The joint meeting was held on April 23, 2013. Although remarks were made to ease requirements for voluntary adoptions of IFRS and improvements to the endorsement process, no decision was made as before.

2013 Tax Reform and Amendment to Tax Treaty

Tax Rate for Individual Income Tax

Tax rate will rise to 45% from 40% starting from 2015if taxable income is more than 40 million yen.
Before Reform After Reform
Taxable income Tax rate Taxable income Tax rate
1.95 million yen or less 5% 1.95 million yen or less 5%
3.3 million yen or less 10% 3.3 million yen or less 10%
6.95 million yen or less 20% 6.95 million yen or less 20%
9 million yen or less 23% 9 million yen or less 23%
18 million yen or less 33% 18 million yen or less 33%
More than 18 million yen 40% 40 million yen or less 40%
More than 40 million yen 45%

Corporate Tax - Tax Credit for Salary Growth

If salary payment increases by 5% or more than the base year, the company will be able to apply tax credit of 10%(if the company is SMEs[*], 20%) in principle.
This tax credit is applied in the fiscal year beginning from April 1, 2013 to March 31, 2016.

Entertainment Expenses

The deductible limit of entertainment expenses for SMEs[*] was increased from 6 million yen (if entertainment expenses are 6 million yen or less, 90% of the amount) to 8 million yen from the fiscal year beginning on or after April 1, 2013.
* SMEs:Companies with paid-in capital of 100 million yen or less (excluding companies which are directly or indirectly wholly held by group companies with capital 500 million yen or more)

Delinquent Tax etc.

The special standard rate that was used for calculating delinquent tax, interest tax and interest on tax refund will be changed from January 1, 2014 as follows.
Standard discount rate on November 30 of the previous year + 4%
Average interest rate for short-term loan for the period from October of the two years before to September of the previous year / 12 + 1%

Amendment to Japan-U.S. Tax Treaty

The government of Japan and the United State signed the protocol amending Japan-U.S. tax treaty on January 25, 2013. The main amendments are as follows:
  Current After amendment
Dividend [Requirements of exemption]
Holding ratio: more than 50%
Holding period:more than 12 months
[Requirements of exemption]
Holding ratio: at least 50%
Holding period:more than 6 months
Interest General rule: 10%
Interest paid to financial
institutionsetc.:
exemption
General rule: exemption
This Protocol shall enter into force on the date of the exchange of instruments of ratification after the legal procedures of each country. Taxes withheld at source shall be applied to amounts paid on or after the first day of the third month next following the date on which the Protocol enters into force.

Consumption Tax Reform

Credit for taxable purchases
(newsletter No.021 2012.4.27)

Under the current rules, if annual taxable sales comprise 95% or more of total sales, the enterprise is able to claim 100% of the prepaid consumption taxes. However, for the enterprises with the annual taxable sales of JPY 500 million or more will only be able to receive a refund for the same percentage of taxable sales on their prepaid consumption taxes for fiscal years beginning on or after April 1, 2012.

Conditions to be exempt enterprises
(newsletter No.021 2012.4.27)

The taxable sales should not exceed JPY 10 million yen two years prior (i.e. base period) to the current period to be exempt from filing consumption tax returns. In addition to this traditional rule, if sales (or salary payment) for the first six months of the immediate prior fiscal year exceed JPY 10 million yen, the enterprise must file a consumption tax return for the current period starting from fiscal years beginning on or after January 1, 2013.

Consumption tax rate

Consumption tax rate will rise to 8% from 5% from April 1, 2014 and ultimately to 10% from October 1, 2015.
  Current From April 1,2014 From October 1, 2015
National Consumption tax rate 4.0% 6.3% 7.8%
Local Consumption tax rate 1.0% 1.7% 2.2%
Total tax rate 5% 8.0% 10.0%

Transitional Measures

Following the change in consumption tax rate, mitigating measures are stipulated. Previous lower rates will still be applied to taxable transactions, which will be completed after the “Effective dates”(descried in above 3), if the below conditions are met:
(1) Taxable transactions are those based on construction contracts, or leasing assets.
(2) In case of transfer of assets, the contracts should be entered into before the "Designated dates", and the transfer should be completed after the "Effective dates".
(3) In case of leasing contracts, the lease terms should start before the "Designated dates" and end after the "Effective dates".

Tax Exempt Status

Under the current rules, a newly established enterprise with paid-in capital of less than JPY10 million is exempt from filing consumption tax returns for the first two years. However, such an exemption is no longer applied to an enterprise established on or after April 1, 2014, if the following conditions are met:
(1) More than 50% of direct or indirect ownership is held by an individual or an entity as of beginning of the first two years.
(2) The amount of taxable sales of either the above party or its related entities exceeds JPY500 million for the taxable period corresponding to the new enterprise’s based period.

Social Security Agreement

These days, the number of people dispatched to work abroad or people living abroad is increasing. When working abroad, regardless of your nationality, you must be enrolled in the social security system of the country you are working in, and occasionally you are obliged to pay contributions to both countries (Japan and the country you are working in). On the other hand, you may not be eligible for benefits even if you contribute to the system because you did not satisfy the coverage period requirements.
Under the circumstances, Social security agreements are concluded for the following purposes.
●To avoid "dual burden of contribution payments" by arranging your compulsory coverage between two countries.
(Elimination of dual coverage)
●To enable you to totalize your periods of both Japan and the other country to fill the gap for benefits under the system of the agreement country so that you may qualify for benefits. (Totalizing the coverage periods) To be applicable to the system, it is required to ask Pension office to issue the certificate and submit it to the business office in the partner country.
If your company is planning to send your employees to overseas or accept foreign staffs from abroad, please contact us in advance.

Update on Social Insurance Rates

Effective March and April 2013, some of the insurance rates have changed and the current rates is summarized as follows:
Item Employer Employee
Before After Before After
Health Insurance (The Health Insurance Association - Tokyo) 4.985% 4.985% 4.985% 4.985%
Care Insurance (The Health Insurance Association - throughout the country) 0.755% 0.775% 0.755% 0.775%
Health Insurance (ITS Health Union) 4.250% 4.250% 4.250% 4.250%
Care Insurance (ITS Health Union) 0.500% 0.500% 0.500% 0.500%
Health Insurance (The Foreign Transportation & Finance Health Insurance Association) 3.400% 3.400% 3.400% 3.400%
Care Insurance (The Foreign Transportation & Finance Health Insurance Association) 0.400% 0.450% 0.400% 0.450%
Health Insurance (Tokyo Electronic Machine Industries Health Union) 4.650% 4.650% 4.650% 4.650%
Care Insurance (Tokyo Electronic Machine Industries Health Union) 0.600% 0.650% 0.600% 0.650%
Welfare Pension Insurance 8.383% 8.383% 8.383% 8.383%
Children Welfare Contribution 0.150% 0.150% - -
Workers Compensation Insurance (Other Business) 0.300% 0.300% - -
Employment Insurance (General) 0.850% 0.850% 0.500% 0.500%
Total 15.443% 15.443% 14.643% 14.643%
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