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Japan Proposes Tax Breaks to Help Businesses Cope With Pandemic

Posted on Apr. 10, 2020

As part of its emergency response to the growing COVID-19 crisis, the Japanese government intends to give most businesses tax breaks, including property tax reductions, tax deferments, and the ability to carry back losses.

Prime Minister Shinzo Abe on April 7 declared a state of emergency, announcing a raft of health and safety measures to help slow the spread of COVID-19 in Japan. To help offset the negative effects that those measures will have on economic activity, Abe also announced an economic package worth ¥108 trillion (about $998 billion), equivalent to 20 percent of the country’s GDP.

The package would provide ¥2 million to small and medium-size enterprises and “relatively larger corporations,” and ¥1 million to individual business owners, Abe said, according to an English translation of his April 7 press conference remarks. He added that the government would also reduce property taxes.

“We will also defer the payments of social security premiums for one year along with consumption tax and other tax payments,” Abe said. “Of course, no penalties will be charged. By implementing deferments at a scale of 26 trillion yen, we will make it possible for those business operators to use those cash reserves for continuing their respective businesses.”

According to an April 7 announcement from the Japanese Ministry of Finance, updated April 9, the government proposes that businesses experiencing a decline of 20 percent or more in revenue starting from February 1, compared with the previous year, will be able to defer their national tax payments for a maximum of one year. National tax payments include income, corporation, and consumption taxes.

Corporations with capital of between ¥100 million and ¥1 billion that experience losses between February 1, 2020, and April 1, 2022, will also be able to carry back net operating losses. Under normal circumstances, only corporations with registered capital of ¥100 million or less are able to carry back NOLs, according to Masao Yoshimura, tax law professor at Hitotsubashi University.

Local governments in Japan impose tax on land and buildings and depreciable assets for businesses, and property taxes will continue to be levied on loss-making businesses during the crisis, Yoshimura said. However, the government intends to give a property tax reduction or exemption for SMEs.

Specifically, property taxes on depreciable assets and buildings owned by SMEs would be cut to 50 percent or zero, depending on how much their sales drop during any three months between February 1, 2020, and January 31, 2022, compared with the prior year, according to Yoshimura. If they see sales decline by more than 30 percent, then they will get a 50 percent property tax cut, while businesses with sales losses of more than 50 percent will get a property tax exemption, he added. SMEs are defined as businesses with registered capital of ¥100 million or less, or individuals with 1,000 employees or fewer.

Organizers that have had to cancel major events, such as concerts, plays, and sports games, will also be able to get relief from the government. “There was a strong public sentiment for supporting the professionals involved in these activities,” Yoshimura said. The government proposed allowing such event organizers to deduct some portion of pre-sold, nonrefunded tickets from their taxable income, treating them like charitable contributions, he added. Organizers would be able to deduct charitable contributions, minus ¥2,000, from their taxable income, up to 40 percent of gross income for the calendar year, according to Yoshimura.

The measures will be included in legislation that the Cabinet will soon send to the Diet, Japan’s parliament.

As the COVID-19 infection rate quickly increased at the end of March, the Japanese public has become increasingly critical of the government’s response to the pandemic, according to Yoshimura, who expressed doubt about the effectiveness of the proposals. The economic package is significantly large, but many observers expect it to be insufficient if COVID-19’s spread can’t be stopped, he said. “In particular the tax measures are designated just for supporting cash flows of businesses and will play a limited role in assisting in a sharp economic downturn,” he added.

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