The Liberal Democratic Party and Komeito's tax outline (Japanese) has been announced. At 127 pages, it takes quite a bit of effort to read.
The centerpiece may be the initiative championed by Prime Minister Abe to bring the effective corporate tax rate down to a percentage in the 20s.
Effective tax rate may be an unfamiliar term, but it is fine to think of it as the actual tax rate. The tax system is complex and cannot be expressed by a superficial percentage; the effective tax rate is the rate that results after those elements are calculated.
Every December, the news becomes animated by talk of the tax outline, but how, in the first place, are taxes decided?
This time, I would like to explain that process.
Where the Tax System Begins: Tax Commissions
Taxes are first discussed by bodies called tax commissions (zeicho).
This is often misunderstood and confusing, but, at the risk of oversimplifying, there are three kinds of tax commission.
- The Tax Commission (Japanese), one of the Cabinet Office's councils
- The Tax Commission (Japanese) of the ruling parties (currently the Liberal Democratic Party and Komeito)
- Tax commissions of the opposition parties
When a tax commission appears in the news or a newspaper, pay attention to which tax commission it is.
The Cabinet Office's tax commission tends to examine the foundations of the tax system at a higher level. Its framework and basic matters are discussed and compiled there.
In principle, practical and legal matters are discussed by the ruling parties' Tax Commission and compiled as the Tax Reform Outline.
At that stage, the ruling parties' Tax Commission coordinates requests from government ministries and industries.
The Tax Commission Prepares the Following Fiscal Year's Tax Reform Outline
The ruling parties' Tax Commission receives tax-reform requests gathered from government ministries and others by around August. In December, it reconciles and compiles the various requests and publishes the result as the Tax Reform Outline. Based on this Tax Reform Outline, the Cabinet makes its decision after the new year, submits a bill to the Diet, the bill is passed in March, and the new tax system takes effect in April, the start of the new fiscal year.
In fact, the Tax Reform Outline is a proposal, not a decision.
However, because tax reform bills submitted to the Diet are generally drafted on the basis of the Tax Reform Outline, the Tax Reform Outline effectively decides the following year's tax system.
There have, however, been cases in the past in which a bill different from the Tax Reform Outline was submitted, so it is advisable to update your knowledge in March, just to be safe.
Once a tax reform is formally adopted, it is published as tax reform on the Ministry of Finance website (Japanese).
This becomes a little confusing again, because the site also carries the Cabinet-approved “Outline of Tax Reform.”
The Cabinet-approved “Outline of Tax Reform” is prepared from the ruling parties' Tax Reform Outline; a bill is then prepared and submitted to the Diet.
The names are confusing, but once you understand the mechanism, you should be fine.
That is how the country's system works. Understanding it should help you make better sense of the news and newspapers. I would be grateful if this has helped you take even a little more interest in taxes.