Japan Ruling Bloc OKs Taxable Income Hike, Other Tax Reforms

Tokyo, Dec. 19 (Jiji Press)–The ruling bloc of the Liberal Democratic Party and the Japan Innovation Party (Nippon Ishin no Kai) adopted on Friday a tax system reform package for fiscal 2026, including a rise in the taxable income threshold to 1.78 million yen. The threshold will rise from the current 1.6 million yen in line with an agreement struck with the opposition Democratic Party for the People. The new level will apply from 2026 for people with annual incomes of up to 6.65 million yen. The threshold is the sum of the basic deduction for all income earners and the employee income deduction for salaried workers. Both levels will be raised by 40,000 yen to reflect inflation. Also, a temporary measure will be taken in 2026 and 2027 to raise the total deductions to 1.78 million yen for people with an annual income of 6.65 million yen or less. Annual income tax payments will decrease by between 4,000 yen and 36,000 yen per person as a result, according to a government estimate, leading to a tax revenue decrease of 650 billion yen per year. Additionally, the package calls for implementing an income tax hike in January 2027 to secure funding for higher defense spending. This will be carried out as a 1-percentage-point income tax surcharge. At the same time, there will be a 1-point rate reduction in the existing special income tax for financing reconstruction following the March 2011 major earthquake and tsunami disaster in northeastern Japan. Together, the two steps are designed to leave the tax burden unchanged for the time being. Regarding funding for the increased defense outlays, the fiscal 2023 tax system reform package included plans to raise corporate, tobacco and income taxes. Of the three, the income tax was the only one with no clear start date. In the latest package, the current level of tax deductions will be maintained for taxpayers with dependents of high school age. Eligibility for the accumulated investment program under the Nippon Individual Savings Account, or NISA, tax exemption system for small-lot investments will be expanded to cover people under 18 from 2027. The gift tax exemption for providing lump-sum education funds to children and grandchildren will be terminated. In order to promote domestic investment, a measure will be introduced to allow companies in all industries to deduct 7 pct of the value of their capital investments from their corporate tax payments. The measure will apply to companies investing at least 3.5 billion yen in production machinery and software in projects with an expected return on investment of over 15 pct. The tax credits will be capped at 20 pct of their total corporate tax liabilities. Companies will have the option of writing off the full value of their investments in the first year to curb tax liabilities instead of claiming the 7 pct deduction. Companies will also be able to deduct from their tax payments 40 pct of spending on research and development for advanced technologies designated as national strategic technologies, including artificial intelligence, quantum technology and semiconductors. The deduction will be increased to 50 pct when companies conduct joint research with universities or other certified R&D institutions. The environmental performance-linked tax on automobile purchases will be abolished at the end of the current fiscal year. The vehicle weight-linked tax for electric vehicles and plug-in hybrid vehicles will be increased in May 2028. Japan will raise 1.2 billion yen per year by downscaling a corporate tax break scheme for companies that raise employees’ wages, in order to secure financial resources for measures such as the abolition of the provisional gasoline tax surcharge and expansion of the free high school education program. END [Copyright The Jiji Press, Ltd.]