Human Resources

May 2003

The Ministry of Finance (MOF) is considering to put a cap on the standard employment income deduction, in what would amount to an effective tax increase for company employees. At the same time, the MOF hopes to alleviate concerns about the higher tax burden by widening the range of deductible expenses that employees can claim if they file tax returns on their own. The standard employment income deduction is a reduction in taxable income designed to cover the expenses typically incurred by company employees in the ordinary course of work. The deduction schedule is currently set so that average employment income is eliminated from overall taxable income. Given Japan's rapidly aging population and declining birthrate, the MOF feels that it has little choice but to increase the tax burden placed on company employees, a group that accounts for some 80% of the nation's work force, in order to cover rising social welfare costs. The ministry estimates that the standard employment income deduction alone costs it around 6 trillion yen in tax revenue a year. A proposal to cap the standard employment income deduction is expected to be included in an intermediate-term report to be put together by the government's Tax Commission in June. The precise size of the cap remains to be decided, but one idea being floated is to adjust the percentages so that, on average, only about 10% of employment income can be deducted. But a ceiling this restrictive would amount to an effective tax hike of trillions of yen. To ease the burden, the MOF will consider giving company employees the option of keeping track of their own employment-related expenses and filing on their own if actual expenses are higher than the standard deduction. Japan also has a specified payment deduction that covers five categories of special expenses paid for by employees, including commuting expenses and the cost of acquiring professional qualifications. But this deduction is allowed only if the total amount of these specified expenses exceeds the standard employment income deduction. In fact, this deduction is almost never used. In 2001, only four people out of about 45 million company employees filed to take advantage of the provision. As a result, the MOF is reviewing to expand the range of deductible expenses in order to make it easier for company employees to file for returns. The MOF is also studying the possibility of expanding the basic deduction and other items that take into account the tax burden of individual taxpayers in order to alleviate expected opposition from company employees. (May 7, the Nihon Keizai Shimbun, the daily Yomiuri)