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Fall Newsletter (No. 36) as of September 28, 2018

Taxes
Transfer Pricing Reporting Reminder
Revision of PE Regulations
Tax credit for salary expense increases
Payroll/Statutory Benefits
Workstyle Reform Laws
Mandatory use of paid vacation
Ceiling on overtime work
Overtime premium for SMEs
Flex-time system
Other workstyle reform laws
Change in Social Insurance Procedures
WebExpenseManager Upgrade
Office Manager Seminar
Disclaimer

Taxes

Transfer Pricing Reporting Reminder

As explained in past newsletters, a new framework for transfer pricing reporting was introduced in Japan as a result of the 2016 tax reforms. A multinational group with consolidated revenue of 100 billion yen or more for the immediately preceding fiscal year is obligated to submit a Notification for Ultimate Parent Entity and Statement of Business (Master file) to the national tax authorities by the online filing/tax payment system "e-Tax." For the Master file, if the parent company has December yea-end, the first deadline for submission in Japan will be December 31, 2018.
Please approach your in-charge if your status has changed from the previous year.

Revision of PE Regulations

The 2018 tax reforms revised the definition of a permanent establishment (PE). PE refers to a location where a foreign corporation is deemed to conduct business. A foreign corporation would not be taxed in Japan unless there is deemed PE. Under the tax reform, revisions were made to broaden the scope of PE to cope with tax evasion tactics. Some of the main points are:
1. Branch PE
Prior to the revision, there was no deemed PE for the storage and delivery of products from a warehouse. With this revision, if the activity is not a preparatory or auxiliary activity for the foreign corporation, it will be deemed to have PE.
2. Construction PE
Prior to the revision, a construction site in which the project lasts over a year was considered to constitute Construction PE. With this revision, if the contract period was split for the purpose of avoiding PE, the combined period will be considered to judge whether there is PE.
3. Agents PE
Prior to the revision, when a foreign corporation sells a product through a Japanese agent, there were instances where the agent sold a product under its name so that the foreign corporation avoided PE. With this revision, a person who enters into a contract repeatedly or who plays a major role in a contract, or act on behalf of the foreign corporation is deemed to have Agent PE.
As a result of these revisions, when there is deemed PE, a tax representative must be appointed and a tax return must be filed in Japan. For foreign corporations, this will be effective for the fiscal year beginning on or after January 1, 2019.

Tax credit for salary expense increases

In our 2017 spring newsletter, we explained there was an article on revisions of tax credits for salary expense increases. However, please note all of the following requirements now need to be satisfied for the year ending December 31, 2018:
A. Large enterprises (a company whose capital amount is over 100 million yen):
(1) Employees' salaries in 2018 ≧ Employees' salaries in 2013 * 105%
(2) Employees' salaries in 2018 ≧ Employees' salaries in 2017
(3) Monthly average salary per employee in 2018 ≧ Monthly average salary per employee in 2017 * 102%
Tax credit = (Employees' salaries in 2018 - Employees' salaries in 2013) * 10% + (Employees' salaries in 2018 - Employees' salaries in 2017) * 2% [10% of corporate income tax is upper limit.]
B. SMEs (a company whose capital amount is 100 million yen or less and whose issued shares are not owned by a large enterprise):
(1) Employees' salaries in 2018 ≧ Employees' salaries in 2013 * 103%
(2) Employees' salaries in 2018 ≧ Employees' salaries in 2017
(3) Monthly average salary per employee in 2018 > Monthly average salary per employee in 2017
Tax credit = (Employees' salaries in 2018 - Employees' salaries in 2017) * 10% [20% of corporate income tax is upper limit.]
In addition, if the monthly average salary per employee in 2018 increases by 2% from 2017, the following additional tax credit will be available.
Tax credit = (Employees' salaries in 2018 - Employees' salaries in 2013) * 10% + (Employees' salaries in 2018 - Employees' salaries in 2017) * 12% [20% of corporate income tax is upper limit.]

Payroll/Statutory Benefits

Workstyle Reform Laws

On June 29, 2018, the "law concerning the development of related laws to promote workstyle reforms" was enacted and will become effective sequentially from April 1, 2019. It consists of eight laws including the Labor Standards Act and Labor Contracts Act. Some of the relevant topics for our clients are:

Mandatory use of paid vacation

From April 2019, for employees whose annual paid vacation given are 10 days or more and take less than 5 days for one year, the employer is obligated to specify dates when the employees should take paid vacation and encourage the employees to take more paid vacations. If employees take paid vacation for 5 days or more voluntarily this would not apply. Companies need to monitor paid vacation its employees and improve the work environment so paid vacation can be taken at least 5 days a year.
The employer must have a way where employees can check to see the movement of their vacation days balance and/or the employer must have a pre-determined cycle for taking vacation which has been approved by the employee representative and based on the company's Labor-Management Agreement.
If an employee is unable to take a paid vacation of 5 days or more a year, a fine of 300,000 yen or less may be imposed.

Ceiling on overtime work

According to the current rules of the Saburoku "36" Agreement, the overtime work limit is basically "45 hours a month, 360 hours a year." However, a certain amount of overtime working hours that exceeds the limit can be included in the 36 agreement, as special clauses, if there are sudden, temporary and exceptional circumstances anticipated, but limited to six times (or months) in one year. Overtime hours without an upper limit are no longer acceptable.
The following contents are specified in the revised Labor Standards Act:
1. Even if there are special clauses, overtime work for one month, including holiday work, shall be less than 100 hours, the upper limit of overtime work for one year shall be 720 hours
2. Total time of overtime work and holiday work shall be within 80 hours on average for multiple months (2 months to 6 months)
This rule will become effective from April 1, 2019 for large enterprises and from April 2020 for SMEs.
Due to this amendment, new format drafts were proposed for the 36 Agreement. Unlike the current format, there are now two formats one for general clause and another for the special clause. Please refer to the links below:
General clause
https://www.mhlw.go.jp/content/12602000/000344353.pdf
Special clause
https://www.mhlw.go.jp/content/12602000/000344354.pdf
During each 36 Agreement renewal period, we recommend a review of the contents of the special clauses, consider ways to reduce employees' overtime and adopt health management measures.

Overtime premium for SMEs

With the revision of the Labor Standards Act in 2010, employers are required to pay 50% or more premiums for overtime work in excess of 60 hours a month. This provision has been suspended for SMEs for the time being, but will go into effect from April 2023.

Flex-time system

From April 2019, the upper limit for the flex-time settlement will be extended from one month to three months. Under the current law, a labor-management agreement can be entered with a flex-time system, but under the revised law, if the settlement period is longer than one month, a filing of the labor-management agreement is necessary with the Labor Standards Inspection Office.

Other workstyle reform laws

In addition, effective April 2019, the establishment of a new specific specialized skills work/output-based labor system for high-level professionals and promotion of inter-service interval system (effort obligation) will become effective. Additionally, effective April 2020, equal pay for equal work will become effective (effective April 2021 for SMEs).

Change in Social Insurance Procedures

Starting next month, the use of the annual average calculation method of remuneration will be possible not only for periodic calculations (santei) but also for one-time revisions (geppen).
If there is a change of two grades or more between the standard monthly remuneration calculated by the 3-month average and the past 12-month average, and such fluctuations are expected occur annually, the annual average method can be used as the standard monthly remuneration for one-time revisions.

WebExpenseManager Upgrade

Our expense reporting system is now more management friendly. In addition to the traditional reports by employee, you can now look at trends over a rolling 13 month period. For our accounting clients who would like to know more about this free system, please approach your in-charge.

Office Manager Seminar

We will be holding our annual seminar to highlight the topics of the latest tax and payroll developments. We will again invite Mr. Ichiro Otsuka, a lawyer from Tokyo Roppongi Law & Patent Offices to speak on key points regarding "Workstyle reforms" and "Results of supervision and guidance on workplaces suspected of long work hours" released from Ministry of Health, Labour and Welfare in August 2018. If you are interested in participating, please send an email to the following address by noon on Thursday, October 11, 2018. Space is limited, so please register early.
distribution@ocassociates.jp
Date: Thursday, October 25, 2018, 1:30 pm - 3:30 pm
Location: Training room within OC & Associates
(https://www.ocassociates.jp/map.pdf)

Disclaimer

This newsletter is for private circulation only. Although care has been taken in the preparation of this document, contents have been highly summarized and it may contain errors and/or ambiguities for which we cannot be held responsible. If you are concerned about a specific issue, we recommend you seek professional advice. The material contained in this newsletter may not be reproduced in whole or in part by any means, without the permission of OC & Associates K.K., OC & Associates Tax Co. or OC & Associates HR Co.
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