Outline of the FY 2020 Tax Reform in Japan

Introduction

On December 12, 2019, the Outline of the FY 2020 (Reiwa 2) Tax Reform was released. Included in the Outline are tax reforms that come from different perspectives. Reforms with the goal of realizing sustainable economic growth in mind include measures on open-innovation activities, measures to encourage investments and wage increases, revisions to the consolidated taxation system, and measures to promote 5G-related equipment installations. Reforms for adapting to economic and social structural changes are tax measures for unmarried single-parents and review of tax deductions for widows/widowers, and a review of the NISA program. Other reforms included are reviews of the international tax system, addressing the issue of property tax on land with unknown owners, improving tax payment environment, etc.

From among these wide range of tax reforms, we will discuss here the review of the NISA system, as it concerns individuals.

Outline of the (current) NISA program

NISA, which stands for “Nippon Individual Savings Account”, is a tax exemption program in which profits from financial products such as stocks and mutual funds are exempt from tax, modeled after the United Kingdom’s Individual Savings Account.

Generally, income tax (20.315%) is levied on profit upon sale and dividends gained from investments in financial products such as stocks or mutual funds. For example, if an individual obtains a gross profit of 100,000 JPY through investments, an income tax of around 20,000 JPY will be deducted, meaning the net earnings will only be 80,000 JPY.

However, with a NISA, the entire 100,000 JPY will be received by the individual.

There are currently three kinds of NISA accounts under the existing system: the (1) regular NISA, the (2) Tsumitate (accumulation) NISA, and the (3) Junior NISA. Below is a comparison of these three kinds of NISA.

Current NISA Program

*1 One can open either a Regular NISA or a Tsumitate NISA
*2 Once the non-taxable period lapses, one can open a new NISA account and roll-over their investments to the new account

A Review of the NISA System

According to the Outline, the following changes regarding the “extension of the account opening period of NISA accounts while revising the program so that it may further promote small-scale regular and diversified investments” was from the perspective of “supporting stable asset formation for hundred-year households” while “increasing the supply of capital necessary for economic growth”.

Changes to the NISA Program

A major point in the revision of the NISA program is the Regular NISA’s transformation into the tentatively-named “New NISA” and the new investment restrictions applied to the New NISA’s two-tier program. With accounts under the Junior NISA program expiring by the end of 2023, the NISA program will be revised into a two-type program made-up of the “New NISA” and the “Tsumitate NISA”. An illustration of the changes of to NISA program can be found below.

Changes to the NISA Program

(Remarks) As specified by the law, the Junior NISA program will end as scheduled at the end of 2023 without any extension.
(Note) Excludes leveraged investment trusts and delisted stocks and securities under supervision.

Reference: (Financial Services Agency) Key Highlights of the 2020 (Reiwa 2) Tax Reforms
https://www.fsa.go.jp/news/r1/sonota/zeikaitaiko01.pdf

Conclusion

Among the individual income tax reforms highlighted in the Outline of the FY 2020 Tax Reform gaining attention is the review of the NISA program.

Cash and deposits account for a significantly higher percentage of a household’s wealth composition in Japan compared to other Western countries. In other words, the liquidity of assets is low in Japan because cash and cash equivalents for the majority of financial assets, and the circular flow of money from households to businesses through the market is weaker compared to Europe and the United States. From the introduction of the NISA program, to the review and expansion of the program, Japan aims to stimulate economic revitalization by directing cash and deposit assets to investment assets, and to stabilize household funds through funded and diversified investments. On the other hand, many say that the NISA program is difficult to understand, and the introduction of the “New NISA” will further complicate the situation ― it will take some time for investment assets to take root in households, starting with letting the public understand the program. We hope that you can use this article as a reference for understanding the system and it has helped you become more aware of the upcoming tax reforms.