The Japanese government is investigating broadening of preferential tax treatment for compensation of company executives. Because the possibility of lowering of corporate taxation is limited to profit and fixed income earnings, the government is now also looking into compensation linked to return-on-investment (ROE) or return-on-assets (ROA).  The options for compensation of executives’ activities will be broadened, and this will (hopefully) push the improvement of profits and investment returns. 

The plan comes after calls from the business community and METI (Ministry of Economy, Trade and Industry) will include it in its proposal for the tax revision of 2016.  If approved by Parliament, it will come into force from March 2017.

The income companies paid to their employees is fiscally regarded as cost. Here it is presently possible to lighten the corporate tax burden.  For the compensation of executives in this system called ‘included charges’ (sonkin sannyuu) there are certain conditions:

1. Monthly payment of the same amount;
2. Bonus determined beforehand at the beginning of a period;
3. Compensation linked to profit. 

If one of these conditions is not met, the compensation is not regarded at charges. As a result, executives such as outside directors and controllers/auditors are not included, with compensation linked to ROA and ROE falling outside of the included charges.  With Japanese companies recently also putting more emphasis on mid-term investment returns instead of short-term profit, the Abe government is pushing for a change in management practices stressing ROE/ROA objectives. This fiscal treatment proposal is one of the initiatives to achieve this.

Source: Nikkei Online, 役員報酬、法人税優遇広く　ＲＯＥ連動も対象に (August 7, 2015)