Draft of Tax reform for year 2012 (10 - New withholding income tax calculation rule applied to Retirement allowance)

The retirement allowance is considered a very important capital that forms the foundation upon which retirees plan their post-retirement lives and hence the rate to calculate the taxable income for retirement allowance income after subtracting the deduction is 50% (hereafter as 50% rule). However, company directors who have short office period may utilize this 50% rule so that they can pay less income tax by shifting the payment of their salary into the payment of their retirement allowance. In order to remove such loophole in the tax law, Japan's tax legislators have proposed to make 50% rule invalid for those company directors whose office period is 5 years or less get their retirement allowance paid. Company directors are, by the definition of Japanese corporate tax laws, board member of the company, executive officer, accounting advisor, auditor, managing director, corporate controller, liquidator or one who engages in running the company's business. Besides company directors, National Diet member, local Diet member, National government employee and local government employee are also the subjects to whom the 50% rule will not applied. Therefore, when calculating withholding income tax for company director's retirement allowance, the formula will be as follows: In addition to income tax, inhabitant tax is also obliged to be withheld upon paying retirement allowance. The abolition of 90% in the following inhabitant tax calculation rule applied to all regardless of position or number of office period of the retiree receiving retirement allowance.