Taxation in Agriculture

Chapter 23. Japan

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation

23.1. Overview

The share of agriculture in the Japanese economy is 1.1% of GDP and 3.4% of employment, the majority of those employed in agriculture are part-time farmers. Agriculture comprises 36% of the country’s total habitable land area and 68% of total water withdrawal.

For tax purposes income from agriculture is treated the same as other incomes under Japan’s taxation system. However, income from direct payments for crops can be deferred provided that these payments are reinvested in the capital or land for the farm business. Preferential tax treatment is provided for farmland which is often exempt from land taxes or is taxed on a lower than market value base. Waivers exist for inheritance tax to encourage the continuation of farming and farmers are exempt from environmental taxes on petroleum for farm use and benefit from tax exemptions on petroleum and coal for heating greenhouses and diesel for machinery used in agricultural production.

23.2. Income taxation

Agricultural income is taxed under Japan’s progressive income tax system. Since agricultural income is generally lower than other incomes it is taxed at a lower tax rate than the income tax rates applying to wages and salaries.

Self-employed farmers or those that have multiple sources of income are required to file a tax return. Farmers declaring income based on double bookkeeping receive the same tax deductions available for all “blue return” filers. The blue return is the special tax return used by all self-employed who have obtained approval by their local tax office to use this tax scheme. Under this system wages payed to family employees engaged in the business of the “blue return” filer can be deducted as necessary expenses. Moreover, under the “blue return” system farmers can defer the loss of farm income for three years (ten years in the case of corporate farms) irrespective of the cause of income loss.

Tax deferral is available for certified farmers receiving direct payment subsidies. These direct payments, included under the Law on Farm Income Stabilisation introduced in 2007, are the main programme for the crop sector. Farmers are allowed to accumulate the direct payments without including them in their annual declared farm income on the condition that the accumulated payments will be used to acquire farmland, farm buildings or farm machines within five years. The accumulated payments then needs to be deducted from the value of the acquired assets in the year of asset acquisition.

To mitigate the impacts of natural disasters on income, Japan’s Income Tax Act allows farmers to reduce their income by all or part of the value of agricultural assets damaged or destroyed by the natural disaster. Moreover, if the loss of the assets is too large to deduct, losses can be carried over for a period of three years after the incidence.

Capital gains from the sale of land are considered as taxable income. Various tax concessions are given to dispose of farmland in order to encourage transfers and consolidation of agricultural land. Gains on land transferred in order to transfer and consolidate farmland for business farmers are eligible for a special tax deduction of JPY 8 million.

Agricultural co-operatives that provide banking, insurance, farm input supply, marketing, and technical advice services to their members are eligible for a reduction on corporate tax rates.

23.3. Property taxation

The municipal Fixed Assets Tax, a tax on land holdings, is levied on the value of assets at a standard rate of 1.4% with an upper limit of 2.1%. Preferential assessment of the value of farmland is provided for under this tax regime. In general, the taxable base for land assets is the Appraised Value for Fixed Assets Tax (AVFAT). The AVFAT is the normal market value. Farmland is eligible for preferential assessment with the AVFAT assessed at 55% of the normal market value. (OECD, 1998)

Farmland is exempted from the City Planning Tax levied by the municipality on land assets, as assessed according to their AVFAT values, at a rate of 0.3%. This tax has been frozen since the 1998 fiscal year.

Furthermore farmland is exempted from the Special Land Holding Tax (municipal tax) of 1.4% of the acquisition cost of land minus the taxes due on that land under the Fixed Assets Tax. This tax has been frozen since the 2003 fiscal year.

The Registration and License Tax is levied on applicants for the registration of land for the purposes of preservation, transfer and other ownership of land. The tax base is the AVFAT and the tax rate depends on the property being registered. For example the registration of land transfer is taxed at a rate of 2% and the registration of land ownership for preservation is taxed at a rate of 0.4%.

A Real Estate Acquisition Tax is imposed by municipal governments upon the acquisition of real estate, calculated as 4% of the AVFAT. For farmland the rate has been reduced to 3% for the period 1 April 2006 to 31 March 2021.

Various forms of tax relief are incorporated into this tax to encourage transfer of farmland in line with structural adjustment programmes. For example, where a farmer purchases farmland in accordance with an authorised plan, they are eligible to claim the base deduction against the purchased farmland of up to 25% to 33% of its AVFAT. A special rule on tax amounts for residential lands is also levied by the municipality upon the acquisition of land. This tax is calculated as 3% of the acquisition cost minus taxes already paid on the same land under the Real Estate Acquisition Tax provisions. However, farmland is generally exempted from this tax. (OECD, 1998) Imposition of this tax has been temporarily stopped since 2003.

The national inheritance or gift tax is progressive and is levied at tax rates of between 10% to 50%. To avoid the subdivision of farmland sole heirs of farmland are exempt from paying these taxes.

Preferential tax base assessment and deferral of taxation are allowed for farmland subject to inheritance taxes. For example, a successor who uses the inherited land for farming is given a “grace” (deferment) on the inheritance payment. Moreover, the tax is exempted if the successor dies or if the successor inherits the farmland as an advance in a single unit.

The valuation of an inherited estate is usually based on its AVFAT and in principle, this applies to farmland as well as other types of land. Farmland in rural (agricultural) areas is evaluated at AVFAT, despite being adjusted by actual price records derived from other farmland transactions in the region. However, the valuation of farmland located in urban or peripheral zones may be determined according to the observed price of residential land nearby. It is possible that farmland can be exempted from this standard valuation, through an alternative approach whereby an Agricultural Investment Price is estimated and used in place of a market price. It is defined as the hypothetical market price for farmland on the assumption that the land will be permanently devoted to agricultural use. As a result of this preferential arrangement, the assessed value of farmland as a taxable base tends to be much lower than the actual market price (OECD, 1998)

Also, if the farmlands are in the specific urbanised area within the three metropolitan areas of Tokyo, Osaka and Nagoya they are designated by municipal authorities as “Productive green zones”. These lands can benefit from tax concessions associated with the Property Tax, City Planning Tax, and Inheritance Tax, with the obligation for the landowner to manage the farmland for at least thirty years.

By 2022, the abovementioned 30 years management obligation expires for approximately 10 000 hectares of farmland. At this point landowners can apply to the municipal government to sell their land. In the case whereby land ownership is not transferred 3 months after applying to sell the land, management obligations will be lifted. In May 2017, a related law was amended so that the designation period can be extended by a decade, on the premise of landowners’ intention.

In 2014, Farmland Banks (Public Corporations for Farmland Consolidation to Core Farmers through Renting and Subleasing) were established in each prefecture to enable farmland transactions including the leasing of farmland. Taxes are used as incentives for landowners to lease land through a Farmland Bank. From 2017, the property tax on leased land was reduced by 50%. Tax rates imposed on idle land have been increased by 1.8 times if owners do not lease out the land or resume cultivation.

23.4. Tax on goods and services

Japan's consumption tax rate was raised to 10% in October 2019 with reduced rate of 8% applying to food (consumed at home and as takeaway).

In 2012, Japan introduced an environmental tax on petroleum and coal to finance GHG emissions reduction measures; farmers are exempted from the taxation on farm-use petroleum.

Heavy crude oil used for agriculture, which is mainly used for heating in horticultural farms, is eligible for an exemption to petroleum and coal tax. In addition, farmers are also partially exempted from the diesel tax used by agricultural machinery.

23.5. Environmental taxes

See above.

23.6. Tax incentives for R&D and innovation

Japan has developed a tax credit system that allows enterprises to deduct certain R&D related expenditures, reducing the amount of corporate taxes. The total tax credit, when all available tax credits are applied, is capped at 45% of applicable corporate income taxes.

R&D tax credits are available to companies irrespective of their size. SMEs with capital of JPY 100 million or below receive a higher percentage of R&D expenditure deduction. Moreover, the R&D tax system provides additional incentives to increase R&D expenditure or to maintain high levels of R&D expenditure in addition to performing collaborative R&D. For example, 30% of collaborative R&D expenditure with national research institutions and universities (25% in the case that the collaboration with the R&D oriented ventures and 20% in the case of other research partners) is deductible from taxable corporate income (the maximum amount of the tax deduction corresponds to 10% of the corporate tax).