Giving and Tax Deductions in Japan

Overview

In Japan, individuals can deduct up to 25% of their income (minus 10,000 yen), for contributions to 17,000 Specific Public Interest Promotion Corporations (Tokuzo Hojin). They are mainly schools, social service organizations and other big organizations. Individuals cannot deduct, however, for contributions to NPO corporations and other smaller civic groups. They can also deduct, within the 25% limit, for "Designated Contributions" (Shitei Kifu), which is disaster relief and other special ocasion contributions designated by the government.

Businesses enjoy a much wider deduction. They can claim,

1) deductions for ANY contributions (to any organizations including political parties and other for-profit corporations), up to a certain percentage amout of their initial capital and income, which is described in the formula: (initial capital x 0.0025 + net income x 0.025)/2.
2) ANOTHER SET of the same amount deductions for Tokuzo Hojin contributions, and
3) full amount deductions for Shitei Kifu contributions.

Civic groups demand a tax reform to treat individuals equally with the businesses. They call for an overall tax deduction for contributions to NPO corporations. Japan's contribution-related tax deduction law is overly complicated, comparable to the U. S. system ;-). If you want to bathe in it, here is a rough sketch of it. (For general description of Japan's tax law in English, go to http://www.jwindow.net/LWT/GENERAL/LIFE/lwt_life_tax.html.)

Giving Japan

In Fiscal 1996, individuals deducted 26.9 billion yen for contributions in Japan. Corporations deducted 490 billion yen (*NPO ni kansuru Kenkyu Hokokusho*, Chapter 3, Section 7 (by Takako Amamiya), http://www.ashita.or.jp/npo/houkoku/h11ho3g.htm). Those are figures documented by tax takers. A real and full amount of contributions has has not been recorded nor reliably estimated. Individuals' giving particularly is undercounted because they are largely not tax deductible and thus not recorded. Japan's foundation giving is 47.9 billion yen in Fiscal Year 1998, as compiled by Japan Foundation Center for 615 grant making foundations which returned questionnaires (Josei Zaidan Sentaa, *Nihon no Josei Zaidan no Genjou 1998 nen*, http://www.jfc.or.jp/bunseki/genjo.html)

The U. S. does not have exact giving figures either. The amounts of Contributions in tax data do not include those made by non-itemizes, who account more than 60% of the U. S. tax payers. Even among those who itemize on their tax returns, close to 30% do not report their charitable deductions (Independent Sector, *Nonprofit Almanac 1996-1997*, p.63). Helped by estimates and sample surveys of 3,000 organizations, American Association of Fund-Raising Counsel (AAFRC) Trust for Philanthropy came up with a total giving amount of $174.52 billion in 1998 (*Giving UA 1999*). The breakdown is $134.84 billion (77.3%) from individuals, $17.09 billion (9.8%) from (non-corporate) foundations, $13.62 billion (7.8%) by bequests, and $8.97 billion (5.1%) from corporations (http://www.aafrc.org/news.htm). Independent Sector interviewed 2,553 adults 18 years of age and older, and came up with a donation figure of $1,075 per household in 1998, which represents 2.1% of an average household income (*The 1999 Independent Sector Giving and Volunteering in the United States* http://www.indepsec.org/gandv/default.htm)

Income Taxes on Nonprofits

As shown in Figure I of "Overview of Nonprofit Sector in Japan", there are about 2.6 million nonprofit private organizations in Japan. The larger and more established among them are about 230,000 tax law-specified "public benefit corporations," which are generally waived from income taxes. They are school, social welfare, readjustment relief, and civil law-specified public benefit corporations. They do pay income taxes for "revenue making activities," that are 31 businesses activities, such as retailing and manufacturing, as specified in Tax Law Chapter 2 Section 13. They have a lower national corporate tax rate: flat 22% for revenue making activities income. Ordinary corporate income tax is 30% for an income more than 8 million yen, and 22% for an income less than that. Local corporate income taxes are the same for both public benefit and business corporations: 5% for prefectural and 12.3% for municipal tax.

Tax law specifies other smaller groups as "unincorporated associations" (Jinkaku naki Shadan). The term technically includes NPO corporations, a new class of corporations introduced by the NPO law in 1998. There are more than 6,000 Jinkaku naki Shadan, including about 1,500 NPO corporations currently incorporated as of April 2000. They are generally treated in the same way as tax law-specified public benefit corporations are. They are not taxed except for the tax law-specified revenue making activities. Their national tax rate, however, are the same as business corporations (30%, not 22%, for an income less than 8 million yen).

All those corporations/associations are waived from taxes on their receipt of contributions (The receipt of donation is not considered a tax law-specified revenue making activity). Public benefit corporations do not pay tax on receipt of bequests, either. "Unincorporated associations" generally do (with some favorable treatments).

All corporations have to pay per-corporation local taxes (Kinto Wari Zei), beside income taxes, regardless their income. Prefectural per-corporation tax is 20,000 yen. Municipal per-group tax is 50,000 yen. The tax law-specified public benefit corporations generally need not pay those taxes if not involved in the specified revenue making activities. Unincorporated associations/NPO corporations have been unceasingly waived from those taxes by each local government's policies.

Deductions for Contributions

Business corporations enjoy a more favorable income deduction for contributions than individuals do. Businesses can generically deduct contributions (including those to NPO corporations, unincorporated associations, and even political parties and for-profit corporations) up to the amount given in this formula: (initial capital x 0.0025 + net income x 0.025)/2. Another set of the same limit deduction is allowed for contributions to Specific Public Interest Promotion Corporations (Tokutei Koeki Zoshin Hojin or Tokuzo Hojin). Tokuzo Hojin are well established 17,000 corporations, which are "extremely beneficial to the public interest," designated by Ministry of Finance from among the 230,000 tax law-specified public benefit corporations. Ministry of Finance also selects "designated contributions (Shitei Kifu)," for which full amount of contributions are deductible. They are disaster relief, year end community chest, or other contributions considered high in public interest by the government.

Individuals are not allowed for deduction for generic contributions as allowed for businesses. Individuals can deduct up to 25% of their income (minus 10,000 yen) only for contributions to Tokuzo Hojin, Shitei Kifu, and the government. (They can also deduct political contributions generally up to 25% of their income.)

The different tax treatments are one of the prime reasons for much smaller contribution deduction figures for individuals than for businesses (26.9 billion vs. 490 billion yen). Individuals have less incentives. Their charitable contributions are largely not documented.

The tax law-specified public benefit corporations have another way to save tax. They can transfer profits from their revenue making activities to their nonprofit activities account. They can do that as a donation, thus deducting up to 20% of their revenue making activity income. That allows the public benefit corporations fund their nonprofit activities by their revenue making activities. The tax law-specified "unincorporated association," including NPO corporations, cannot do that.

Campaign for a New NPO Tax Law

In June 1999, twenty eight nonprofit support centers and other nonprofit organizations organized a "Coalition for Reforming NPO/NGO Tax and Corporation Laws". Working with a cross-party NPO Parliamentary Caucus, they started a campaign to reform the NPO Law by November 2001, the deadline set in the parliamentary resolution adopted at the NPO Law passage in 1998. They demand the followings:

1. Introduce a tax deduction for contributions to NPOs (for both individuals and corporation, and both national and local taxes).
2. Allow "contribution" of fund from NPO's revenue making to nonprofit activities to their nonprofit account (so that NPOs can use their earned income for nonprofit purposes).
3. Introduce tax deduction for real estate donations. (Currently individuals are levied "presumed capital gain tax" by donating real estate to NPO corporations.)
4. Clarify legal criteria in approving tax exempt status to NPOs in a new tax to be adopted (in order to avoid government's arbitrariness).
5. Establish an independent body to approve exempt status.
6. Make the approval process appropriate and open. Specify the length of review period, document reasons of denial when denying an application, and establish a complaint process.
7. Remove any tax barrier for NPO incorporation (such as "presumed capital gain taxes" that may be levied against the representative of an unincorporated association when, on paper, he transfers his properties to the incorporated NPO).

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