Taxation of corporate entertainment expenses in Japan

This dissertation analyzes whether or not tax changes have influenced Japanese corporate behavior regarding entertainment expenses.;The Japanese public has attributed this increase to loose taxation and tax enforcement. Accordingly, the Ministry of Finance has persuaded the Diet to pass increasingly strict deductibility requirements. In 1982, the deductibility of entertainment spending by large corporations was prohibited entirely. On the tax enforcement side, the National Taxation Administration has endeavored to utilize the present tax law framework in order to generate maximum revenue. In particular, the NTA has focused upon how to expand the definition of corporate entertainment expenses.;Two hypotheses are presented to explain why Japanese corporations spend on entertainment expenses despite increased tax restrictions. The compensation hypothesis assumes that a portion of entertainment expenses comprises fringe benefits paid to executives. If the marginal personal income tax rate of corporate executives is higher than the marginal corporate income tax rate, the combined tax burden of corporations and executives is reduced. The business relationship hypothesis assumes that a certain amount of entertainment expenses is necessary for successful business transactions in Japan. Entertainment spending functions as a lubricator between separate legal entities so that Japanese-style long-term relationships are facilitated.;NTA data detailing corporate entertainment expenses from 1969 to 1991 are used in the regression analyses. The regression results demonstrate that each hypothesis is capable of explaining some dimensions of corporate entertainment spending. Contrary to the public's view, the deductibility restrictions have limited corporate entertainment spending. However, the need to maintain long-term relationships and the disparity between corporate and personal income tax rates have exerted larger influences.;The provisions in the Special Taxation Measures Law have restricted the deductibility of corporate entertainment expenses since 1954. Despite these restrictions, corporations in Japan have steadily increased entertainment spending. In 1991, they spent 6.141 trillion yen (;Possible policy options, both taxation and non-taxation, are proposed.