We are Murata Sogo Tax & Accounting Office in Miyakojima-ward, Osaka.

Since the end of last year, there have been frequent reports of problems surrounding the political funds of a faction of the Liberal Democratic Party. The fact that a portion of party income is kicked back to lawmakers but is not reported in the political fund balance reports of their own political organizations has shaken our trust in politics to its very core.
What is the tax treatment of kickbacks illegally obtained from party income?

Kickbacks to individuals from political funds are subject to taxation as “miscellaneous income” under the Income Tax Law.

Political activity expenses received from political parties and donations of goods for political activities received from individuals and political organizations such as sponsoring groups are considered “miscellaneous income” and are taxable as income on tax returns.

How to calculate miscellaneous income

The difference between the annual “political fund income” and the deducted “expenses spent for political activities” is taxable.

(1) “Political Fund Income” Includes the Following Items.

Funds for political activities such as political activity expenses received from political parties.
Donations of goods for political activities or donations of benefits or labor received from individuals, political parties, or political organizations such as support groups.

(2) “Expenses Spent for Political Activities” Include, for Example, the Following.

However, expenses paid from income that has been reported to the Election Administration Committee of the prefecture (the Central Election Administration Committee for the election of members elected for proportional representation in the House of Councillors) under Article 189 of the Public Offices Election Law are excluded from expenses paid for political activities here.

Expenses for secretaries and office staff (including temporary staff) used exclusively for political activities Salaries and allowances of secretaries and office staff (including temporary staff) used exclusively for political activities (salaries of secretaries in charge of policy, secretaries of the first councilors and secretaries of the second councilors, which are paid by the national government, are excluded).
Rent for office space used exclusively for political activities and other office expenses (e.g., equipment expenses)
Communications and travel expenses used exclusively for political activities
Expenses for reports to the Diet, political press releases, etc.
Expenses for commissioned research, books, and meetings used exclusively for political activities
Expenses for headquarters and branch offices incurred on a recurring basis to cover the costs of political activities of political parties.
Entertainment expenses, hospitality expenses, and donations related to political activities (excluding those that qualify for the deduction for donations (income tax credit) or the special deduction for donations to political parties (tax credit)) 3.

(3) Obligation to File a Tax Return

If a Diet member receives salary from a single source and all of the salary is subject to withholding at source, he/she is obliged to file an income tax return and pay taxes if the total amount of his/her income (excluding employment income and retirement income) exceeds 200,000 yen.
In other words, since Diet members earn an income called annual salary (which corresponds to employment income) over the course of a year, they are obligated to file an income tax return and pay taxes if, in addition to this, they receive kickbacks in excess of 200,000 yen.

 

As we have seen, kickbacks that are not used as political funds by individual Diet members (so-called “back taxes”) must be declared as miscellaneous income. If the Diet members themselves, as legislators, do not file tax returns in violation of the Income Tax Law, it may shake the public's confidence in the Diet, and the Diet members themselves may be in violation of the Income Tax Law.