Participants in Japan's hometown tax program, which allows people to "donate" some of their tax payments to a municipality of their choice in return for gifts or experiences, may need to increase their contributions or face reductions in gift sizes after the central government tightened regulations on Sunday.

Last month, ahead of the changes, competition intensified among the numerous intermediary websites for "furusato nozei," as the program is called in Japanese, while some people scrambled to make donations to take advantage of benefits under the previous system.

The Ministry of Internal Affairs and Communications has tightened rules for calculating expenses from October, as under the program local authorities must keep the total value of gifts, which are often locally produced specialty foodstuffs and products, and other costs including shipping fees below 50 percent of the donations they receive.

Image captured on Sept. 25, 2023, shows an intermediary website offering various products available as gifts through the "furusato nozei" program, with notices saying donation prices will increase from October. (Kyodo)

According to the new rules, expenses that were previously exempted must now be included in the total.

Specifically, administrative costs of the "one-stop special exception," which remove the need to file a tax return, and the costs of issuing a certificate of receipt of donations must be included. Fees paid to intermediary websites are also treated as expenses in full, even if they are listed as system management fees.

This is because some municipalities' offerings tally up to more than 50 percent when these costs are included, with a senior internal affairs ministry official commenting that "at least half of the donations should be used to stimulate local (economies)."

"This is an 'evasion of the law,' and cannot be overlooked any longer," the official said.

Local governments are responding to the new rules by either raising prices or by cost-cutting through reductions in gift sizes and quantities.

Intermediary sites saw a surge in donations late last month after announcing the rules would change, while some municipalities also encouraged donations before the new regulations took effect.

How regions are managing the changes has varied greatly. Aomori Prefecture in northeastern Japan, which offers around 60 different kinds of gifts including apples and scallops, is increasing its prices by about 30 percent as shipping costs and the rising price of raw materials have impacted the equation.

Meanwhile, some municipalities are focusing on "travel and experience" gifts in the form of tickets to local events, therefore reducing shipping costs.

Intermediary operators are also making moves. Major intermediary site Satofull Co. has introduced a new plan offering a discount on some commissions if municipalities outsource their entire program management to the firm, touting the potential for reduced costs and increases in market share.

Fujiyoshida in Yamanashi Prefecture, west of Tokyo, ranked ninth in Japan in terms of donations in fiscal 2022. Since it has previously kept expenses, including administrative costs, under 50 percent, changes to its gifts are not necessary even under the new rules.

But with the rules of the home tax program changing almost every year, each shift has caused confusion among local authorities.

"I understand the purpose of regulation, but it is too complicated," one Fujiyoshida official said. "We want more effort put into measures that will lead to increased income for local governments, such as restrictions on intermediary fees."

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