Japan’s New Tax Laws May Affect Your Business in Japan
In December 2015, the Liberal Democratic Party and the New Komeito Party released the 2016 tax reform proposals for Japan. These are currently being debated in the Japanese Diet and are expected to be passed into law with effect from 1 April 2016.
According to the proposals, the Japanese government intends to further promote growth-oriented corporate tax reform by reducing the effective corporate income tax rate to below 30%.
In order to fund these cuts in the headline rate of corporation income tax, other proposals seek to expand the nation’s tax base e.g. via increases in non-income based taxes, and restrictions on the utilization of losses to offset taxable income.
Other notable proposals include transfer pricing documentation requirements based on the OECD recommendations regarding the action plan on base erosion and profit shifting (BEPS), and certain provisions relating to the consumption tax.
A number of the proposals may affect foreign companies doing business in Japan, including those highlighted below. Whilst major revisions are not expected during the legislative process, details may change prior to enactment into law.
Corporate Tax in Japan
Reduction of national corporate tax rate: The corporate tax rate was reduced from 25.5% to 23.9% in the 2015 tax reform. The income levy component of the factor-based enterprise tax, imposed on companies with share capital of over JPY 100 million, was also reduced (from a top rate of 7.2% to a top rate of 6.0%). These rates and the effective income tax rate for companies with share capital of over JPY 100 million are proposed to be further reduced by the 2016 tax reform, as follows:
* Companies with share capital of JPY 100 million or less are subject to regular enterprise tax. Unlike factor based enterprise tax, this does not include a value-added levy or a capital levy, but taxes income at a higher rate than the income levy of factor-based enterprise tax. Therefore, the effective income tax rate for such companies will be higher.
Revision of factor-based enterprise tax rate: In contrast to the reduced income levy, the non-income based value-added levy and capital levy were raised in the 2015 tax reform (from 0.48% to 0.72% and from 0.2% to 0.3%, respectively). These are set to be further increased under the 2016 tax reform (to 1.2% for the value-added levy and to 0.5% for the capital levy) for tax years beginning on or after 1 April 2016.
Revision of NOL carryforward system: The limitation on the utilization of net operating losses (NOLs) was reduced in the 2015 tax reform, and would be further limited under the 2016 tax reform, as follows:
Additionally, the extension of the NOL carryforward period from nine years to 10 years, which was announced in the 2015 tax reform, would be delayed for one year and would apply to tax years beginning on or after 1 April 2018.
Transfer Pricing in Japan
The 2016 proposals include transfer pricing documentation reforms, in response to the OECD/G20 BEPS project final report on Action 13:
Country-by-country (CbC) report: Japanese companies that are the ultimate parent company of a Japanese multinational group (MNE group) would be required to provide revenue, profit before tax, income tax paid and certain other information for each tax jurisdiction in which the MNE group operates. These reforms would apply for fiscal years beginning on or after 1 April 2016, and an English language CbC report would have to be provided no later than one year after the fiscal year end of the ultimate parent company of the MNE group. A Japanese subsidiary of a foreign MNE group would be required to file the CbC report if Japan has a double tax treaty with the foreign jurisdiction of the ultimate parent company and the CbC report cannot be obtained from the other jurisdiction.
Master file: Japanese companies that are members of a foreign MNE group that meets a certain group revenue threshold would be required to provide information about their group’s organizational structure, descriptions of businesses, the financial position and certain other information in a Japanese or English language “Master File,” which would have to be submitted no later than one year after the fiscal year end of the company required to file. These reforms would apply for fiscal years beginning on or after 1 April 2016. Penalties are expected to apply for late filing.
Local file: Japanese entities with foreign related party transactions would be required to prepare, maintain and provide a “local file” to the tax authorities upon request. Local files would be required to include certain documents necessary to determine the arm’s length pricing of foreign related party transactions. These reforms would apply for fiscal years beginning on or after 1 April 2017, and (for entities meeting a certain threshold) the documentation would have to be prepared by its tax return filing date.
Consumption Tax in Japan
Introduction of multiple rate structure: In spite of ongoing political debate about whether the rate of Japanese consumption tax (JCT) should be increased as planned from 8% to 10% on 1 April 2017, the 2016 tax reform proposals provide for the introduction of a reduced rate when the JCT rate is raised to 10%. Certain supplies of food products and newspapers would be eligible for this reduced rate of 8%.
To facilitate the accurate computation of JCT liabilities under a multiple JCT rate structure, a qualified tax invoice system (similar to European VAT invoicing) would come into effect on 1 April 2021 – with transitional measures before that.
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Article by David Bickle, Partner at Deloitte Tohmatsu Tax Co., March 2016.