Japan: Japanese 2016 Tax Reforms

Last Updated: 19 July 2016
Article by Eric Roose

Consistent with annual procedures, the Japanese government proposed Japanese tax reforms for 2016 last December. Several of the proposed reforms are focused on further advancing the overall economic reform program of the coalition government led by Prime Minister Abe (often referred to as 'Abenomics'). The entire reform package provides for reforms in the corporate tax, consumption tax and individual tax areas as well as addressing long standing issues such as online sales and the OECD anti-tax avoidance project known as BEPS. This update focuses solely on those reforms specific to corporate tax payers. The effective date of the proposed reforms discussed below was April 1, 2016 and includes:

  1. the reduction of national corporate tax rates
  2. the changes to the enterprise tax and special local corporate taxation scheme;
  3. the changes to the Net Operating Loss carry-forward and deduction limitation;
  4. the provisions related to corporate reorganizations;
  5. the controlled Foreign Corporation Reforms;
  6. the Income Attribution Rules;
  7. a new taxation scheme for online sales by foreign based entities;
  8. certain measures related to commitments under the OECD's Base Erosion and Profit Shifting (BEPS) project.

In addition to the reforms discussed in further detail below, other reforms include:

  1. the retention of the current 8% consumption tax rate for food and drink purchases as well as newspaper subscriptions;
  2. the special extensions of certain tax benefits for SME's;
  3. the modification of special economic zones;
  4. the special provisions regarding securities and the exit tax;
  5. Transfer pricing; and
  6. the provisions relating to the Japan-Taiwan double taxation agreement (DTA).

These additional provisions are not covered in this article as they are beyond the scope of this discussion but will be discussed at a later date.            

National corporate tax rate reduction

In keeping with its previously stated commitments to lower the corporate tax rate in Japan (historically one of the highest in the world) a corporate tax rate reduction was introduced which will be effected over a two-year period. The new rate effective from April 1, 2016 is 23.4%, down from the previous rate of 23.9%. The rate will also be reduced even further to 23.2% from 2018 onwards. This brings the rate more in line with that of other developed countries and is a significant reduction from the longstanding rate of over 40% which was in effect until 2012, when the government decided that reform of the rate was needed in order to stimulate the Japanese economy. It is hoped that these new lower rates will not only help to attract foreign investment into the country but also provide much needed tax relief for Japanese corporates.      

Modification of the enterprise tax and repeal of the special local corporation tax

The Enterprise Tax is a multi-layered tax on companies with a capital base of more than JPY100 million (approximately USD900,000). This tax is computed by taxing three different components: a Value Added component, a Capital component, and an Income component. Various rates of taxation are applied to each of these components. The enterprise tax system was revised, under a previous tax reform, by splitting the tax into two parts, the corporate enterprise tax and a newly created 'special local corporate tax'. This newly created tax was a measure introduced to provide local governments with a portion of the proceeds from the national enterprise tax.

Under the 2016 tax reforms, this special local corporate tax is to be phased out during the 2016 tax year and will be abolished from 2017 onwards. Whilst this special tax will be abolished, the enterprise tax will revert to its pre-modified format.

The rates in parentheses presented above are as a result of the special local corporate tax and have limited application.

Change in NOL limitations

Many countries, including Japan, have provisions for the utilization of net operating losses (NOL) in subsequent tax periods in order to offset taxable income in those periods. These NOL carry-forwards are often subject to limitations as to the percentage of income that may be offset and also to a limitation as to the number of years such losses can be carried forward. The new Japanese tax rules make an adjustment to the limitation rules on the use of NOL carry-forwards. The income offset limitation will be lowered incrementally over the next three years from the current rate of 65% to 60% from April 1, 2016, 55% from April 1, 2017, finally settling at a rate of 50% from April 1, 2018 and beyond. While this is a significant reduction in the previous NOL utilization limitation level of 80%, an offsetting extension of the NOL carry-forward period from nine to ten years will be implemented for tax years from April 1, 2018 onwards. This will effectively lead to more taxes being collected earlier and may result in a larger amount of NOLs expiring unutilized, even with the one-year additional carry-forward extension.

Corporate reorganization modifications

Japanese tax rules provide exemptions from tax for certain types of corporate reorganization transactions. To qualify for tax-exempt treatment, various requirements must be met as to the continuity of management and shareholder identity, so as to prevent abuse of the tax-free reorganization rules in transactions in which tax should be recognized. The 2016 tax reforms relax the restrictions on the resignation of specified directors and provide clarification around the continuity of shareholding rules for certain types of mergers, share splits and other share transfers.

As regards the continuity of management requirement for tax-exempt share exchanges and transfers, the resignation of specified directors will no longer disqualify the transaction from tax-exemption so long as at least one director remains as a director. Consequently, where the resignation of a director used to be problematic in the share exchange/transfer context, now there is more flexibility in the planning process since the resignation of all but one director will not negatively impact the tax-exempt nature of such transactions. Further, in transactions where a parent company acquires subsidiary shares in a qualifying share exchange or transfer, so long as the subsidiary has at least 50 shareholders prior to the acquisition, then such acquisition can be valued at the most recent tax return's reported net asset value plus an adjustment for capital acquired.

CFC (Anti-tax haven) revisions

Japan, like many other developed countries, has special rules to prevent Japanese tax base erosion through the use of off-shore related-party companies located in jurisdictions with lower tax rates. The Japanese rules can be quite harsh and can result in significant tax liabilities and are also complex and difficult to apply in practice. The rules apply to related-party transactions with certain types of entities and provide special exemptions from classification in certain circumstances.

The 2016 tax reforms revise the exemption rules to include insurance companies which are active in the Lloyd's market and also to exempt intra-group transactions between related-party tax haven entities as long as these entities are 100% owned, either directly or indirectly, by the same Japanese parent company. This effectively addresses the issue regarding Japanese taxation of transactions that were in effect not abusive and did not result in the reduction of the Japanese tax base.

An additional revision addresses the computation of foreign tax credits associated with taxable income in the tax haven context and specifically the application of the exempt foreign dividend rules. Under these new rules the computation of foreign taxes available for credit will be computed as follows:

Importantly, dividends which are exempt from the taxation on the CFC level are also excluded from the CFC's subsidiary income in the above calculation.  

Income attribution rules

As part of the 2014 tax reforms, specific provisions were enacted to address the issue of income attribution to permanent establishments (PE). While these reforms were comprehensive, special clarifications were required to support the adoption of the new income attribution rules which came into effect from April 1, 2016. These clarifications specifically address issues raised in the context of the computation of foreign tax credits and utilization of NOL carry-forwards of a PE after a qualifying merger.

The first of these clarifications focuses on the amount of foreign income used in computing the foreign taxes available for credit where a PE is allocated losses from a home based company. In cases where the amount of income allocated to the PE directly from the home based company is actually a loss (i.e., less than zero) then the balance of the loss is used for foreign tax credit computation purposes. However, in cases where the amount of income allocated to the PE plus other foreign sourced income results in a loss, then the loss is not taken account of in the foreign tax credit computation and the income amount is instead simply zero. This prevents the importing of foreign losses into the foreign tax credit computation.

The second clarification applies in a narrow set of circumstances whereby a previous Japanese PE's losses are effectively reimported into Japan through a qualifying merger of two foreign entities. For example, if foreign company A and foreign company B each have PE's with NOL carry-forwards (foreign company A having a current Japanese PE and foreign company B having a former Japanese PE) then, by undergoing a qualifying merger, these two companies can effectively reimport the losses of the former PE back into Japan. These new rules eliminate the NOL's of the former Japanese PE and limit the deductibility of NOLs to the extent of the NOLs of the current Japanese PE only. This prevents the importing of NOLs into the Japanese tax regime and the trafficking in NOLs.

Taxation of online sales

Electronic (online) sales transactions have been a challenging issue for countries throughout the world. How to determine the source of the income and the incidence of taxation have been particularly troublesome with the OECD even weighing in on the subject as part of its Base Erosion and Profit Shifting (BEPS) project. The Japanese tax system has historically considered and defined the incidence of taxation for digital services to be either the domicile or residence of an individual or in the case of corporate service recipients, the location of the head office or principal office. This has led to difficulties in taxing certain B2B transactions where a foreign service provider provides a digital service to a recipient PE located outside Japan but belonging to a Japanese customer and where the service recipient is the Japanese based PE of a foreign business customer.
The new rules amend the incidence of taxation determination and provide that:

  • where the recipient is a foreign (i.e., not Japanese) PE of a Japanese customer, the service will be considered a foreign supply of services and not taxable in Japan; and
  • where the recipient is a Japanese PE of a foreign customer, the service will be considered as a domestic supply of services inside Japan and subject to Japanese taxation.

These new taxation rules will be effective from January 1, 2017.

BEPS adoption measures

Of course, no tax update is complete without considering the progress being made on the adoption of BEPS and any measures related thereto being adopted by the respective participating governments. Japan has fully committed to the BEPS project and has begun to implement the procedures and legislation required to progress the program in Japan. The Japanese transfer pricing rules are being modified to require MNEs to prepare the three types of documentation required under BEPS, namely the Country-by-Country Report, the Master File and the Local File. The first of these two will be mandatory from fiscal year 2016 onwards with the latter, the Local File, being mandatory from 2017 (tax year 2018) onwards. Whilst a discussion of the requirements of each of these reports is beyond the scope of this update, MNEs should make themselves aware of the requirements and implement documentation production and maintenance procedures accordingly.    

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.