Japan enacts tax reform

by Masao Yoshimura

The Tax Reform Act of 2016 was enacted in Japan on March 29, lowering the corporate tax rate, broadening the tax base, and adding new rules requiring country-by-country reporting and contemporaneous transfer pricing documentation.

The new law reduces the Japanese corporate tax rate, including the local business tax, to 29.97 percent in FY 2016 and to 29.74 percent in FY 2018.

The rate cut fulfills a pledge made by Prime Minister Shinzo Abe in November 2015 to bring the corporate tax rate below 30 percent. This promise was made in exchange for the Japan Business Federation’s (Keidanren) commitment to invest in plants and equipment and to raise wages in 2016.

Base broadening

To offset the revenue reduction, the new law abolishes some tax preferences, including bonus depreciation for productivity improvement equipment. Tax depreciation rules are also tightened; corporations must now calculate annual depreciation costs for buildings and accompanying facilities and structures using a straight-line method.

The new law also lowers the cap on the use of carryforward losses for large entities. Previously, losses carried forward could be offset against up to 65 percent of profit in FY 2015 and 50 percent of profit from 2017. Under the new law, the cap is adjusted to 60 percent in FY 2016, 55 percent in FY 2017, and 50 percent from 2018.

Local business tax

Japan’s local business tax base for a large corporations consists of three factors — income, value added (calculated by the addition method), and stated capital.

The new law changes the tax rate of these factors for large businesses, increasing the tax rate on stated capital from 0.3 percent to 0.5 percent and the tax rate on value added from 0.72 percent to 0.96 percent. At the same time, the tax rate on income is reduced from 6.0 percent to 4.8 percent.

Country-by-country reporting

The new law also implements Action 13 of the OECD/G20 base erosion profit shifting plan and introduces new transfer pricing documentation rules.

For fiscal years beginning on or after April 1, the ultimate parent corporation or a surrogate corporation of a qualifying MNE group must submit English-language country-by-country reports detailing the group’s operations.

Also, a constituent corporation resident in Japan or a permanent establishment situated in Japan of a qualifying MNE group must submit a master file of the group in the Japanese or English language. The new law defines a qualifying MNE group as a group having total consolidated group revenue more than 100 billion YEN in the preceding fiscal year.

The new law also changes the transfer pricing documentation rules. For fiscal years beginning after or on after April 1, 2017, taxpayers are required to prepare and maintain contemporaneous documentation relating to non-arm’s length transactions by the due date of the return unless covered by a small-amount exemption.

This is a change from rules which required taxpayer to produce transfer pricing documentation only in response to the tax authorities’ request.

— Masao Yoshimura is an Associate Professor of Tax Law at Hitotsubashi University’s Graduate School of International Corporate Strategy in Tokyo, Japan, where he focuses on corporate and international tax.

 

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