2019 Japan tax reform outline
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4 February 2019
Japan tax
newsletter
2019 Japan tax
Ernst & Young Tax Co.
reform outline
On 14 December 2018, the ruling party (a coalition comprised of the Liberal
EY Global tax alert library
Democratic Party and Komeito) released the 2019 Tax Reform Outline (below
Access both online and pdf versions of “the outline”). This newsletter provides an overview and explanation of the
all EY Global Tax Alerts. major amendments and revised provisions contained in the outline, which affect
• Copy into your web browser: such matters as corporate taxation and international taxation.
http://www.ey.com/GL/en/Services/Tax/ To accomplish the twin goals of the Abe Cabinet, i.e. converting the social
International-Tax/Tax-alert-library%23date security system into a reliable system for all ages which provides comfort to
all generations from the young to the elderly and ensuring the nation’s fiscal
Contents health, the consumption tax rate will be raised to 10% in October 2019. In
order to smooth the fluctuations in demand that are expected to occur prior
• Corporate taxation............................2
to and following the rate hike, sufficient support will be provided in terms of
• International taxation........................8 both national budget and tax rules. Tax measures to stimulate automobile and
home purchases will be implemented. Furthermore, in order to secure a path
• Individual income taxation and
asset taxation.................................20
for continuous growth amidst the aging of Japanese society, the “productivity
revolution” and “human resource development revolution” continue to be issues
• Tax administration/Other.................23 of the highest priority. R&D tax rules will be revised from the perspective of
encouraging innovative R&D. Various tax measures to assist small and medium-
sized enterprises (SMEs) will be implemented and simultaneously, new tax
payment deferment and exemption rules for inheritance tax and gift tax will be
established to promote business succession of sole proprietors. Furthermore,
transfer pricing taxation rules and earnings stripping rules will also be
significantly revised to match the international standards concerning taxation
agreed to in the OECD’s BEPS project and other forums.
Please note that the contents of this newsletter may be partially revised,
deleted or added in response to future Diet deliberations on the reform bill.Corporate taxation
1. Revision of R&D tax rules
From the perspective of promoting active investment in R&D, R&D tax rules (special corporate tax credits available for
conducting experimental research, etc.) will be revised as follows.
(1) Gross-amount tax credits (tax credit rules pertaining to R&D expenses)
(A) The maximum credit available to certain startups which conduct R&D (Note 1) will be increased to 40% (from the
current 25%) of corporation tax of the applicable fiscal year.
(B) High expense level tax credits will be abolished as a standalone measure but will be extended for 2 years after
integrating it into the gross-amount tax credits as an additional measure which further increases the maximum
credit enjoyed by entities with a high level of R&D expenses. The maximum credit will be 10% of corporation tax of
the applicable fiscal year.
(C) The credit rate curve (calculation formula for tax credit rates) for R&D expenses will be revised.
(D) The applicable period of the special measure designating a maximum credit rate of 14% (c.f. the general rate of 10%)
will be extended by 2 years.
R&D tax rules (maximum credit)
Current rules Post-reform
A maximum of 40% of A maximum credit of 45%
corporation tax (For startups, a maximum of 60%)
Abolishment of high
expense level tax credits
Extension of A’ (A’)
Additional increase of the maximum
10% of credit in cases where the ratio of R&D
(A’) corporation tax
(C) expenses to sales exceeds 10%
Additional (Elective rules)
High expense Temporary measure lasting 2 years
increase of the (Temporary measure)
level tax credits
maximum credit
25% of
corporation tax (A)
Gross-amount tax credits
(A) Increased to 40%
Gross-amount tax credits for startups
Increased to 10%
10% of
5% of (B) Open innovation tax credits
(B) Open innovation tax credits corporation tax
corporation tax
(Prepared based on “Key Points of the FY2019 Tax Reform on Economy and Industry,” published by the Ministry of Economy, Trade and Industry in December 2018
(hereinafter, “METI materials”))
2 | Japan tax newsletter 4 February 2019(2) Open innovation tax credits (tax credit rules pertaining
to special R&D expenses) Even if an early stage startup has a cumulative deficit,
if it posts a profit in any given fiscal year, it must pay
Certain research consigned to private-sector companies
taxes (e.g., in the case of companies with stated capital
(including R&D startups (Note 2)) will be added to the
exceeding JPY100 million). This year’s revision (i.e.
list of eligible R&D expenses. The tax credit rate for
the increase of the maximum tax credit from 25% of
research consigned to R&D startups and joint research
the applicable fiscal year’s corporation tax to 40% of
conducted with R&D startups will be 25%, while the
the same) will result in an increased amount of cash at
tax credit rate for research consigned to private-sector
hand remaining after such tax payments are made. This
companies will be 20%. In addition, the maximum
increase in cash at hand will act as a source of funds for
credit will be increased to 10% (from the current 5%) of
further R&D investment.
corporation tax liability in the applicable fiscal year.
Furthermore, the consignment of research to large
Current rules Credit rate enterprises, which was formerly ineligible for open
Counterparty is a university or innovation tax credits before the revision, will henceforth
30%
special research institution etc. be eligible for the open innovation tax credit.
Counterparty falls under the
category “Other” (private-sector 20% Use of the open innovation tax credits, whose scope was
companies etc.) significantly expanded during the FY2015 tax reforms,
Research consigned to a large stood at JPY300 million in FY2014, but increased
Not eligible
enterprise etc. to JPY3,900 million in FY2015 and to JPY 4,200
million in FY2016 (Source: “Report of Results of the
Survey Concerning Application of the Special Measures
Credit rate Concerning Taxation” published by the Ministry of
Post-reform (Current rules Finance (submitted to the Diet in February 2018)). As
Post-revision) the application criteria were relaxed in the FY2017
Joint research with R&D startups 20% 25% reforms, and the FY2019 tax reforms will increase the
maximum tax credit (5% to→ 10%), it is thought that the
Research consigned to large
enterprises etc. (Note 3)
Not eligible 20% importance of open innovation tax credits to companies
(Prepared based on METI materials)
will continue to increase.
(Note 1) Companies established within the previous 10 years and which have
NOLs which will be carried over into the next fiscal year (excluding
subsidiaries of large enterprises etc.).
(Note 2) Eligible companies are startups that receive investments from
venture funds that have been certified under the Industrial
Competitiveness Enhancement Act or from national university
corporations and national research and development agencies that
meet certain requirements.
(Note 3) Limited to basic research, applied research and R&D for the
purpose of utilizing intellectual property, and excludes the mere
consignment of R&D operations.
Japan tax newsletter 4 February 2019 | 32. Enterprise tax rate (Standard tax rates of the corporate enterprise tax and
special corporate enterprise tax)
To correct the disparity in financial resources between
regions, a portion of the corporate enterprise tax under the Special Post-reform
current rules will be revamped into a new measure named Corporate corporate corporate
“special corporate enterprise tax (name tentative),” and enterprise tax enterprise enterprise
this special corporate enterprise tax paid to prefectures will tax tax (b) +
special
temporarily be deposited into the national treasury and then Pre- Post- Newly corporate
reallocated to each prefecture in accordance with population reform reform introduced enterprise
ratios and other factors. (a) (b) (c) tax (c)
(1) For fiscal years beginning on or after 1 October 2019, Ordinary
the standard tax rates of the income levy and revenue companies with
stated capital
levy of corporate enterprise tax will be reduced, and exceeding
the special corporate enterprise tax will be introduced. 3.6% 1% 260% of (b) 3.6%
JPY100 million
The special corporate enterprise tax is a national tax (income exceeding
levied on taxpayers obliged to pay corporate enterprise JPY8 million per
tax, and the tax returns therefor must be filed with annum)
and paid to relevant prefectures alongside corporate Ordinary
enterprise taxes. In terms of standard tax rates, the sum companies with
of the post-revision income levy rates of the corporate stated capital
equal to or less
enterprise tax and special corporate enterprise tax rates 9.6% 7% 37% of (b) 9.59%
than JPY100
will be identical to the income levy rate of the corporate million (income
enterprise tax under the current rules. exceeding JPY8
million per annum)
Companies
subject to taxation
1.3% 1% 30% of (b) 1.3%
based on revenue
amount
(Prepared based on “FY2019 Local Tax Reforms (Draft),” published by the Ministry of
Internal Affairs and Communications)
(2) With regard to the tax rate limitations on the income
levy for ordinary companies with stated capital
exceeding JPY100 million (i.e. companies to which
pro forma standard taxation based on companies’ size
is applied), a measure will be established to raise said
limits to 1.7 times the standard tax rate (currently 1.2
times the standard tax rate).
4 | Japan tax newsletter 4 February 20193. Revision of qualification criteria for reorganization tax rules
(1) Downstream merger conducted after a parent company has converted a subsidiary into a wholly-owned subsidiary
In the event a company which has become a wholly-owned subsidiary of another company through share exchanges or
other methods is projected to conduct a downstream merger in which the wholly-owning parent company is treated as
the acquired company, the determination of tax-qualifying criteria, such as the control relationship continuity criteria,
shall be made using the relationship at the time immediately prior to said merger.
Step 1 Step 2
• Implementation of share exchange whereby wholly-owning parent • Eligible for treatment as a tax-qualified reorganization even in cases
Details company P1 converts company S1 into a wholly-owned subsidiary where a merger (downstream merger) is conducted through which
• Company P1 converts company S1 into a wholly-owned subsidiary company S1 becomes the surviving company
[100% controlling relationship]
Company P1 Company P1 Shareholders
Shareholders
Diagram
Ceases to be a shareholder Downstream merger
through the implementation
Company S1 Company S1
of share exchanges
(Prepared based on METI materials)
For the situations depicted in the above diagrams, in cases wherein company S1 holds the licenses and approvals, etc.
necessary to operate business, there is a large demand for “downstream mergers” which enable company S1 to be the
surviving company. In the future, reorganizations such as these will be able to be conducted with ease without concern
as to whether they are qualified or non-qualified from a tax perspective.
(2) Reorganizations using the shares of a wholly-owning parent company that indirectly owns shares
With regard to tax-qualifying requirements relating to mergers, company splits and share exchanges, and the
requirements regarding the deferral of capital gain recognition from the transfer of old shares, the shares (Note) of the
company that indirectly owns all of the outstanding shares of the acquiring company will be added to the shares of the
parent company of the acquiring company as qualified consideration in a triangular merger etc.
Prior to the reorganization After to the reorganization
• As consideration for the absorption-type merger whereby company S2 • Company S2, which acquired company S3, remains as the surviving
Details acquires company S3, shares of company P1, which indirectly owns company and company P2 becomes a new shareholder of company
100% of the shares of company S2, are transferred to company P2 P1 alongside the general shareholders
General shareholders General shareholders Company P2
Company P1 Company P2 Company P1
Diagram Company Company
P1 shares Company S1 P1 shares Company S1
Absorption-
Company S2 type merger Company S3 New company S2
[100% controlling relationship] [100% controlling relationship]
(Prepared based on METI materials)
Japan tax newsletter 4 February 2019 | 5(Note) With regard to certain mergers conducted between companies (A) Wholly-owned subsidiaries of large enterprises
within a corporate group, in the event that the shares of certain
(stated capital of JPY500 million or more)
foreign companies indirectly owning all of the outstanding shares
of the acquiring company (hereinafter, “specially-related foreign (B) Companies whose outstanding shares or
company”) are provided as consideration, the merger will not
be considered to have met the tax-qualification requirements. investments are all owned by multiple large
Furthermore, in the event that a merger in which shares of a enterprises within a 100% capital relationship group
specially-related foreign company are provided as consideration
is not deemed as a qualified merger, then the capital gains on old
Due to the measure in (2) above, companies such as
shares owned by shareholders at the time of the merger will be
taxed. company S2 which were qualified for application of
various tax incentives since they were deemed as SMEs
under the Act on Special Measures Concerning Taxation
In the event that company P1 in the above diagram is a
despite the fact that they did not qualify as SMEs under
listed company, there are cases where company P2, the
the Corporation Tax Act, are expected to lose eligibility
shareholder of company S3 (the non-surviving entity),
for the application of various tax incentives.
desires the acquisition of shares of company P1, which
have higher liquidity (convertibility to cash). After the Company P
revision, even if consideration for this triangular merger (stated capital of Act on Special
JPY500 mil.) Corporation
Measures
is paid through the provision of company P1 shares to Tax Act
Concerning Taxation
100%
company P2, said merger will fulfill the qualification
Company S1
requirements. Company
(stated capital of Non-SME Non-SME
JPY100 mil.) S1
(Pre-revision)
100%
SME
4. Revision of the scope of enterprises categorized as Company
Company S2 Non-SME ↓
large enterprises S2
(stated capital of (Post-revision)
JPY100 mil.) Non-SME
(1) With regard to SMEs issuing shares that are partnership
property of investment limited partnerships (referred (Prepared based on METI materials)
to as “business succession funds”) in relation to
certification of business restructuring investment plans 5. Revision of requirements in relation to deductible
under the Small and Medium-sized Enterprises Business performance-linked compensation
Enhancement Act, determination of whether an SME
Requirements in relation to procedures for deductible
is deemed to be a large enterprise (i.e. enterprises to
directors’ performance-linked compensation paid by
which SME tax rules such as the following cannot be
companies will be revised as follows.
applied: The SME investment tax incentive, special
depreciation in the event specified SMEs acquire (1) [Revised] Procedures concerning decisions made by the
management capability enhancement equipment, and compensation committee and compensation advisory
SME business enhancement tax rules) will be conducted committee (hereinafter, “compensation committee(s)
by excluding the shares owned by the Organization for etc.”)
Small & Medium Enterprises and Regional Innovation
(A) The requirement that companies that have
(categorized as a large enterprise) when it has invested
set up compensation committee(s) etc. not
in said business succession fund.
employ executive directors as members of the
(2) With respect to the determination of “enterprises compensation committee(s) etc. will be removed,
categorized as large enterprises,” which are not and a new requirement stipulating that executive
considered as SMEs that are qualified for application of directors cannot participate in resolutions
various special tax measures for SMEs provided for in concerning decisions concerning their own
the Act on Special Measures Concerning Taxation, the performance-linked compensation will be added.
following companies will be added to the scope of large
(B) New requirements will be added such that a
enterprises.
majority of the members of compensation
6 | Japan tax newsletter 4 February 2019committee(s) etc. must be independent outside to specified investment trusts, the requirement limiting
directors and that the approval of all independent ownership to less than 50% of the outstanding shares
outside directors who are members of said of or investments in other companies will be revised
committee(s) etc. must be obtained concerning so that “investments in other companies” includes
decisions on performance-linked compensation. investments in silent partnerships (Tokumei Kumiai or
TK in Japanese).
(2) [Abolished] Procedures concerning decisions made by
companies that have a board of corporate auditors (3) Extension of applicable periods
The following two procedures will be removed from the (A) The applicable period of special measures for the
scope of procedures which qualify as procedures to reduction of the corporation tax rate of SMEs (15%
approve directors’ performance-linked compensation of income equal to or less than JPY8 million per
that are deemed as deductible expenses: annum) will be extended by two years.
(A) A decision made by the board of directors of a (B) The applicable period of the SME investment tax
company that has a board of corporate auditors incentive and SME business enhancement tax
where appropriate documents have been submitted rules and other measures will be extended by
and approval has been obtained from the majority two years upon the revision of certain application
of the corporate auditors; and requirements etc.
(B) A decision made by the board of directors of a
company that has an audit committee where
approval has been obtained from the majority of
audit committee members.
6. Other
(1) Introduction of special depreciation rules concerning
disaster prevention and mitigation equipment for SMEs
For SMEs that have received certification of their
business continuity capability enhancement plans
or collaborative business continuity capability
enhancement plans (names tentative) under the Small
and Medium-sized Enterprises Business Enhancement
Act and that have acquired specified business continuity
capability enhancement equipment (e.g. private electric
generators, data backup systems and fire shutters)
in relation to said business continuity capability
enhancement plans or collaborative business continuity
capability enhancement plans for said certification by
31 March 2021, and which have used said equipment
for said business purposes, a tax measure will be
introduced to allow a special depreciation of 20% of the
equipment acquisition price.
(2) Revision of requirements for special measures for
taxation of investment companies investing in silent
partnerships
With regard to special measures pertaining to taxation
of investment companies and special measures
pertaining to taxation of trustee companies in relation
Japan tax newsletter 4 February 2019 | 7International taxation
Revision of earnings stripping rules Current rules Revision
The earnings stripping rules under the current taxation Related party net interest
Net interest expenses
(including that paid to or
system are based on the same concept as that of Action 4 expenses only (interest
(A) Qualified received from third parties;
of the Base Erosion and Profit Shifting (BEPS) Final Report. included in the Japanese
interest interest included in the
taxable income of the
However, since there are discrepancies between the two recipient is excluded)
Japanese taxable income of
rules in terms of qualified interest categories, the definition the recipient is excluded)
Income before deduction
of adjusted income and the standard maximum deductible Income before deduction
of interest, taxes and
amount, revisions will be made to the current Japanese rules of interest, taxes and
depreciation/ amortization
(B) Adjusted depreciation/ amortization
to match Action 4 of the BEPS Final Report while taking income
expenses (EBITDA)
expenses (EBITDA) (does not
into consideration its impact on normal economic activities (includes non-taxable
include non-taxable domestic
domestic and foreign
(e.g. loans from domestic (i.e. Japanese; same hereinafter) dividend income)
and foreign dividend income)
banks). (C) Standard
maximum
1. Overview of the rules deductible
50% 20%
amount
An overview of the current earnings stripping rules is as
• The amount of net
follows.
Maximum deductible • The amount of related interest expenses is less
Adjusted income (B) amount party net interest than or equal to JPY20
expenses is less than or million
Related party net Adjusted income equal to JPY10 million • The total amount of
Requirements
interest expenses only × Deductible • The amount of interest net interest expenses
50% C
for exemption
(A) expenses paid to related of all domestic group
*Interest included in the parties is 50% or less companies (share
Japanese taxable income of of the total amount of ownership ratio in excess
the recipient is excluded
Non-deductible (*)
interest expenses of 50%) is 20% or less of
total adjusted income
Other * Non-deductible interest
(Depreciation/amortization expenses from a given (Prepared based on METI materials)
and domestic and foreign year can be carried over
dividend income) and deducted over the
subsequent 7 year period.
2. Qualified net interest expenses and non-qualified
Taxable income in the interest expenses
applicable fiscal year
(income before taxes)
Enforcement: April 2013
Interest qualifying under the revised earnings stripping
rules will equal the amount remaining (hereinafter, “amount
An overview of the earnings stripping rules after the revision of qualified net interest expenses”) after deducting from
is as follows. the total amount of qualified net interest expenses for the
Maximum deductible applicable fiscal year (refers to the amount remaining after
Adjusted income (B) amount
deducting the “non-qualified interest expense amount”
Net interest expenses
Adjusted income from the interest expense amount; same hereinafter), the
× Deductible
(A) 20% C
total amount of interest income calculated as corresponding
*Interest included in the to the aforementioned qualified net interest expenses
Japanese taxable income of
the recipient is excluded Non-deductible (*) (hereinafter, “total amount of deductible interest income”).
The aforementioned “non-qualified interest expense
Other * Non-deductible interest
amount” refers to the following amounts prescribed for each
(depreciation) expenses from a given
year can be carried over category of interest expenses also described below.
and deducted over the
Taxable income in the subsequent 7 year period.
applicable fiscal year
(income before taxes)
Enforcement: April 2020
8 | Japan tax newsletter 4 February 2019(1) The amount of interest expenses described below
excluding interest expenses described under (2) Under the current rules, interest expenses paid to
foreign related parties are deemed as qualified net
(A) The amount of interest expenses included in the
interest expenses, but in Action 4 of the BEPS Final
Japanese taxable income of the recipients of the
Report, both domestic and foreign interest expenses,
interest expenses
regardless of whether they are paid to related parties
(B) The amount of interest expenses paid to certain or to unrelated parties, are deemed qualified interest
public corporations expenses. After the revision, qualified interest expenses
(C) The amount of interest expenses pertaining to will, in practice, be the amount of interest expenses paid
bond future agreements where there is a clear to foreign related parties and foreign unrelated parties
correspondence between the borrowing and the as a result of consideration given towards the impact on
lending (excluding the amounts described under (A) normal economic activities (e.g. loans from domestic
and (B)) banks). In other words, in comparison to conditions
before the revision, there will be the addition of interest
(2) Specified bond interest (refers to interest expenses expenses paid to foreign unrelated parties.
paid to unrelated parties pertaining to bonds (excluding
bonds whose acquirer(s) does/do not constitute
the substantial majority) issued by said company; 3. Adjusted income
hereinafter the same.) In the calculation of adjusted income, both the amount
Any of the following amounts per bond of non-qualified dividend income excluded from taxable
income and the amount of non-qualified dividends received
(A) The amount of specified bond interest that is from foreign subsidiaries excluded from taxable income
withheld at source during payment or included in will be excluded from the amounts added to the income of
the domestic taxable income of the recipient of that the applicable fiscal year, and non-deductible income tax
specified bond interest, and the amount of specified amounts that are deducted from corporation tax amounts
bond interest paid to certain public corporations. will be excluded from the amounts deducted from the
(B) The amount prescribed below, depending on the income of the applicable fiscal year. Furthermore, necessary
category of the bond as defined below measures will be established for the calculation of adjusted
income of operators of silent partnership (Tokumei Kumiai or
i. Bonds issued in Japan: Amount equivalent to TK in Japanese) agreements.
95% of the amount of specified bond interest
ii. Bonds issued overseas: Amount equivalent to
Under the current rules, the amount of non-qualified
25% of the amount of specified bond interest
dividend income excluded from taxable income and the
amount of non-qualified dividends received from foreign
subsidiaries excluded from taxable income are added
to the income of the applicable fiscal year. However,
these rules will be revised in order to realign them with
recommendations provided in Action 4 of the BEPS Final
Report, which is not to make adjustments for tax-exempt
income.
Japan tax newsletter 4 February 2019 | 94. Standard maximum deductible amount
Under the current rules, a de minimis standard
In the event that qualified net interest expenses exceed 20%
exempting companies from application of the earning
of adjusted income in the applicable fiscal year (from the
stripping rules has been established for companies
current 50%), the amount equivalent to the amount in excess
whose qualified net interest expenses equal JPY10
of said limit will not be included in deductible expenses.
million or less. In addition, a standard has been
established for companies whose qualified interest
The standard fixed ratio under current Japanese tax is equal to or less than 50% of interest expenses,
rules is 50% which exceeds the best practice range for exempting such companies from application of the
standard fixed ratios recommended in Action 4 of the earning stripping rules. These revisions will increase
BEPS Final Report set between 10% to 30%. Therefore, the de minimis standard from JPY10 million to JPY20
tax rules will be revised to lower said ratio to 20%. million. Furthermore, the standard for “companies
whose qualified interest is equal to or less than 50% of
5. Application exemption criteria interest expenses” will be abolished and a new standard
for holding companies will be established as described in
The earning stripping rules will not be applied when any of (2) above.
the following criteria are met.
(1) The amount of qualified net interest expenses in the 6. Amount of deductible excess interest
applicable fiscal year is JPY20 million or less (from the
(1) In the event that qualified net interest expense is less
current JPY10 million or less)
than 20% of adjusted income of the applicable fiscal
(2) The ratio of the amount under (A) in the applicable fiscal year (from the current 50%, as mentioned in 4. above),
year to the amount under (B) is 20% or less and if there were any amounts which were treated as
(A) The amount remaining after deducting the total non-deductible interest in any fiscal years beginning
amount of qualified net interest income (refers to within the previous 7 years due to application of
the amount remaining after deducting the total earnings stripping rules (hereinafter, “excess interest”),
amount of qualified interest expenses from the then an amount equivalent to said excess interest can
total amount of deductible interest income) of be included in deductible expenses not to exceed a limit
a domestic company* from the total amount of which equals the difference between the qualified net
qualified net interest expenses interest expenses and 20% (from the current 50%) of
adjusted income.
(B) The amount remaining after deducting the total
amount of adjusted losses (refers to the amount (2) A revision will be made to allow application of (1)
less than zero in the event that an amount less than above, even if the applicable amounts are indicated in
zero is derived from the calculation of adjusted documents attached to amended tax returns or requests
income) of a domestic company* from the total for correction.
amount of adjusted income
* Domestic companies refers to any company located in Japan and There is no change to the rule that excess interest can
other companies located in Japan that are related to said company be carried over for 7 years.
through ownership of more than 50% of outstanding shares (limited
to companies whose start date and last date of a fiscal year both
respectively equal the start date and last date of the fiscal year of
said domestic company).
10 | Japan tax newsletter 4 February 20197. Application period
The TPG provides that “the word ‘intangible’ is meant to
The above revisions (excluding 6. (2)) are applicable to address something which is not a physical or a financial
corporation tax for fiscal years beginning on or after 1 April asset, which is capable of being owned or controlled
2020. The above revision described in 6. (2) is applicable for use in commercial activities and whose use or
to corporation tax whose submission deadlines for final tax transfer would be compensated had it occurred in a
returns, etc. is on or after 1 April 2020. transaction between independent parties in comparable
Furthermore, although the aforementioned revisions circumstances.” In response, the reforms will clarify
are related to national taxation, the necessary local tax the scope of intangible assets for tax purposes. These
(corporate inhabitant tax and corporate enterprise tax) provisions are thought to define intangible assets under
measures will also be established in accordance with the the transfer pricing tax rules.
treatment in national taxation concerning the revision of the
earning stripping rules. 2. Revision of methods for calculating arm’s length
prices (TPMs)
Although earning stripping rules will be revised to not The discounted cash flow method (DCF method) will be
include non-qualified domestic and foreign dividend added to the methods allowed for the calculation of arm’s
income (excluded from taxable income) in adjusted length prices (hereinafter, “transfer pricing methods” or
income, and the standard maximum deductible amount “TPM”). The DCF method is recognized as an effective
will be lowered from 50% to 20%, through revisions to TPM for intangible asset transactions when comparable
limit qualified interest, in practice, to interest expenses transactions allowable under the TPG cannot be identified.
paid to foreign parties and the introduction of the
rule described in 5. (2) above, the new rules give due Along with this revision, in the event companies do not
consideration to the economic activities of Japanese submit documents deemed necessary for calculating arm’s
companies. On the other hand, this will require foreign length prices, the DCF method will be added to TPMs that
companies in Japan which have large amounts of loans can be employed in the calculation of estimated taxation
from overseas, companies employing structured finance by National Tax Agency employees to calculate an amount
products, and companies issuing bonds overseas to deemed as the arm’s length price (based on information that
exercise caution. would have been available to them at the time the foreign
related transactions were conducted).
Revision of transfer pricing tax rules TPMs proposed by the TPG and the necessity of referencing
comparable transactions.
In view of the amendments made to the BEPS Report and
1. Comparable uncontrolled price
the OECD Transfer Pricing Guidelines (hereinafter, “TPG”), method (CUP method)
TPMs that reference
comparable transactions
revisions will be made to the transfer pricing tax rules in 2. Resale price method (RP
method)
Japanese laws concerning methods for calculating arm’s
3. Cost plus method (CP method)
length prices and transactions of certain hard-to-value 4. Transactional net margin
Cannot be used when there are
no comparable transactions
intangible assets. TPM method (TNMM)
5. Transactional profit split
1. Clarification of the definition of intangible assets method
subject to transfer pricing tax rules Expansion of TPG concerning
6 Other methods the DCF method during the
Intangible assets subject to transfer pricing tax rules are said BEPS Project
to be assets other than tangible assets and financial assets Prepared based on “Ministry of Finance Explanatory Materials (Concerning International
(cash, deposits and securities) that are owned by companies, Taxation) (2 of 2),” a document prepared for the 20th Tax Commission Meeting (7
November 2018)
and for which consideration should be paid in the event they
are transferred or lent out in accordance with the terms
of ordinary transactions conducted between independent
business operators.
Japan tax newsletter 4 February 2019 | 11The TPG recommends use of the DCF method as The definition of specified intangible assets is thought
the TPM for intangible asset transactions and other to be largely identical to the definition of “hard-to-value
transactions. In practice, although there are cases intangibles (HTVI)” described in the TPG. Although many
wherein the DCF method is used to calculate transfer countries (e.g. the UK, the Netherlands, Australia and
prices of intangible assets, in Japan, legal treatment of New Zealand) are thought to be in line with the TPG,
the DCF method is unclear. Revisions will be made for caution is necessary when conducting transactions
this reason, but in the future, public announcements with countries that have established their own rules
providing clear guidance concerning the application of concerning intangible asset transactions (e.g. the US
the DCF method are desired. and Germany). Public announcements providing clear
guidance concerning specified intangible assets are
desired.
3. Introduction of price adjustment measures pertaining
to transactions involving hard-to-value intangibles
(specified intangible asset transactions) (2) Application exemption criteria
With regard to transactions involving specified intangible This price adjustment measure will not be applied in
assets (hereinafter, “specified intangible asset transactions”), cases wherein National Tax Agency employees request
in the event that there is a difference between the forecasts submission of documents described in (A) or (B)
used as a base for the calculation of arm’s length prices below from a company and the company submits said
and the results, the District Director of the Tax Office will documents within a fixed period following the request
be given the authority to make corrections by deeming date.
as the arm’s length price the amount calculated using the
(A) Documents described below
most appropriate TPM for the specified intangible asset
transaction under review, after taking into consideration i. Documents that include details of forecasts used
the results of the specified intangible asset transaction as a base for the calculation of arm’s length
under review and the probability of the occurrence of the prices of specified intangible asset transactions
events that caused the difference. However, notwithstanding
ii. Documents that provide evidence that the
the foregoing are cases where the difference between the
events that caused the difference between said
foregoing calculated amount and initial transaction price
forecasts and results were natural disasters or
does not exceed 20%.
other similar events and that it was extremely
(1) Specified intangible assets difficult to forecast its occurrence at the time
of transaction, or that the arm’s length price
“Specified intangible asset” refers to an intangible asset
was calculated after appropriately taking into
that meets all of the following requirements.
consideration the probability of the occurrence
(A) Is unique and has significant value of said events at the time of transaction
(B) Revenue forecasts are used as a base for the (B) Documents that provide evidence that the
calculation of its arm’s length price difference between the forecast revenue amount
(C) Projections used as a base for the calculation of its between the period lasting from the first day of
arm’s length price are deemed to be uncertain the fiscal year that includes the first day when
unrelated party revenue was generated through the
use of a specified intangible asset until 5 years have
passed from the first day of the first fiscal year and
the actual revenue amount does not exceed 20%
(Note) If a company submits the documents described in (B) above, the
price adjustment measure will not be applied to days subsequent to
the submission date.
12 | Japan tax newsletter 4 February 20196. Application period
Companies are required to prepare documents that
include details of forecasts used in the calculation of The above revisions are applicable to corporation tax for
the arm’s length price at the time of transaction when fiscal years beginning on or after 1 April 2020 and income
conducting a specified intangible asset transaction. tax for 2021 or after.
Furthermore, in the event an unforeseeable event Furthermore, although the aforementioned revisions
occurs in fiscal years after the transaction and the actual are related to national taxation, the necessary local tax
revenue greatly deviates from the forecast revenue, the (individual inhabitant tax, corporate inhabitant tax and
company is required to prepare documents that include corporate enterprise tax) measures will also be established
analyses of the causes. in accordance with the treatment in national taxation
concerning the revisions of the transfer pricing tax rules.
4. Extension of the period for a correction decision
relating to transfer pricing tax rules Revision of foreign subsidiary income inclusion
The periods for correction decisions and requests for the taxation rules (CFC rules)
correction of corporation tax relating to transfer pricing tax 1. Shell companies
rules will be extended to seven years (from the current six
The following foreign related companies will be excluded
years).
from the scope of shell companies (or “paper companies” in
Japanese).
Caution is necessary not only for specified intangible
asset transactions or when selecting the DCF method
as a TPM, but also regarding the fact that the general Even if companies are excluded from the scope of shell
period for correction decisions etc. under transfer companies as a result of qualifying as foreign related
pricing tax rules will be extended by one year. companies under (1) to (3), there may be cases when
they are classified as cash boxes. Furthermore, foreign
related companies with an effective tax rate of less than
5. Establishment of the difference adjustment method 20% will be excluded from application of this revision.
With regard to adjustments of differences made in relation In addition, it is necessary to heed future developments
to a TPM for referencing the profit margin of comparable concerning whether there will be requirements to attach
transactions, when necessary adjustments cannot be made documents to final tax returns to fulfill the exemption
due to the fact that assessing quantitative differences requirements described below, as was required for
is extremely difficult, use of a method based on the exemption under the former tax rules, or whether
interquartile method will be allowed for adjusting such submission of documents will be required each time
differences. the tax authorities request documents that show that
requirements are being met as is the case with the
Public announcements providing clear guidance presumptive provisions under the current tax rules.
concerning specific operation methods are desired,
such as explanations of the type of situations deemed
as cases “when necessary adjustments cannot be made
due to the fact that assessing quantitative differences is
extremely difficult.”
Japan tax newsletter 4 February 2019 | 13(1) Certain foreign related companies which are holding (Note 1) The foregoing “specified subsidiary” refers to a foreign
company partially subject to CFC rules located in the
companies
same country as the head office of the foreign related
(A) A foreign related company whose main business company under review or other non-business operating
companies related to the business operating company
is to own shares of subsidiaries and where more under review.
than 95% of its assets are comprised of shares of (Note 2) The foregoing “business operating company” refers
subsidiaries and certain cash and deposits and to a foreign related company that fulfills the economic
where more than 95% of its income is comprised of activity criteria and the directors and employees of its
head office are engaged in carrying out all operations
dividends from subsidiaries and certain interest on ordinarily deemed as necessary to appropriately
deposits execute its main business. The same applies in (2).
(Note) “Subsidiary” above refers to a foreign company located
The types of shell companies thought to be
in the same country as the head office of the foreign
related company under review and of which 25% or excluded from CFC rules (i.e. no longer deemed as
more shares are owned by said foreign related company. shell companies) are as portrayed in figure 2.
The types of shell companies thought to be
Figure 2
excluded from controlled foreign corporation
(CFC) rules (i.e. will no longer be deemed as shell Domestic company
companies) are as portrayed in figure 1. Japan
Country X
Figure 1 Foreign related
Domestic company company
Japan
Country X Foreign related company Shell company
Shell company (Business operating (Non-business operating
company) company)
25% or higher
Foreign related company
Subsidiary partially subject to CFC rules
(Specified subsidiary)
(B) A foreign related company whose main business is
the ownership of shares of specified subsidiaries
and which meets all required criteria including
that its businesses are managed, controlled and
operated by a “business operating company” that
is located in the same country as the head office
of said foreign related company, and said foreign
related company fulfills functions indispensable
for said business operating company to execute
business in said country; furthermore, more than
95% of said foreign related company’s assets are
comprised of shares of specified subsidiaries and
certain cash and deposits and more than 95% of
its income is comprised of dividends from specified
subsidiaries, certain consideration received from
share transfers of specified subsidiaries and certain
interest on deposits (referred to as a “non-business
operating company” in (B))
14 | Japan tax newsletter 4 February 2019(2) Certain foreign related companies relating to the
While a foreign related company that falls under (A) is ownership of real estate
subject to application of the foreign subsidiary income
(A) A foreign related company whose main business
inclusion taxation rules (CFC rules) under the current
is to own certain real estate located in the same
tax system, dividends received from companies that
country as that of its head office or shares
fulfill requirements such as share ownership ratios of
of specified subsidiaries and which meets all
25% or more will not be included in the calculation of
required criteria including that its businesses are
the applicable amount pertaining to said foreign related
managed, controlled and operated by a business
company and as a result, income inclusion taxation (or
operating company located in the same country,
unitary taxation) will not occur for said amount. It is
and said foreign related company fulfills functions
thought that this measure was established after taking
indispensable for said business operating company
into account the fact that income inclusion taxation does
to execute business (limited to the real estate
not occur even under the current rules.
business) in said country; furthermore, more than
Moreover, in the event a foreign related company that 95% of said foreign related company’s assets are
falls under (A) transfers its subsidiary shares, it will comprised of said real estate, shares of specified
become difficult to fulfill the income requirements subsidiaries and certain cash and deposits and
therein. On the other hand, since income requirements more than 95% of its income is comprised of income
under (B) include “certain consideration received from earned from said real estate and from shares of
share transfers of specified subsidiaries,” it will become specified subsidiaries, and certain interest on
easier for a foreign related company to fulfill said deposits (referred to as a “non-business operating
requirements. However, this category is subject to the company” in (A))
following additional requirements in comparison to (A). (Note) The foregoing “specified subsidiaries” refers to other
non-business operating companies related to the
(i) Main business is the ownership of shares of specified business operating company under review.
subsidiaries (refer to Note 1 for requirements of a
The types of shell companies thought to be
specified subsidiary)
excluded from controlled foreign corporation
(ii) Its businesses are managed and controlled by a (CFC) rules (i.e. will no longer be deemed as shell
business operating company located in the same companies) are as portrayed in figure 3.
country as its head office (refer to (Note 2) for
Figure 3
requirements of a business operating company)
Domestic company
(iii) Fulfills functions indispensable for said business
Japan
operating company to execute business
Country X
With regard to (iii), it is necessary to heed future
developments since it is currently unclear what functions Shell company Foreign related
(Non-business company
specifically are recognized by these rules (the same operating company) (Business operating
applies for (2) and (3)). company)
Shell company
(Non-business
operating company/
specified subsidiary)
Real
estate
Japan tax newsletter 4 February 2019 | 15(B) A foreign related company whose main business and said foreign related company fulfills functions
is to own real estate located in the same country indispensable for said business operating company to
as that of its head office and actually used by execute businesses to develop or establish resources,
a business operating company located in the such as petroleum or natural gas, or social capital in
same country as the head office of said foreign said country (referred to as “resource development
related company and which meets all required projects” in (3)); furthermore, more than 95% of said
criteria including that its businesses are managed, foreign related company’s assets are comprised of
controlled and operated by said business operating shares of specified subsidiaries, certain loans provided
company; furthermore, said foreign related to specified subsidiaries, said real estate and certain
company fulfills functions indispensable for said cash and deposits and more than 95% of its income is
business operating company to execute business comprised of income earned from shares of specified
in said country and more than 95% of said foreign subsidiaries, said loans and said real estate, and certain
related company’s assets are comprised of said interest on deposits
real estate and certain cash and deposits and more (Note 1) The foregoing “specified subsidiaries” refers to foreign
than 95% of its income is comprised of income companies located in the same country as the head office of
earned from said real estate and certain interest on the foreign related company under review and of which 10%
or more of shares are owned by said foreign related company,
deposits. and they fulfill functions indispensable for the business
operating company under review to carry out resource
development projects in said country.
It is thought that type (A) was established to cover
(Note 2) The foregoing “business operating company” refers to a
foreign related companies engaged in the real estate foreign related company that fulfills the economic activity
business owning real estate for the purpose of selling criteria and whose directors and employees of its head office
or lending them to third parties, and type (B) to cover are engaged in carrying out all operations ordinarily deemed
as necessary to appropriately execute resource development
foreign related companies that own real estate for its
projects. In addition, it also includes other foreign companies
own use such as an office building. located in the same country as the head office of said foreign
related party and where the directors and employees of said
Moreover, if certain requirements are fulfilled, foreign other foreign companies jointly engage in carrying out all of
related companies whose main business is to own the foregoing operations.
shares of specified subsidiaries (intermediary holding The types of shell companies thought to be excluded
companies; refer to the note for criteria concerning from controlled foreign corporation (CFC) rules (i.e.
specified subsidiaries) are also allowed under type (A), will no longer be deemed as shell companies) are as
while such ownership is not allowed under type (B), since portrayed in figure 4.
it is limited to foreign related companies whose main
Figure 4
business is to own real estate.
Domestic company
Concerning type (B), it is thought that the requirements
for matters other than real estate are roughly the same Japan
as those described in 1. (1) (B) above. Country X
Foreign related
Shell company Shell company
company
(Non-business (Non-business
(3) Certain foreign related companies relating to resource (Business operating
operating company) operating company)
company)
development and other projects
10% or higher
A foreign related company whose main business is the Functions Provision of
ownership of shares of specified subsidiaries, provision indispensable for funds
executing resource
of funds procured from unrelated parties to specified development
subsidiaries or ownership of real estate located in the projects (specified
subsidiary)
same country as that of its head office, and which
meets all required criteria including that its businesses
are managed, controlled and operated by a business Resources
operating company located in the same country
16 | Japan tax newsletter 4 February 2019Foreign related companies whose main business is any of Foreign related companies whose insurance premium
the following and which meet certain requirements will revenue from unrelated parties is minimal and amount
be excluded from the scope of shell companies. of reinsurance premiums paid to unrelated parties is low
(i) Owns shares of specified subsidiaries (foreign have been added to the scope of cash boxes. These rules
companies that fulfill functions indispensable for are thought to have been developed to cover captive
executing resource development projects; refer to insurance companies.
(Note 1))
(ii) Provides funds procured from unrelated parties to 3. Effective tax rate (tax burden ratio) of application
specified subsidiaries exemption criteria
(iii) Owns certain real estate located in the same country (1) Income
as that of the head office of the foreign related The amount of income calculated based on provisions
company under review set forth by laws and regulations pertaining to foreign
Moreover, “loans” have been added to the same asset corporation tax of the country where the head office of
requirements described in 1. (2)(A) and (B) above, while the foreign related company under review is located will
“income earned from loans” have likewise been added to be prescribed to be the amount of income of the foreign
the income requirements. related company calculated by excluding provisions
concerning consolidated tax payment and provisions
In addition, under this measure, “other foreign
concerning pass-through treatment from the foregoing
companies located in the same country as the head
provisions set forth by laws and regulations and then
office of said foreign related party and where the
adding adjustments to that amount for non-taxable
directors and employees of said other foreign companies
income.
jointly engage in carrying out all of the foregoing
operations” are added to the same “business operating (2) Foreign corporation tax
company” requirement described in 1. (1)(B) and (2)(A) The amount of foreign corporation tax levied in the
and (B) above. country where the head office of the foreign related
company under review is located will be prescribed to
2. De facto cash boxes be the amount of foreign corporation tax calculated
Foreign related companies which meet all of the following as the amount of foreign corporation tax levied on the
criteria will be included in the scope of de facto cash boxes. amount of income of the foreign related party calculated
by excluding provisions concerning consolidated tax
(i) A foreign related company whose ratio of the total of payment and provisions concerning pass-through
certain insurance premium revenue (refers to “specified treatment from the provisions set forth by laws
insurance premium revenue” in (ii)) received from and regulations pertaining to the foregoing foreign
unrelated parties to total insurance premium revenue in corporation tax.
the applicable fiscal year is less than 10%
(ii) A foreign related company whose ratio of the total of
certain reinsurance premiums paid to unrelated parties
in relation to insurance premium revenue (excludes
specified insurance premium revenue; the same applies
for the term “insurance premium revenue” used in (ii))
to total insurance premium revenue in the applicable
fiscal year is less than 50%
Japan tax newsletter 4 February 2019 | 17In the sections entitled “Examples of Application of US It is thought that this revision will be made in order to
Consolidated Tax Payment Rules” and “Examples of US match the income amounts described in 3. (1) above.
Subsidiaries Owning Shares of US LLCs Electing Pass- Moreover, since this revision specifies “provisions
through Taxation” in the “Tax Treatment of Foreign concerning consolidated tax payment and provisions
Subsidiary Income Inclusion Taxation Rules (CFC Rules concerning pass-through treatment,” it is thought
or Anti-Tax Haven Rules)” published by the Japan Tax that the UK’s group relief measure and Germany’s tax
Association in September 2014, it states that it is grouping (“organschaft”) rules are not included in the
appropriate to calculate effective tax rates based on scope thereof (same concept applies in section 5.)
calculations of standalone income and corresponding
standalone corporation taxes based on the presumption
that each company has paid taxes on a standalone basis. 5. Calculation of foreign tax credit
The US federal corporation tax rate in 2014 exceeded Out of the amount of foreign corporation tax deducted in
30%, and thus US subsidiaries were generally not subject cases wherein a domestic company will be subject to income
to CFC rules when the foregoing concept was applied. inclusion taxation, the amount of foreign corporation tax
Therefore, detailed and accurate calculations were not levied in the country where the head office of the foreign
required at the time. However, since the US federal related company under review is located will be prescribed
corporation tax rate has been reduced to 21%, detailed to be the amount of foreign corporation tax calculated
and accurate calculations will be required due to the fact as the amount of foreign corporation tax levied on the
that there is large difference in tax treatments in cases amount of income of the foreign related party calculated by
wherein the effective tax rate is equal to or higher than excluding provisions concerning consolidated tax payment
30% as opposed to cases wherein it is less than 20%. and provisions concerning pass-through treatment from the
In the future, it will become necessary to heed future provisions set forth by laws and regulations pertaining to the
developments concerning details of calculation methods, foregoing foreign corporation tax.
including calculation methods of state taxes.
It is thought that this revision will be made in order to
4. Amounts subject to application of entity-level income match the foreign corporation tax amounts described in
inclusion tax rules 3. (2) above.
The standard income amount in cases wherein amounts
subject to income inclusion are calculated using standards 6. Amounts subject to partial application of partial
set forth by local laws and regulations will be prescribed to income inclusion tax rules
be the amount of income of the foreign related company The amount after reducing the amount described in (ii) from
calculated by excluding provisions concerning consolidated the amount described in (i) will be added to the amount of
tax payment and provisions concerning pass-through specified income subject to partial income inclusion tax rules
treatment from provisions set forth by laws and regulations in relation to foreign related companies partially subject
pertaining to corporate income tax of the country where the to income inclusion rules (excluding companies deemed as
head office of the foreign related company is located and foreign financial subsidiaries).
then adding adjustments to that amount for non-taxable
income. (i) The balance after deducting total reinsurance premiums
paid from total insurance premiums received
(ii) The balance after deducting total reinsurance claims
received from total insurance benefits paid
These rules are thought to target captive insurance
companies as in 2. above.
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