Japan: The 2015 Tax Reform

Japan has just embarked on the 2015 Tax Reform to be more growth-oriented with the aim of a reduction in the effective corporate tax rates to allow corporations to pay higher wages to existing employees as well as increase overall employment thereby increasing economic consumption and investment. On 31 March 2015, a set of tax reform bills centering on corporate tax reductions has been enacted. The key provisions relevant to multinational corporate taxpayers are as follows.

Corporate tax rate

• The national corporate tax rate will be reduced from 25.5% to 23.9% for taxable years beginning on or after 1 April 2015
• The local enterprise tax rate applicable to income base will be reduced from 7.2% to 6% for taxable years beginning on or after 1 April 2015 but before 31 March 2016
• An additional enterprise tax reduction from 6% to 4.8% will apply for years beginning on or after 1 April 2016
• The combined national and local effective corporate tax rate will be reduced from 34.62% to 32.11%
• A further reduction in the combined effective tax rate to 31.33% is planned in taxable years 2016
• The Government plans to reduce the combined effective tax rate to below 30% over several years

Net operating loss (NOL)

• Limitation for annual NOL deduction is reduced from 80% to 65% for taxable years beginning on or after 1 April 2015 and before 31 March 2017
• A further reduction of the limit to 50% will apply to taxable years beginning on or after 1 April 2017
• Carryover period for NOLs incurring for taxable years beginning on or after 1 April 2017 is extended from 9 years to 10 years
• Small and medium enterprises are eligible for a 100% NOL deduction and a 9-year or 10-year carryover period
• Newly established corporation and a corporation emerging from bankruptcy are allowed a 100% NOL deduction for 7-year period

Income tax base (local enterprise tax)

• Income base percentages over a total enterprise tax are expected to be reduced from 75% to 62.5% and 50% for 2015 and 2016 respectively

International taxation

• Effective tax rate is reduced from 20% or less to less than 20% when determining a foreign tax haven subsidiary status
• A 95% participation exemption for dividends paid by a foreign subsidiary will no longer be available for dividends that are deductible in the country where the foreign subsidiary is located

Research and development (R&D) tax credit

• The R&D tax credit limitation will be reduced from 30% to 25% of national corporate tax liability of a taxable year
• A new R&D tax credit limitation of up to 5% of national corporate tax liability will be introduced for special experiment and research expenses
• The carryover of unused creditable amount will be repealed

Consumption tax

• The second phase of the consumption tax rate increase (from 8% to 10%) will be postponed to 1 April 2017
• With effect form 1 October 2015, provision of digital services (e.g. e-books, internet-delivery of music, advertisement, etc.) by a foreigner to Japanese customers will be subject to consumption tax

The 2015 Tax Reform is the “first step” in a two-step process mainly relates to large corporations. A second step is expected to be enacted primarily effecting small to medium size corporations in years to come.