Japan Tax Update 2014 Tax Reform Proposal Issue 96, December 2013

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Japan Tax Update
2014 Tax Reform Proposal
Issue 96, December 2013
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The Japanese government on
December 12, 2013 approved a
proposal (Taiko) for certain tax
reforms to be implemented mainly
from the fiscal year beginning
April 1, 2014 (“2014 Tax Reform
Proposal”). The proposed tax law
changes will be submitted to the
Diet during January 2014 for
consideration.
This newsletter illustrates the
major components of the 2014 Tax
Reform Proposal with regard to
corporate taxpayers.
・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・
To get rid of economic deflation and revitalize the
Japanese economy, Abenomics has pursued three key
measures (dynamic monetary policy, discretional
financial policy and growth strategy) to stimulate nonpublic investment. These plans are provided in the
government’s plan “Japan Revitalization Strategy –
Japan is BACK” (Approved in the Cabinet on June 14,
2013).
With the decision to move ahead with the
consumption tax rate, the ruling parties, Liberal
Democratic Party and the Komeito approved the “Tax
Reform Proposal to Stimulate Non-governmental
Investment” on October 1, 2013.
Following the above tax reform proposal, the Cabinet
approved on December 5, 2013 an economic package
designed to further stimulate the economy. And based
on this package, the 2014 Tax Reform Proposal
prepared by the ruling parties was released on
December 12, 2013.
This newsletter illustrates major tax reform proposals
for corporate taxpayers as follows:
1.
2.
3.
4.
5.
6.
Corporate tax
International tax
Individual income tax
Consumption tax
Local tax
Procedures for taxpayers relief
Japan Tax Update
1. Corporate Tax
(1) One year early termination of the Restoration Corporation Surtax
As a part of the “Special Measures to Secure the Financial Resources to Implement the Restoration from the
Tohoku Earthquake” (“Special Tax Bill”) in 2011, a Corporation Surtax was introduced for a three year period
from the first fiscal year beginning on or after April 1, 2012.
To help enable the revitalization of the Japanese economy, the 2014 Tax Reform Proposal targets to lower the
corporate tax burden by terminating the Corporation Surtax one year earlier than planned. It should be noted
that the Income Surtax and the Withholding Surtax (2.1% surtaxes on individual income taxes and withholding
taxes) will remain the same as was originally legislated. Under this proposal, the effective corporate tax rate will
change as below:.
From first fiscal year beginning on
or after April 1, 2012
From first fiscal year beginning
on or after April 1, 2014
Corporations subject to the sizebased enterprise tax regime
38.01%
35.64%
Other than above
39.43%
37.11%
(Tokyo-based)
With respect to the Withholding Surtax, at present a Japanese corporate taxpayer in order to claim a credit for
any Withholding Surtax (levied on investment income like interest or dividend) paid against Corporation Surtax
otherwise due is required to separately file a Corporation Surtax tax return. These procedures will be reviewed
to enable a corporate taxpayer to claim a credit for any such Withholding Surtax paid directly from its normal
corporate tax liability, once the Corporation Surtax period is terminated.
(2) Investment incentive designed for National Strategic Special Areas
As a part of certain legislation (the Law of National Strategic Special Areas) approved by the Diet on December 7,
2013, the below tax incentive measures (special depreciation or tax credit by investment in such designated
areas) are proposed in the 2014 Tax Reform Proposal:
Qualified corporate
taxpayer
A qualified corporation
with an approved
implementation plan
for specified
businesses planned in
National Strategic
Special Areas
Incentive conditions
During the period from April 1, 2014 or the
effective date of the Law of National
Strategic Special Areas (whichever is the
earlier) through March 31, 2016, a qualified
corporation acquires and places into
service in the National Strategic Special
Area fixed assets specified in the
implementation plan.
The assets include certain machinery, R&D
related equipment, buildings, facilities and
structures.
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Credit or deduction allowed

Corporations can elect special accelerated
depreciation (50% of the acquisition cost of
the machinery and R&D related equipment or
25% for buildings, facilities and structures) or
a tax credit (15% of the acquisition cost of
machinery and R&D related equipment, or 8%
for buildings, facilities and structures). The
credit is limited to 20% of the corporate tax
liability before the credit.

Corporations are allowed to claim 100%
depreciation for certain machinery and R&D
related equipment put in use for the specified
innovative core business.

The benefit is available for national and
inhabitants tax and enterprise tax purposes
for both large corporations and SMEs.
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(3) Extension of the employment promotion incentive
Under the 2013 Tax Reforms, an employment promotion incentive was amended to relax the requirement to
apply the incentive and increased the tax benefit for corporate tax payer. Under the 2014 Tax Reform Proposal,
the applicable period will be extended for another 2 years – i.e., for tax years commencing on or before March
31, 2016.
Amendments to
employment
promotion
incentive
Conditions for application
Increase in the number of employees
subject to employment insurance by
10% or more and by five people or
more (two or more in the case of an
SME),as compared to the end of the
prior tax year.
Limitation of credit
The tax credit is equal to the increased number of
employees multiplied by 400,000 yen, limited to 10%
(20% in case of SME) of the taxpayer’s corporate tax
liability before the credit. For an SME, an additional
inhabitants tax credit of approximately 20.7% of the
national credit is available.
(4) Amendments to other special measures
1) Under the 2014 Tax Reform Proposal, large corporations will be able to deduct 50% of the
entertainment expenses for food and drink (excluding entertainment for internal purposes).
Size of
corporation
Large
corporation
Tax years commencing
on or before March 31,
2013
Tax deductible amount
Tax years commencing
Tax years commencing between April 1,
between April 1, 2013
2014 and March 31, 2016
and March 31, 2014
0
50% of the entertainment expense for food &
drink (excluding entertainment for internal
purposes)
0
SMEs （Note）
The smaller of 1) 90% of The smaller of 1) 100%
By election, 1) 50% of the entertainment
the entertainment
of the entertainment
expense for food & drink (excluding
expense or 2) 5,400,000 expense or 2) 8,000,000 entertainment for internal purposes) or 2)
yen
yen
8,000,000 yen
（Note）Small to medium sized enterprises (“SMEs”) are ordinary corporations with capital not exceeding JPY 100 million and
not wholly owned by a corporation with capital of JPY 500 million or more.
2) Extension of the applicable period for the investment incentive for International Strategic Areas
Under the 2011 Tax Reforms, certain inbound investment incentives were introduced to assist in
rebuilding from the Tohoku earthquake and tsunami and encourage foreign corporate investment into
Japan. The applicable period of these tax measures will be extended by the 2014 Tax Reform Proposal,
as below:
Tax measures
Proposed amendments
Special depreciation or tax credit for certain capital
expenditures in the Designated International Strategic Area
Incentive will be extended for certain capital expenditures
incurred through March 31, 2016.
Income exclusion for qualifying corporations engaged in the
International Strategic Area
Income exclusion for Asian Headquarters and R&D centers
Incentive will be extended for applying corporations through
March 31, 2016.
Incentive will be extended for applying corporations through
March 31, 2015.
3)
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Other proposals

Temporary surtax measures on undisclosed expenditures by corporate taxpayers will be amended
to become permanent measures.

Temporary suspension of the tax loss carry back will be extended for another 2 years (exclusion
for SMEs).
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



Temporary suspension of taxation of retirement pension funds will be extended for another 3
years.
Rollover relief applicable to the acquisition of specified assets to replace existing ones will be
reviewed with regards to qualifying assets, and the applicable period will be extended for another
2 years.
Overseas investment loss reserves will be reviewed with regards to qualifying assets, and the
applicable period will be extended for another 2 years.
In the corporate tax credit provided for the investment incentive, the credit amount limitation will
be lowered from the current 100% to 90% of current tax liabilities.
(5) Amendments in relation to the proposed amendments to the Corporation Act
A draft bill containing certain amendments to the Corporation Act was submitted to the Diet on November 29,
2013 for discussion. Several tax amendments are proposed to comply with such proposed amendments, as
follows:
1)
2)
3)
The transfer of fractional shares to the issuer corporation by a shareholder who objects to a reverse
stock split will no longer be subject to taxation as a deemed dividend.
Requirement for corporate tax deductibility of directors’ bonuses determined based on corporate
earnings will be reviewed for corporations with audit committees.
Shiyounin-kenmu-yakuin as defined under current tax law (a director holding both director and
departmental head positions concurrently) will not include director who is a member of the
corporation’s audit committee.
(6) Proposals regarding the corporate rehabilitation tax regime
1)
Debt forgiveness by multiple financial institutions in respect of a borrower and in accordance with a
plan prepared pursuant to rules provided by the Regional Revitalization Assistance Institution (Chiiki
Keizai Kasseika Sien Kikou) will be subject to the corporate rehabilitation tax regime.
2)
With respect to the business revitalization of SMEs, plans prepared pursuant to rules provided by the
Regional Revitalization Assistance Institution (Chiiki Keizai Kasseika Sien Kikou) will qualify for
special treatment with respect to the recognition of built in gain or loss in specified assets owned by an
investment business limited partnership.
2. International Tax
(1) Adoption of AOA (attribution of profits to a branch) as a basic principle
After many years of discussion and drafts and following the approval by the OECD Committee on Fiscal Affairs
on 22 June 2010 and the release by the OECD Council on that same day of a revised Model Tax Convention, the
OECD 0n July 22, 2012 released its final Report on the Attribution of Profits to Permanent Establishments.
Under this revised Model Tax Convention, a new Article 7 (“the new Article 7”) applies the Authorised OECD
Approach (“AOA”) to the calculation of attributable income (under the principle of what is generally referred to
as the functionally separate entity approach).
The 2014 Tax Reform Proposal seeks to amend Japanese domestic rules with regard to the taxation of PEs in
Japan to be consistent with the revised Model Tax Convention, as well as trends in international tax law and
practice. If implemented, this will affect significantly the principles and approach to international taxation as
applied under Japanese tax law, and will affect both the taxable income calculation of Japanese branches of
foreign corporation significantly as well as the calculation of foreign tax credits for Japanese corporations.
The proposed amendments will apply from tax years commencing on or after April 1, 2016
1) Basic principles underlying the AOA
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If the potential amendments to Japanese tax law are enacted to be in line with the principles as applied
by the new Article 7, the current Japanese tax principles, which are based rather on a legal entity
approach, would be amended to that of the attribution approach.
The effect of the change - as described in the OECD commentary and principles of the new Article 7 would mean that the attributable income of a PE would be calculated based on the functional and factual
analysis of the PE by (i) allocating assets, risks and capital to the PE, (ii) recognizing intra-entity
dealings, and (iii) recognition of dealings as if the PE were a separate and independent enterprise.
2) Domestic source income
The definition of domestic income and attributable income to a PE would change as follows:
(i)
A PE’s attributable income (that is, the business income of the PE) would be included in domestic
source income. Then, the sourcing rules would consider and treat the attributable income of a PE
separately from the income of the foreign entity not attributable to the PE. (where the taxation of
the non-attributable income would remain the same as the current taxation of a foreign corporation
without a PE in Japan).
(ii) Pursuant to the inclusion of the concepts underlying the new Article 7, a PE’s attributable income
would be calculated based on a functional and risk analysis for dealings by the PE on an arm's
length basis as if it were a separate and independent enterprise. As one consequence, the
principle/rule that no income or loss would arise from the mere purchase of assets by a PE from its
head office would no longer apply.
3) Foreign tax credits
(i)
Foreign corporation with a PE in Japan
When a foreign corporation’s PE in Japan is subject to taxation in Japan as well as in jurisdictions
other than its country of residence, double taxation may arise. To alleviate an unfair tax burden, it
is proposed to introduce a foreign tax credit regime applicable to PEs in Japan similar to that which
applies to Japanese corporations. However, foreign tax (including withholding tax) paid in the
enterprise’s country of residency would not, in principle, be creditable under consequential changes
to the foreign tax credit regime.
(ii) Japanese corporation with a PE in foreign jurisdictions
When a Japanese corporation with a PE in a foreign jurisdiction is subject to foreign country
taxation, the tax is generally creditable against corporate tax in Japan. The scope of foreign source
income would need to be clarified following changes to the taxation of PEs.
A foreign PE’s (of a Japanese corporation) attributable income would be calculated taking into
consideration income or loss from intra-entity dealings. In the calculation of a foreign PE’s (of
domestic corporation) attributable income, this could be based on the allocated free capital and
subject to the interest deduction limitation.
The timing to recognize a foreign PE’s (of domestic corporation) attributable income would not be
when the profit of the enterprise is realized but when the intra-entity dealing takes place. The
recognition of built-in gain of assets upon the closing of a foreign PE would not arise.
4) Documentation
To determine a PE’s attributable income, documentation would need to be prepared to clarify the nature
and prices of intra-entity dealings.
5) Local tax
Local inhabitants tax and enterprise tax would be calculated according to the amended corporate tax
calculation upon introduction of the attribution approach.
(2) Transfer pricing- the scope of transactions with unrelated parties
At the present, the scope of the transactions with unrelated parties that will be subject to the transfer pricing
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regime is limited to sales, transfer, loan or provision of assets when the price is substantially agreed in advance
between the related parties or under certain conditions. By the 2014 Tax Reform Proposal, provision of services
will be included in the scope of the transactions with unrelated parties above.
3. Individual income tax
(1) Lowering the salary income deduction
Under the 2012 Tax Reform, the ability to exclude a portion of gross salary income from taxation was abolished
for salary income exceeding 15 million yen. Under the 2014 Tax Reform Proposal, this exclusion will be further
limited and ultimately capped at 2.2 million yen for salary income bracket exceeding 10 million yen.
Taxable income
Formula for exclusion
amount calculation
1,800,000≦
40％ of income （Note）
1,800,000< ≦3,600,000
30％ of income + 180,000
3,600,000< ≦6,600,000
20％ of income + 540,000
6,600,000 < ≦
10％ of income +
10,000000
10,000,000< ≦
1,200,000
12,000,000
12,000,000< ≦
5％ of income + 1,700,000
15,000,000
15,000,000<
（Note）The minimum amount is 650,000 yen.
Salary income exclusion
current through 2015
2016
650,000 minimum, up to
720,000
720,000 minimum, up to
1,260,000
1,260,000 minimum, up to
1,860,000
1,860,000 minimum, up to
2,200,000
2,200,000 minimum, up to
2,300,000
2,300,0000 minimum, up to
2,450,000
2017
ditto
ditto
ditto
ditto
ditto
ditto
ditto
ditto
ditto
2,200,000
2,300,000
2,450,000
(2) Taxation of transfer of unexercised stock options back to the issuing corporation
The 2014 Tax Reform Proposal clarifies that the transfer of an unexercised stock option back to the issuing
corporation will trigger taxation of any economic gain to the transferor by reference to the relevant income
classification (ex., business income, salary income, retirement income, temporary income or miscellaneous
income) as opposed to taxation as capital gain.
The above clarification is applicable to transfers on or after April 1, 2014.
(3) Amendments to conform with proposed amendments to the Corporation Act
The buyback of fractional shares by the issuer corporation from a shareholder who objects to a reverse stock
split will be no longer be taxed as a deemed dividend.
(4) Extension of applicable period for Income Tax Deferral upon Exercise of a Qualified Stock
Options Granted by a Designated Foreign Corporation
Under the 2011 Tax Reforms, the point of taxation with regard to qualified stock options granted by a designated
corporation pursuant to the Special Measures Law (“SML”) to promote establishment of the Asian Headquarters
or R&D centers is deferred from time of exercise of the option until the future disposal of the underlying shares.
This incentive regime is currently scheduled to lapse on March 31, 2014.
The 2014 Tax Reform Proposal extends this regime for another two years to March 31, 2016
4. Consumption tax
(1) Review of the deemed consumption tax credit ratio under the simplified taxation method
Upon application, a consumption tax payer may compute its consumption tax credit available by applying the
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deemed tax credit ratio.
Under the 2014 Tax Reform Proposal, the deemed tax credit ratio will be lowered as below with respect to
taxpayers engaged in the financial /insurance services or real estate business, for taxable periods commencing
on or after April 1, 2015:
Current
Industry Group
Group 1 （Whole-selling）
Group 2 （Retail selling）
90%
80%
Proposed amendments
Industry Group
Deemed tax
credit ratio
Group 1 （Whole-selling）
90%
Group 2 （Retail selling）
80%
Group 3 （Manufacturing）
Group 4 （Others（including
financial /insurance services））
Group 5 （Services
（including real estate））
70%
60%
Group 3 （Manufacturing）
Group 4 （Others）
70%
60%
50%
Group 5 （Services
（including financial
/insurance services））
Group 6 （Real estate）
50%
Deemed tax
credit ratio
40%
(2) Review of the taxation of DFS (Duty Free Shops)
The taxation of DFS will be reviewed with respect to the scope of duty free items, sales method and maintenance
of relevant documents.
The above amendments will apply for taxable transactions on or after October 1, 2014.
(3) Review of the taxable sales ratio
When calculating the taxable sales ratio (taxable sales amount divided by total sale amount (taxable and nontaxable)) for the purpose of calculated the available consumption tax credit, currently five percent of the gross
consideration for the transfer of a security is counted as non-taxable sales, while 100% of such consideration is
counted as non-taxable sales when transferring a note receivable .
Under the 2014 Tax Reform Proposal, the transfer of a note receivable will be treated in the same manner as the
transfer of a security for this purpose – i.e. five percent of the consideration will be counted as non- taxable sales.
The above amendments will apply to the transfer of a note receivable on or after April 1, 2014.
(4) Introduction of a multi-tiered rate system
The consumption tax rate will increase from 5% to 8% on April 1, 2014 and to 10% on October 1, 2015.
The 2014 Tax Reform Proposal indicates it has been decided to introduce a multi-tiered rate system after the
rate is increased to 10%, though the timing of such introduction is not specified. Details of this regime (such as
items qualifying for a lower tax rate, etc.) will be clarified in the 2015 Tax Reform Proposal.
(5) Consideration of the cross border service transaction
New legislation is currently under discussion with respect to the taxation of cross border service transactions for
Japanese consumption tax purposes, and such legislation is targeted for inclusion in the 2015 Tax Reform
Proposal.
Discussions within the Government Tax Committee will include how to determine the place of service, potential
taxation methods such as a reverse charge method in use in many European VAT regimes, and the like.
5. Amendments to the local tax regime
To finance local tax revenues and reduce regional differences in revenue generation, it is proposed to lower the
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inhabitants corporate tax rate and at the same time to introduce a new local corporate tax that will be earmarked
to a special government reserve for allocation to local governments in financial distress.
Proposed changes in the local tax rates
(1)
Effective from tax years commencing on or after October 1, 2014, the local tax rate will be changed as below:
Inhabitants tax (corporate tax
base)
Current
Standard
Upper
rate
rate
Proposed amendments
Standard rate
Upper rate
Metropolitan and prefectural
inhabitants tax
5.0％
6.0％
3.2％
4.2％
Municipal inhabitants tax
12.3％
14.7％
9.7％
12.1％
Special local corporation tax
Current
Proposed
amendments
Corporations subject to size based
enterprise tax
148％
67.4％
Corporations subject to income
based enterprise tax
81％
43.2％
Corporations subject to
revenue/sales based enterprise tax
81％
43.2％
Size based enterprise tax
Current
Proposed
amendments
≦4,000000 yen
1.5％
2.2％
4,000,000≦ ≦8,000,000 yen
2.2％
3.2％
8,000,000≦ yen
2.9％
4.3％
2.7％
3.4％
4％
5.1％
5.3％
6.7％
Income based enterprise tax
≦4,000000 yen
4,000,000≦
≦8,000,000 yen
8,000,000≦ yen
(2) Creation of a national “local corporate tax”
Effective from tax years commencing on or after October 1, 2014, a new national “local corporate tax” will be
introduced. Corporate tax payers will be obliged to file and pay the “national local corporate tax” at a fixed rate
of 4.4% of their corporate tax liabilities.
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6． Amendment of the procedures for tax payers relief
In accordance with the proposed amendment in the Administrative Appeal Act, appeal procedures for national
tax matters will be reviewed as per below.
Process for appeal
Due date for
appeal
Current
In principle, a request of reinvestigation should be
followed by a formal filing of objection (taxpayer
first files formal objection).
Proposed amendments
Tax payer is allowed to request reinvestigation
without filing formal objection in advance.
2 months from the day after a taxpayer knows of
the tax assessment or action is taken by the tax
authorities
3 months from the day after a taxpayer knows of the
tax assessment or action is taken by the tax
authorities
For more information, please consult your tax representative or contact any of the
following members listed below:
Zeirishi-Hojin PricewaterhouseCoopers
Kasumigaseki Bldg. 15F, 2-5, Kasumigaseki 3-chome, Chiyoda-ku, Tokyo 100-6015
Telephone: 81-3-5251-2400, http://www.pwc.com/jp/tax
Partner
Managing Director
Akemi Kito
81-3-5251-2461
[email protected]
Yoko Kawasaki
81-3-5251-2450
[email protected]
Jack Bird
81-3-5251-2577
[email protected]
Marc Lim
81-3-5251-2867
[email protected]
Yumiko Arai
81-3-5251-2475
[email protected]
PwC Japan Tax (Zeirishi-Hojin PricewaterhouseCoopers), a PwC member firm, is one of the largest professional tax corporations in Japan with more than 500
people. In addition to tax compliance services our tax professionals are experienced in providing tax consulting advice in all aspects of domestic/international
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