Japan Tax Update Proposed 2011 Tax Reform PwC Japan Tax Newsletter

Japan Tax Update
Special Edition: December 2010, Issue 56
Proposed 2011 Tax Reform
PwC Japan Tax Newsletter
The Tax Practice of PricewaterhouseCoopers
Japan (Zeirishi-Hojin PricewaterhouseCoopers)
is one of the largest professional tax
corporations in Japan with about 560 people. In
addition to tax compliance services our tax
professionals are experienced in providing tax
consulting
advice
in
all
aspects
of
domestic/international
taxation
including
financial and real estate, transfer pricing, M&A,
group reorganization, global tax planning, and
the consolidated tax system to clients in various
industries.
The firms of the PricewaterhouseCoopers
global
network
(www.pwc.com)
provide
industry-focused assurance, tax and advisory
services to build public trust and enhance value
for clients and their stakeholders. More than
163,000 people in 151 countries across our
network share their thinking, experience and
solutions to develop fresh perspectives and
practical advice.
This newsletter is prepared based on the
outline of the tax reform proposal released on
December 16, 2010. The annual tax reform is
usually approved by the Diet by the end of
March. The full details of the amended tax laws
will not be clarified until Diet approval has been
received, and Cabinet Orders or Enforcement
Orders enacting the changes issued.
This Newsletter is provided for general
guidance only, and does not constitute the
provision of advice or professional consulting of
any kind. Before making any decision or
taking any action, you should consult your
usual PwC contact with all the pertinent facts
relevant to your particular situation.
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
© 2010 Zeirishi-Hojin PricewaterhouseCoopers.
All rights reserved. “PricewaterhouseCoopers” refers
to Zeirishi-Hojin PricewaterhouseCoopers or, as the
context requires, the PricewaterhouseCoopers global
network or other member firms of the network, each of
which is a separate and independent legal entity.
On December 16, 2010, further details were released regarding
the proposed 2011 tax reform (“Proposed Reform”) which was
approved by the Cabinet and thereafter will be submitted to the
Diet.

Highlights of the Proposed Reform for corporate taxpayers
(1) Reduce the corporate tax rate
(2) Increase taxable base
(3) In-bound investment incentive for international foreign
corporation

Highlights of the Proposed Reform for consumption tax
taxpayers

Highlights of the Proposed Reform for individual taxpayers
Japan Tax Update
Special Edition: December
2010
Highlights of the Proposed Reform for corporate taxpayers
(1) Reduction of corporate tax rates
 Reduce top corporate tax rates by approximately 5%
- National tax: 30% to 25.5%
 After taking into account the deductibility of enterprise tax, the Proposed Reform reduces the corporate
tax burden from 40.69% to 35.64% (for the Tokyo Metropolitan Area)
 Additional tax rate reductions apply to small corporations
If enacted, it is expected that the effective date for the Proposed Reform will be for years beginning after
March 31, 2011.
(2) Increase the taxable base
1) Limit annually the use of net operating loss carry-forwards to 80% of taxable income (limitation will not
apply to small corporations, excluding small corporations owned by large corporations).
2) Increase the net operating loss carry-forward period from the current seven year period to a nine year
period.
3) Defer tax deductions by limiting the use of accelerated depreciation - current depreciation rate of 250%
(i.e. 250% declining balance method) will be reduced to 200%
4) Lower the limitation of bad debts allowance by 25% annually, with eventual abolishment of the
allowance by 2014 (small corporations and financial institutions will not be subject to this amendment)
5) Lower the limitation of deductible donation expense to 50% of the current level
6) Lower the current cap on R&D tax credit of 30% of corporation tax liability to 20%
7) Abolish special depreciation for certain qualified facilities (eg. facilities for promoting reform of energy
demand-and-supply structure)
If enacted, it is expected that the effective date for the Proposed Reform of 1), 4), 5) and 6) will be for years
beginning after March 31, 2011, for the Proposed Reform 3) and 7) will be for assets acquired after March
31, 2011. The Proposed Reform of 2) will be applicable to the loss incurred in the years ending after March
31, 2008 for years beginning after March 31, 2011.
(3) Inbound investment incentive for international foreign corporations
 A Qualified Corporation that will be engaged in the operational management or R&D activities and
newly established by an international foreign corporation will be allowed to claim 20% income
deduction over 5 years from the date when it is appointed as a qualified corporation pursuant to the
relevant law.
 Stock options issued by the international foreign corporation and granted to the employees of the
above Qualified Corporation will be treated as tax qualified stock option and income from the grant will
be deferred. The Proposed Reform will be applied to the stock options granted during three years from
the date when a hiring corporation is appointed as a Qualified Corporation pursuant to the relevant law.
PwC Observation: While generally the proposed reduction in tax rates is beneficial, corporate taxpayers
should consider the financial statement impact of such changes (eg. recognition of tax expense due to the
reversal of deferred tax assets).
Highlights of the Proposed Reform for consumption tax taxpayers

The current rule which allows full input credit for taxpayers where at least 95% of taxpayer revenue is
subject to consumption tax will only be applicable to an entity whose annual taxable sales for the period is
not more than 500 million yen. For other entities, an input credit will be allowed based on either the
percentage of taxable revenue method or the attributable method.
If enacted, it is expected that the change will be effective for taxable period beginning after March 31, 2012.

Change the “base period” rules so that a company is required to become a taxpayer in any year
immediately following the year in which the taxpayer has at least 10 million yen of taxable revenue during
the first 6 months of the year.
PricewaterhouseCoopers
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Japan Tax Update
Special Edition: December
2010
If enacted, it is expected that the change will be effective for the fiscal year beginning after September 30,
2012.
PwC Observation: The Proposed Reform is likely to increase the consumption tax liability and will have a
cash flow impact.
Highlights of the Proposed Reform for individual taxpayers



Extend tax breaks for dividends and capital gains taxes for another 2 years
Eliminate the earned income exclusion income for income in excess of 15 million yen/year from the
income tax for the calendar year of 2012.
Raise the maximum inheritance tax rate from 50% to 55% from the inheritance occurred after March 31,
2011.
PwC Observation: Because of the potential effective increase in effective tax rates for those with high earned
income, individual taxpayers may consider accelerating income from 2012 into 2011.
For more detailed information, please do not hesitate to contact your financial tax services
representative or any of the following members:
Zeirishi-Hojin PricewaterhouseCoopers
Financial Services
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
PricewaterhouseCoopers
Yoko Kawasaki
81-3-5251-2450
[email protected]
Jack Bird
81-3-5251-2577
[email protected]
Sachihiko Fujimoto
81-3-5251-2423
[email protected]
Akemi Kitou
81-3-5251-2461
[email protected]
Eiichi Sato
81-3-5251-2407
[email protected]
Jun Takashima
81-3-5251-2574
[email protected]
Yusuke Yamada
81-3-5251-2580
[email protected]
Yumiko Arai
81-3-5251-2475
[email protected]
Ken Leong
81-3-5251-2945
[email protected]
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