It may come to no surprise that Japan's tax policies for FY2021 are influenced by the COVID-19 pandemic, which had a severe social and economic impact. This year also marks the first tax reforms under the Suga Cabinet after the reign of Abe Shinzo ended last year.Other main keywords influencing the Japanese tax reforms this year where 'DX', the promotion of digital transformation and the climate change, the quest for carbon neutrality.

Concretely this results in

• tax reduction measures related to corporate taxation to support companies battling the negative economic effects of COVID-19 and
• progressive tax regimes to promote DX and carbon neutrality.

Corporate Taxation 

Introduction of digital transformation (DX) investment promotion tax incentive

Companies that submit a business adaption plan to the government with company-wide plans for the introduction of IT/digital solutions to develop new products or demand, or raise productivity or by new production or sales methods will be eligible for this scheme. It is meant to encourage companies to build an environment that supports development of company-wide IT/digital backbone in all aspects of their business operations and say goodbye to dated legacy systems.  The incentive is initially expected to last for two years.

The incentive includes a Tax credit of 3% and special depreciation of 30%, capped at total capital investment of ¥30 billion. EY provides a good explanation of this measure in their Tax Newsletter of February 2021. (Page 8)

Introduction of tax incentive to promote carbon neutrality investments

This temporary measure of 3 years, is meant to support businesses in their endeavors to reach a carbon neutral society by 2050. Companies that plan investments to introduce

1)    facilities for manufacturing products that will accelerate reaching the goal of carbon neutrality or

2)    facilities that will help the manufacturing process substantially to accelerate carbon neutrality or conserve energy

into a medium or long-term environmental adaptation plan and have it certified by METI, will be eligible for tax credits (10%/5% respectively) and special depreciation (50%). For more details in English, see also EY

Revisions to the R&D tax system in support of active R&D

Investments in R&D have been promoted over the past years, further encouragement is provided to maintain international competitiveness as the world is affect by the changes due to COVID-19. For SMEs tax credit rates remain the same at 12-17% and maximum credit can be heightened if increase rate exceeds 9.4% (was 8.%) (Details in English, EY page 2)

Revisions to the tax regime to encourage ways increases and investments

Here requirements for eligibility are lowered to 2% or more wage increases (was 3%) and that the mount of wages paid exceeds that of the previous fiscal year. A tax credit of 15% of the amount of wages paid to newly employment and education and training expenses are 1.2 times the previous year, a tax credit of 5% is added, bringing the total to 20%.

Special measure related to maximum deduction of net operating losses carried-forward

For companies to deal with the impact of COVID-19, this measure offers companies with certified business adaptation plans to make bold investments a maximum net-operating loss deduction of 100% for a maximum of five years will be in place. (EY Page 12)

Tax measure to encourage M&As remunerated with shares

Sellers that transfer shares they own and in exchange receive shares issued by the buyers will be able to defer the recognition of capital gains or losses arising from the transfers. For foreign entities, the measure is applicable only to Japanese permanent establishments (PE) of foreign entities that own the target company's shares.  (EY page 14)

Extension of investment promotion incentives for SMEs

A number of fiscal measure to support SMEs are extended in FY2021. These include:

• Extension of special measure for the reduction of the corporate tax rate of SMEs at 15% (regular 19%) by two years
• Measures to stimulate retail, service and agriculture/fishery/forestry businesses are extended by two years
• Extension of measure for reinforcement of managerial resources' facilities by two years.
• Extension of fiscal measures to promote in regional economy, with addition of fiscal support for investments in maintaining and reinforcing supply chains.  (MOF (J)

Revisions to the fiscal measures to promote increase of income of SMEs

The measure is extended for two years, and provides fiscal support when salaries are increased by more than 1.5% in a fiscal year, and provides tax relief of 15% of the salary increase in the previous year and if the increase is more than 2.5% and additional 10% can be added. (Capped at 20% of the corporate tax amount due) (MOF (J)

Tax incentive to assist SMEs with consolidation of their managerial resources

This measure is introduced to assist SMEs to deal with potential losses in share values in the case of mergers and acquisitions (M&A). It will be able to deduct the reserve amount from taxable income in the same fiscal year. (EY Page 16)

Tax administration

In this year a variety of measures is introduced to promote electronic procedures related to tax administration. These include:

• Abolishment of the requirement to have documents stamped with a registered corporate seals
  • Exceptions: Agreement on division of inheritance, real estate mortgage registration agreement, letter of guarantee concerning to tax payment
• Abolishment of the need to obtain prior approval to electronically preserve ledgers and documents related to national taxes;
• Amount of additional taxes due to underreported tax returns will be reduced by 5% if the underreported tax returns are filed in relation to electronic ledgers fulfilling the conditions applicable under the current rules.
• Digital tax payment procedures by smartphone applications will be allowed from 2022.

The EY tax Alert provides more information on these measures (from page 26)

Sources:

• Ministry of Finance (MOF), FY 2021 Tax Reform (March 2021)
• EY Tax Alert: 2021 Japan tax reform outline (February 2021)