April 1st is traditionally the start of the new business year in Japan. In 2015, this also means a number of significant changes in taxation in Japan, as the new tax policy of the Abe government comes into force.  Below we list the main changes.

Corporate Taxation

The main point of the new taxation policy is that corporate tax rates are lowered, while the taxation base is broadened to keep up tax revenues.

Since April 1, 2015 corporate tax is lowered to 23.9% from the current 25.5% and the standard tax rate for corporate enterprise tax per income levy is lowered from the current 7.2% to 6.0%. In 2016 both will be lowered further towards the goal to bring the effective corporate tax rate in the 20% range.

Note: effective rates for model large company, for SMEs lower rates apply

The special tax benefits for SMEs is extended for another 2 years, and the tax rate applicable to their annual income up to 8 million JPY will remain lower at 15% instead of 19%.

Revision of the net operating loss (NOL) carry forward system (Increased tax base)

The limit on net operating loss deductions by large companies under the carry-forward system for losses on blue-return filing is lowered, as an incentive to improve revenues.

The limit used to be 80% of the taxable income, but will be lowered to 65% for the coming two fiscal years, from April 2017 it will be lowered further to 50%. For SMEs however, the current limit of 100% of taxable income on NOL will remain in place.  Special arrangements for companies involved in reorganisation or rehabilitation procedures the applicable limited will be the amount equivalent to 100% of the taxable income.  For newly established corporations and specific purpose companies etc. as well the same applicable limit will exists.

The carry-forward period of loss on blue-return filing, los on disaster and consolidated loss will be extended from 9 to 10 years.  (The preservation period of books and documents pertaining to the period, will be extended to the same length of 10 years) 

Revision of dividends received deduction system

The system regarding the amounts of dividends that can be excluded from gross revenue, has been revised as well. With regard to shares of wholly-owned subsidiaries the system stays the same where the full amount of dividends received are excluded from the gross revenue.  For other ownership ratio categories the rules will be as listed below:

R&D Tax credits

The limit on total tax credits available for R&D expenses will remain the same at 30% of the corporate tax liability. The tax credit rate for SMEs will also remain the same at 12% (8-10% for larger companies).  Changes however concern the limit on tax credit for general R&D expenses which is lowered to 25% of the corporate tax liability (was: 30%). 

Tax credit for special R&D expenses is raised, if it concerns joint research with special R&D institutions or universities to 30% and if it concerns other R&D 20% (Was 12% for both categories). The limit on the tax credit available for special R&D expenses will be 5% of the corporate tax liability of each fiscal year, separate from the limit on the total tax credit available and the one available for SMEs.

Creation of tax system to strengthening companies’ local presence

In order to stimulate local economies, in line with the Local Revitalization Act, a number of new measures are introduced.

These include special tax credits for corporate tax for the acquisition of buildings in local areas, and measures to help local companies to improve and expand their headquarters and assist companies to relocate their headquarter functions from metropolitan areas to a local area.  (For plans approved until March 31, 2018)

The amount of special tax credits is limited to max. 20% of corporate tax liability.

Improvement of job development tax system

The tax credit system to promote regional employment and transfer of employment to the regions is providing higher tax credits to companies who do so.  If relocation plans are approved before March 31, 2018, the following tax credits are available.

The amount of special tax credits is limited to max. 30% of corporate tax liability.

International Taxation

Revision of foreign dividends exclusion system

This revision applies to dividends that a domestic company receives from its foreign subsidiary (In principle from April 1, 2016 onwards), which will be excluded from the foreign dividends exclusion system if they are wholly or partially included as deductible expenses according to the law of the country where the headquarters of the foreign subsidiary are located.  The measure is to prevent double taxation.

Requirements for reporting of financial account information of non-residents

To make automatic exchange of financial account information with other countries, with whom Japan has concluded tax treaties, banks will be required to submit financial account information of non-residents from 2017 onwards.  

Revision of special provisions on assessment of eligibility pertaining cross-border reorganizations

• If the tax burden of a foreign company cannot be calculated due to the short time after establishment, the corporate tax rate of the country where the company is headquartered is used.
• Tax burden rate used as a measure for determining where a foreign company is a specified foreign company with less tax burden, is changed to less than 20% (was 20% or less)
• These revisions will apply on mergers or reorganizations undertaken on or after April 1, 2015.

Revisions of controlled foreign company rules

 The following changes are implemented:

• Adjustment of the trigger tax rate to less than 20%
• Revision of exemption rules
• Revision of return filing requirements
• Treatment of instances where a specified foreign subsidiary receives dividends from its subsidiary
• Treatment of instances where domestic corporation receives divides from its specified foreign subsidiary

For more details in English see Ernst & Young Tax. Co., Japan tax Newsletter: 2015 Tax reform outline (2 February 2015)

Smooth implementation of transformation to Attributable Income Approach in international taxation principle

A number of further measures to support implementation of this approach introduced as part of the 2014 tax reforms is taken. For more details in English on this, see Ernst & Young Tax. Co., Japan tax Newsletter: 2015 Tax reform outline (2 February 2015)

Consumption taxation

The increase of consumption tax to 10%, which had been scheduled for October 2015, is postponed will be increased instead on April 1, 2017. This after the major negative economic effects of the consumption tax increase to 8% last year. The Japanese government is currently deliberating diversification of consumption tax, with lower taxes for items such as food.

Consumption tax for cross-border service provision

• Revision of place of supply criteria for provision of digital services, such as books, music and adverts from location of office of provider to the person receiving the service.  (From October 2015)
• The scope of the affected transaction is still under discussion, but does not include digital services accompanying the transfer of assets or use of telecommunication lines.
• Implementation of a reverse charge mechanism for B2B transactions
• Method of taxation for B2C transactions and measures to secure appropriate taxation, where providers of B2C digital services will have to pay consumption tax
• Establishment of an overseas business registration system
• Tax exemption for SMEs
• If taxable sales during the base period do not exceed 10 million yen, the Japanese consumption tax law provides an exemption from consumption tax obligations under certain circumstances
• Measures will be in effect from October 1, 2015

Consumption tax for overseas entertainment and sports providers

The reverse charge mechanism for consumption tax will come into effect from April 1, 2016. Tax payment obligation will shift from recipient to the provider.

Individual taxation

New exit tax (capital gains taxation when moving residence out of Japan)

This special provision is meant to prevent tax evasion by moving to another country and is a capital gains tax for unrealized capital gains of stocks and assets at the time of departure from Japan.

Main criteria:

• Total of taxable financial assets is more than ¥100 million and
• Residence in Japan for a total period of more than 5 years during the 10 years prior to departure.

 For more details in English on this, see Ernst & Young Tax. Co., Japan tax Newsletter: 2015 Tax reform outline (2 February 2015)

Automobile taxation

Lightweight cars were until now very popular due to their low costs in taxation.  Lightweight car owners until now paid ¥7400 annually, but this amount is increased to ¥10800 a year.  The increase is meant to cover the gap in tax-revenue due to the abolishment of the Automobile Acquisition Tax (jidousha shotokuzei).

Standards for tax-exemptions for fuel-efficient cars will be more stringent, and for most cars that meet current standards the Car Weight Tax (jidousha juuryouzei) will increase, signifying an end to the era that almost all cars were designated as ‘Eco-cars’.  A popular car, such as the Daihatsu Tanto, tall-wagon type light car, tax will increase by ¥15.800 per year.

Most hybrid cars will continue to receive tax reductions, while plug-in hybrids, green diesel cars, electric cars and fuel-cell cars will continue to be tax-exempt.

Promotion of asset-transfers to younger generations (Gift tax)

With the majority of assets in Japan owned by elder generations, the government strives to promote the transfer of assets to younger generations in order to stimulate consumption and the larger economy.  The policy that exempts gifts by parents and grandparents for education purposes up to With the majority of assets in Japan owned by elder generations, the government strives to promote the transfer of assets to younger generations in order to stimulate consumption and the larger economy.  The policy that exempts gifts by parents and grandparents for education purposes up to 15 mln is continued and broadened to include funds for childrearing as well.  Until March 2019, transfers to children or grandchildren older than 20 up to ¥10 mln will be exempt from taxation.

Asset-transfers are also stimulate through increases in inheritance tax, which were implemented in January 2015.

Home-town (furusato) tax payments

To stimulate local economies, the Japanese government is extending the range of tax deductions when donations are made to local municipalities.  If an individual donates more than ¥2000, about 20% (was 10%) of the inhabitants tax (juminzei) can be deducted.  Also procedures with regards to filing for tax deductions with regards to these donations are simplified, making it no longer necessary to file for it, when handing in the final tax statement for the following year.  

Sources:

• Ernst & Young Tax Co., 2015 Tax Reform outline (2 February 2015)
• Ministry of Finance, Heisei 27 nendo zeisei kaisei (2015 Tax system reform (March 2015) (In Japanese)
• Ministry of Finance, Heisei 27 nendo zeisei kaisei no taikou (Outline of 2015 Tax system reform) (January 2015)
• Nikkei Online, Fueru zeikin heru zeikin 4 gatsu kara kou kawatta  (Increasing taxes, decreasing taxes, this is how it changes in April) (march 31, 2015) (In Japanese)