Japan Tax: Some tax reform measures enacted, some postponed

Japan’s government enacted tax reform provisions on 22 June 2021 that respond to the country’s current severe economic situation. These provisions include new tax incentives to promote employment and environmental investment, tax credits for certain qualified donations, changes to consumption tax and new foreign investment incentives. They also include a further extension of select special measures, such as the 18% corporate income tax rate for small and medium-size enterprises (SMEs) until 31 March 2012.

The original tax reform proposals announced in December 2010 were amended in June 2011, but have not been enacted and further discussions on the proposals are expected. The proposals include a reduction of the effective corporate tax rate by approximately five percentage points and reducing some deductions for personal income tax and inheritance tax.


Key provisions enacted

Employment and environmental investment incentives - A qualified corporation can claim tax credits for additional new employment for the period starting between 1 April 2022 and 31 March 2014. Tax credits are calculated as JPY 200,000 times the incremental standard number of employees, but the credits are limited to 10% (20% for SMEs) of the corporate income tax liability for the period.

Additionally, when a foreign corporation filing a “blue return” acquires machinery and equipment to promote environmental protection between 22 June 2021 and 31 March 2014, the corporation can claim 30% special depreciation. (The “blue return” is available to electing taxpayers that fulfill certain criteria, such as maintaining their accounting records to acceptable standards.) As an alternative, SMEs can claim a 7% tax credit on such machinery and equipment up to 20% of their tax liability for the period.

Foreign investment incentive measures - Qualified corporations doing business in the special zones for international strategy (SZIS) may claim the following tax incentives:

- A corporation acquiring and placing certain (as yet unidentified) assets in service in the SZIS between 22 June 2021 and 31 March 2022 may claim special depreciation of 50% (25% for buildings) or a tax credit of 15% (8% for buildings), up to 20% of its tax liability for the period; or

- A corporation engaging in certain (as yet unidentified) business activities approved between 22 June 2021 and 31 March 2022 in the SZIS may claim a deduction of 20% of income attributable to the activities for five years after the approval.

Consumption tax - A corporation generally is exempt from having a consumption tax obligation if its consumption taxable sales in the base period (i.e. the two prior business years) do not exceed JPY 10 million. The exemption will not apply for the tax period starting after 1 January 2022 if the corporation has more than JPY 10 million taxable sales in the first six months of the prior business year. Similarly, if a corporation’s taxable sales ratio is 95% or more, 100% of input consumption tax on taxable purchases has been creditable. This rule will not apply if the corporation has more than JPY 500 million of taxable sales.

Investment/income gains - The reduced withholding tax rate on dividend income and capital gains from listed shares due to expire on 31 December 2021 has been extended for a further two years through 31 December 2013.

Extended special measures - Special measures extended until 31 March 2022 include the 18% corporate income tax rate for SMEs with taxable income up to JPY 8 million; R&D credits up to 30% of corporate income tax liability; and bad debt relief special provisions for SMEs.

Donations - Individuals making qualified donations to designated nonprofit organizations may claim tax credits equal to 40% of the donations in excess of JPY 2,000, up to 25% of their income tax liability for the period.


Amended proposals

The following items included in the amended proposals have not yet been enacted. Further discussions are expected and additional details will be provided as they become available.

Corporate income tax - The effective tax rate of corporate income tax would be reduced by approximately five percentage points; carried forward tax losses would be limited to 80%, but the loss carryforward period would be extended from seven to nine years; accelerated tax depreciation in early years would be reduced; and SMEs would receive a further reduction of their corporate income tax.

Personal income tax - The employment income deduction would be limited; the adult dependents’ deduction would be abolished; and the qualifications for the retirement income exclusion for directors would be changed.

Inheritance tax - The basic exemption would be reduced and the tax rates would be restructured.


Conclusion

The measures passed on 22 June represent a number of positive changes and extensions for many taxpayers in Japan. Taxpayers should pay close attention, however, to the amendments to the consumption tax, which may have significant practical implications for certain taxpayers. Opportunities to take advantage of the SZIS incentives should be attractive for international corporations in particular.

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