Japan

2023 Tax Reform

On 28 March 2023, the 2023 Tax Reform Act was approved by the Diet, and, on 31 March 2023, the 2023 Tax Reform Act, and related Enforcement Orders and Regulations, were promulgated. In principle, these are effective for corporate tax years beginning on or after 1 April 2023.

The 2023 Tax Reform Act provides for tax measures to grow the economy and distribute wealth fairly by promoting investment in markets, industries, and human resources. In response to changes in the international taxation environment as a result of the Organisation for Economic Co-operation and Development’s (OECD’s) introduction of a global minimum tax, as well as a need to reflect changes in the structure of the domestic economy brough on by the declining birth rate and aging population, the Tax Reform Act includes both changes to existing tax laws as well as the introduction of new provisions.

In order to fund increased defence spending, one major change to the domestic corporate tax rules is the introduction of a corporate income surtax of 4% to 4.5% for large enterprises (which will be imposed on tax payable over 5 million Japanese yen (JPY)), and which will be effective sometime after 2025.

On the international tax front, a key change is the introduction of the Income Inclusion Rule (IIR) as part of the OECD’s Global Minimum Tax (‘Pillar 2’). Effective for tax years beginning on or after 1 April 2024, the IIR will be applicable to Japanese headquartered multinational corporations, and to Japanese subsidiaries of foreign headquartered multinationals, where the worldwide gross revenue of the ultimate parent entity in two or more of the four fiscal years immediately preceding the fiscal year is 750 million euros (EUR) or more. Such corporations will be subject to the new Global Minimum Tax on the minimum taxable amount, and the new Global Minimum Local Corporate Tax on the resulting Global Minimum Corporate Tax amount, for each applicable fiscal year. A new reporting system for the IIR will also be introduced, as well as a Qualified Domestic Minimum Top-up Tax in the tax reform of 2024 or later.

To cope with the increased compliance burden for corporate taxpayers as a result of the introduction of Pillar 2, the 30% trigger rate for ’paper companies‘ or ’cash box companies‘ under the controlled foreign corporation (CFC) rules will be lowered to 27% for tax years of the Japanese parent company beginning on or after 1 April 2024.

Consumption tax

A new Qualified Invoice System (QIS) was introduced as part of Japan’s 2016 Tax Reform, which will be effective from 1 October 2023. Under the QIS, a consumption taxpayer (a ‘taxpayer’ who files consumption tax returns and pays or receives a refund of consumption tax) can in principle only take an input tax credit if such taxpayer receives a ‘qualified invoice’ from a seller that is registered as both (i) a consumption taxpayer and (ii) a qualified issuer (QII). Effectively, the new system will require sellers to include their QII number in invoices so that the purchaser receiving such invoice will be able to take the input credit for the consumption tax included in the invoice. The requirement is similar to that of a seller to include its VAT number on an invoice in the European context.

Businesses (other than exempt entities) will need to have filed an application with their tax office to become a QII no later than 30 September 2023 in order to be able to issue qualified invoices from 1 October 2023.