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Agenda
2
Section one• Tax reform – basic plan
Section two• 2015 tax reform proposal highlights
- Corporate income tax - International tax- Consumption tax- Individual tax
Section three• Update on tax treaties
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2015 tax reform fundamental principles
• Overcome deflation and regenerate economy• Energise the local economy• Delay the consumption tax rate hike• Enact anti-abuse rules related to international taxation (i.e. BEPS)• Enact legislation to help recover from the Tohoku Earthquake
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2015 2016 2017 2018
Reduce corporate tax rate from 34.62%
Expand tax base • NOL limitations
Current: 80% of current income
• Limit dividend exclusion rules
• Enhance size-based enterprise tax Current: 2/8 of enterprise tax
• Special taxation measures
Corporate tax reform
32.11%
(▲ 2.51%)
31.33%
(▲3.29%)
less than 30%?
65% of current year income
50% of current year income
Reduce exclusion ratio
3/8 of total 4/8 of total
Revisit from scratch
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Comparison of corporate effective tax rates
Current headline rates for countries other than Japan as of March 2014 except for the UK (April 2015). Japan rates are for Tokyo headquartered corporations.
6
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%US France Germany UK China Korea Singapore
40.69% (-2011)40.75%
35.64%33.33%
38.36%(-2008)
30.00%(-2008)21.00%(-2014)
20.00%
33.00%(-2007)
25.00% 24.20% 20.00%(-2007)
17.00%
(2010-)
29.59%
Global changes in corporate effective tax rates
15.83%31.91%
21.00%33.33% 21.00%
22.00% 17.00%
38.01% (2012-)
23.71%
11.93%
22.47%
33.10%33.10%
5.75%
13.76%
2.20%
Japan2014
Japan 2015
10.63%Target rateNew rate
National taxes
Local taxes
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Comparison of corporate effective tax rates
Current headline rates for countries other than Japan as of March 2014 except for the UK (April 2015). Japan rates are for Tokyo headquartered corporations.
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45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%US France Germany UK China Korea Singapore
40.75%
35.64%33.33%
20.00%
25.00% 24.20%
17.00%
29.59%
Current corporate effective tax rates
15.83%31.91%
21.00%33.33% 21.00%
22.00% 17.00%
23.71%
11.93%
22.47%
33.10%33.10%
5.75%
13.76%
2.20%
Japan2014
Japan 2015
10.63%Target rateNew rate
National taxes
Local taxes
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Corporate tax reform
Government is signalling future tax reform including:• Expand size-based enterprise tax• Change depreciation schedules• Change SME taxation
- ‘SMEs’, as defined, have a number of tax breaks compared to non-SMEs.
• Revisit special taxation measures• Change tax status of public interest corporations and cooperative
kumiais
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Previous New
Fiscal years commencing between 1 April 2015 and 31
March 2016
Fiscal years commencing on or after 1 April 2016
National taxCorporate tax 25.50% 23.90%Local corporation tax (Corporate tax amount ×4.4%) 1.122% 1.0516 %
Local taxEnterprise tax (applicable to companies with paid-in capital exceeding JPY100 million)
- Income levy
JPY4 million or less 2.20% 1.60% 0.90%More than JPY4 million to JPY8 million 3.20% 2.30% 1.40%
More than JPY8 million 4.30% 3.10% 1.90%- Value added levy 0.48% 0.72% 0.96%- Capital levy 0.20% 0.30% 0.40%Local corporate special tax 67.40% 93.50% 152.60%
For large corporation with paid-in capital exceeding JPY100 million (standard rate):
Corporate income taxReduction in statutory tax rates
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For large corporation with paid-in capital exceeding JPY100 million headquarteredin Tokyo.
Corporate rate reduction
April 2013 April 2014 April 2015
Corporate tax reduced from 30% to 25.5% for fiscal years beginning on or after 1 April 2012
Effective tax rate for March year ends
38.01% 35.64% 33.10%
April 2015April 2014
Plus
Equals
10% tax uplift (25.5% x 10%)
Effective tax rate for December year ends
38.01% 35.64%
January 2015January 2013
New corporation surtax
April 2016
32.34%
33.10%
January 2016
April 2016
40.69%
January 2017
April 2017
32.34%
Corporate tax reduced from 25.5% to 23.9% for fiscal years
beginning on or after 1 April 2015
Corporate income taxReduction in effective corporate tax rate
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Old NewFiscal years beginning
between 1 April 2015 and 31 March 2017
Fiscal years beginning on or after
1 April 2017
Percentage of current year income that may be offset by tax losses
Tax loss carry forward period
80%
9 years
65%
9 years
50%
10 years¹
1. Applicable to tax losses incurred in fiscal years beginning on or after 1 April 2017.
2. Newly established corporations will have seven years from establishment date in which full deduction is allowed, unless listed on a stock exchange.
Corporate income taxLimitation on utilisation of carried forward tax losses
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Current ProposalType of investment
Ownership % Exclusion % Type of investment
Ownership % Exclusion %
Wholly owned domestic subsidiary
100% 100% Wholly owned subsidiary 100% 100%
Affiliated domesticcorporation
25% or more100% lessallocable interest
Affiliated corporation More than 1/3
100% less allocable interest
Other domestic corporation
Less than 25%
50% less allocable interest
Other domestic corporation
More than 5% but less than 1/3
50%
Portfolio investment 5% or less
20%(40% for insurance companies)
Corporate income taxReduction in dividend income exclusion
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Special taxation measures should be reviewed and limited to ‘necessary’ tax incentives.
1. Tax incentives which will be allowed to expire
• Investment incentive for increased investment in machinery
• Taxation of an accredited corporation engaged in R&D
• Reduced real estate registration tax upon a corporate bunkatsu (de-merger)
2. Tax incentives to be narrowed
• Rollover relief for newly acquired qualified assets
• Investment incentive granted to SMEs which acquire facilities and equipment for the improvement of operational efficiency
3. Certain high priority incentives to be enhanced
• R&D tax credit
• Reduced corporate tax rate applicable to SMEs (2 year extension)
Corporate income taxChanges to special taxation measures
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Corporate income taxChanges to R&D tax credit
Amendment
High level typeR&D costs over 10% of the sales x creditable rate*
Increased typeIncreased amount of R&D costs x rate of increase (5-30%)
Elect
* (R&D ratio – 10%) X 0.2
Open innovation type tax creditSpecial R&D costs x 20% or 30%**
**Joint R&D with university or public research institution: 30%Joint R&D between corporations: 20%
Note – abolishment of the one year carry over rule
+ Significant increase of creditable rate (currently at 12%)
Creditable limit
10% of corporate tax amount
Total amount tax creditGross R&D costs X 8% to 10%
Note – abolishment of the one year carry over rule
12% of the gross R&D for SME
5% of corporate tax amount
25% of corporate tax amount
A combined credit limit of 30%
Creditable limit
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Corporate income taxAmendments to tax credit for salary growth
Tax credit = Salary payments in current fiscal year less salary payments in Base Year x 10%[limited to 10% of corporate tax liability (20% for SMEs]
Condition 1 Total salary payment: equal to or greater than ‘Base Year’ multiplied by specified ratio
Condition 2 Total salary payment: equal to or greater than prior fiscal year
Condition 3 Average salary payment: greater than prior fiscal year
ProposalLarge companies
SMEs
Current
3%increase
5%increase
5%increase
2%increase
31 March 201531 March 2016
31 March 201731 March 2018
3%increase2%
increase
31 March 201531 March 2016
31 March 201731 March 2018
3%increase
5%increase
5%increase
2%increase
31 March 201531 March 2016
31 March 201731 March 2018
4%increase
3%increase
3%increase
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Corporate income taxNew incentive to encourage transfer to local ‘hubs’Local hubs tax incentives includes (i) special depreciation or tax credit; or (ii) tax credit for increasing headcounts.
Tokyo 23 wardsLarge cities
Local hub
Employee
Local hub
Employee
Newly hired
Local hub
Employee
Newly hired
Transferredfrom Tokyo
Local hub
Employee
Tokyo HQ
Employee
Expansion of local hub Transfer from areas such as Tokyo to local hubs
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International taxEliminate dividend income exclusion for ‘hybrid’ financial instruments
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Based upon the recommendation of BEPS Action Plan 2, the dividend received by a Japanese corporation from a foreign affiliate would be excluded from the dividend exclusion regime.
Japanese parent Foreign affiliate
Dividend exclusion
Equity
Dividend 60
Retainedearnings
32Corporate tax
8
Deductible dividend
Taxable income 40
Dividend 60
Deductibledividend
57
Non-deductibleDividend*
3
Dividend
No double taxation
Corporate tax rate at 30%**Tax cost in Japan is 0.9
(= 3 X 30%)
* Exclude from income tax calculation as expenses for receiving the dividend.** For simplicity, the corporate tax rate is 30% in the current case.
Corporate tax rate at 20%, withholding tax at 0%, domestic tax cost is 8
(= 40 X 20%)
Total tax cost is 8.9
Ordinary dividend
Foreign affiliate
Dividend 60
Retainedearnings
20Corporate tax
20
Corporate tax rate at 20%, withholding tax at 0%,
domestic tax cost is 20 (= 100 X 20%)
Total tax cost is 20.9
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International taxChanges to the controlled foreign corporation tax regime
• The changes proposed by the 2015 Tax Reform Proposal under the controlled foreign corporation (CFC) tax regime are as follows:
1. The trigger rate changed from ‘20% or less’ to ‘less than 20%’
2. Expand scope of holding companies
3. Relaxation of tax return filing requirements; and
4. Changes related to the amounts subject to tax related to tax deductible dividends from foreign corporation.
• The proposed changes in the trigger rate, the treatment of foreign holding companies, and the relaxation in the filing requirements will apply for foreign affiliates whose tax years begin on or after 1 April 2015.
• The proposed changes related to the definition (i.e. taxable income – including deductible dividends) will have an effective date of 1 April 2016 (with some grandfathering).
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International taxChanges to the controlled foreign corporation tax regime
Resident/domesticcompany
Resident/domesticcompany
Specially related party (corporation/Individual)
Familyshareholdersgroup
Resident/ domestic company hold more than 50% (directly or indirectly)
Foreign affiliates
Foreign affiliates located in a jurisdiction with effective tax rate of 20% or less
Scope of taxable person(i) Resident or domestic corporate shareholder that owns, directly or indirectly, 10% or more equity interest (ii) Resident or domestic corporate shareholder as part of a family shareholder group that owns, directly or indirectly 10% or more equity interest
Specified foreign subsidiaries
Outside of CFC scope
Active business exemption
(corresponding to change in business form)
All conditions must be met1. Business Purpose TestThe main business should not be holding equity securities(excluding regional headquarter company whose main business is to hold the shares in the controlled company
Reform of business test for regional headquarter company, controlled corporation, holding corporation
Reform
Change the triggering tax rate from ‘20% or less’ to ‘less than 20%’
Reform2. Substance TestA place necessary to conduct its main business in the country where its head office is located
3. Admin & Control TestManages and controls its main business in the country where its head or main office is located
4. Local Country Test (for those industries other than 7 types referred to below)
Conducts its business mainly in the country where its head or main business is located
Unrelated Party Test (7 types of industry including wholesale)The corporation would be considered to conduct its business mainly with third parties if its conducts business with parties other than related party (capital relationship of more than 50%) (exclude transaction between a regional headquarter company, with wholesale as its main business, and its controlled subsidiaries)
ReformTransactions between regional headquarter company (with wholesale business as its main business) and its controlled Japanese subsidiary are considered to be with a related party
Aggregate income of sub
Fail to meet
Exempt
With investment income
No investment income
Aggregate investment income
No income aggregated
ReformRelaxation in the filing requirements
Meet all conditions
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International taxIntroduction of authorised OECD approachAOA Principles• Align Japanese domestic rules with 2010 version of OECD Model Tax Convention, which
attributes income to a PE using the ‘functionally separate approach’.
• Effect of change is that income attributable to a PE will be calculated based on functional and factual analysis of the PE by (i) allocating assets, risks and capital to the PE and (ii) recognising intra-entity dealings as if the PE were a separate enterprise.
• Definition of domestic source income will change to include income attributable to a PE, while income of the foreign entity not attributable to the PE will be excluded.
Current AOA
Principle Entire method Attribution method
Taxable domestic source income
All domestic source income of a foreign corporation with a PE is subject to Japanese corporate tax
1. Business (attributable) income of a PE2. Non-attributable income will be treated in
the same way as current taxation of a foreign corporation without a PE in Japan
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2015 Tax Reform Proposal
• It will be clarified that interest received by a foreign corporation without Japanese branch related to accounts receivable for goods or services outstanding for less than 6 months will not be subject to corporation tax in Japan.
• Any Japan real estate owned by the head office of a foreign company with a PE in Japan shall be considered to have been transferred to the Japanese PE at the book value of the asset in the hands of the head office.
• In calculating the foreign tax credit for a Japanese company, rules will be issued to clarify the amount of foreign source income attributable to a foreign branch. Further, the amount of foreign taxes attributable to the foreign branches will be in a separate ‘basket’ for foreign tax credit calculation purposes.
International taxChanges to the ‘Attribution of Income’ method for a permanent establishment
Attribution Method (Standard)(attributable income of a PE)
Japan source
business income
Offshore Corporation (Headquarter)
OffshoreJapan
Third Country
Withholdableincome from
Third Country
Japan withholdable income not
attributable to Japan Branch
(Note 1, 2)
Japan Branch(PE)
Inter-company transaction recognised
Attributable to Japan Branch Attributable to
headquarter
Foreign tax credit available to
Japan Branch
Subject to filing
Subject to filing
Attributable to Japan Branch
Note 1 Headquarter invested in Japan directly (not through Japan Branch)Note 2 In general, withholding tax would be final tax (i.e., no further tax).
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Consumption taxPostponement of increase in tax rate
• Increase of consumption tax rate from 8% to 10% will be postponed from 1 October 2015 to 1 April 2017.
• A multiple rate system will be introduced when the consumption tax rate is 10% and this system will provide lower consumption tax rates to necessities.
Consumption tax rate
April 2014 April 2017
April 2017
Currently 8%
April 2014
Increase to 10% beginning
1 April 2017
5% before 1 April 2014
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Consumption tax Cross border service transactions
Cross border electronic services such as download of e-books/music will be subject to consumption tax in Japan from 1 October 2015.
OffshoreOnshore
Service Provider A
Consumer
Service Provider B
Download e-books/ musicSubject to consumption tax
Download e-books/musicCurrently no consumption tax is imposed
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Consumption taxCross border services
Scope of cross border electronic services
Definition of electronic services• Services provided via electronic telecommunication lines• Includes provision of copyrighted products and licensing of
copyrighted products via electronic telecommunication lines• Excludes services to mediate other’s communications through
telecommunications facilities such as telephone and telegraph• Excludes notifying the result of other services and services
accompanying other services
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Consumption tax Cross border services
• Service Provider A will collect consumption tax from Consumer. Service Provider A will file consumption tax return with the tax office and pay the tax.
• If business purchases the services, no input consumption tax credit is available, unless Service Provider A is a registered foreign service provider.
• The registration of foreign service provider will start from 1 July 2015.
Electronic services to consumers (B2C)
OffshoreOnshore
Service Provider A
Consumer(or business)
Electronic service
Tax Office
Tax filing and payment
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Electronic services to business (B2B) Reverse charge mechanism
OffshoreOnshore
Service Provider ACompany B
Tax filing and payment
Input tax credit
Tax Office
Consumption tax Cross border services
• Service Provider A will not collect consumption tax. Company B will report the consumption tax and pay the tax. Company B may claim input consumption tax credit on the purchase. (Reverse Charge Mechanism)
• Service Provider A should notify Company B that the transaction is subject to the reverse charge.
• If the taxable sales ratio of Company B is 95% or more, no reporting is required for the time being.
• Electronic service will be B2B if it is clear from the nature or conditions of the services that the recipient is a business.
Electronic service
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For provision of services such as performing arts and sports attractions in Japan by foreign entertainment providers, the Japanese sponsor will be subject to Japanese consumption tax via the reverse charge system from 1 October 2016.
Consumption tax Performing arts and sports attractions by foreign entertainment providers
Foreignentertainment
provider
Domestic sponsor
Receives revenue, net of consumption tax, from domestic business operator for provision of performing arts and sports attractions in Japan
Subject to consumption tax under the reverse charge system
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Individual tax – exit tax
• The 2015 Tax Reform Proposals introduced a new exit tax for certain individuals leaving Japan.
• At the time of the exit, the individual will be subject to tax on gains on securities and derivative transactions as if the individual sold or settled the transactions at fair market value.
• The new rule will be applicable to exits and donations and inheritances of property made by a Japanese residents on or after 1 July 2015.
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Individual tax – exit tax (cont’d)
Proposed Rules
Taxpayer The resident would be subject to this tax if both of the following conditions are met:1. Value of assets subject to taxation at the time of the exit is JPY100 million or more; and2. Within 10 years of exit, the individual has been a Japanese resident for more than 5 years. For foreign nationals, the five out the last ten years ‘clock’ does not start until July 1, 2015. Time living in Japan under a visa status under ‘Table 1’ of the Immigration Control Law is not included (e.g. specialists in the humanities or international services, intra-company transferee, temporary visitor, etc.)
Assets subject to exit taxation
Securities as defined in the individual tax law, ownership of tokumei kumiai contracts and unsettled derivative transactions, credit transactions and hedging transactions of stock risks trading
Filing requirements for tax report
By the due date of the final tax return to be filed by a registered agent of the taxpayer (valuation date is the exit date); ORIn a ‘short period’ tax return which is due upon exit (if no tax agent is appointed) (valuation date is 3 months prior to the expected exit date)
Rescission of taxation by return to Japan within 5 years
If the taxpayer returns to Japan within 5 years of exit and retains assets continuously from the date of exit, taxation of such assets will be cancelled upon filing by the taxpayer within 4 months of the return date.
Transfer by donation or inheritance to a non-resident
Donor is deemed to sell or settle the derivative or transfer the securities on the date of transfer for purposes of the tax return filing.
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1. Japan-Oman Tax Treaty
2. Japan-UK Tax Treaty
Dividend Interest Royalties
New Convention 5% (shareholding of 10%)*10% (in all other cases)
10%Exemption (governmental or financial institution)
10%
Dividend Interest Royalties
Amended Convention 0% (shareholding of 10%)*10% (in all other cases)
Exempt in principle Out of scope
*If a dividend is tax deductible by a payer company, a 10% tax rate is applied.
Update on tax treaties
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3. Japan-Sweden Tax Treaty
Dividend Interest Royalties
Amended convention 0% (shareholding of10%)*10% (others)
Exempt in principle 0%
*If a dividend is tax deductible by a payer company, a 10% tax rate is applied.
Dividend Interest Royalties
New convention 5% (shareholding of 10%)10% (others)
10%Exemption (governmental or financial institution)
10%
4. Japan-UAE Tax Treaty
Update on tax treaties (cont’d)
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5. Japan-US Tax Treaty*
Dividend Interest Royalties
Protocol 0% (shareholding of at least 50%)**
Nil -
*Introduction of arbitration procedures.**Not applicable if a dividend is tax deductible by a payer company.
Update on tax treaties (cont’d)
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Contact us
Jack Bird
Partner, PwC Japan
+ 81 3 5251-2577
Yoko Kawasaki
Partner, PwC Japan
+ 81 3 5251-2450
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Thank you.
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