The parliament (National Diet) on 29 March 2016 passed the tax reform for 2016. The main changes are set out below:
Corporate income tax: The main corporation tax rate is to be reduced to 23.4% from 23.9% for taxable years beginning on or after 1 April 2016. A further reduction to 23.2% will be applicable for taxable years beginning on or after 1 April 2018. The local enterprise tax rate applicable to income base will be reduced to 3.6% from 6.0% for taxable years beginning on or after 1 April 2016. In addition, the combined national and local effective corporate tax rate will be reduced to 29.97% and 29.74% for taxable years beginning on or after 1 April 2016 and 1 April 2018, respectively from the current 32.11%.
Amendments were also made to the following transfer pricing documentation rules:
Master file: Introduced a requirement for a master file for multinational group with consolidated group revenue of JPY 100 billion or more for the preceding fiscal year. A Japanese company which is the constituent entity of a multinational group and a permanent establishment (PE) of non-Japanese companies should submit the master file for fiscal years beginning on or after 1 April 2016. Master file will contain information regarding description of the group’s capital structure, transfer pricing policy and significant intangible assets utilized.
Reporting structure: In line with the Action 13 of OECD Base Erosion and Profit Shifting (BEPS) project.
Local file: A requirement for a local file has introduced in line with the OECD Base Erosion and Profit Shifting (BEPS) project from 1 April 2017. A Japanese company and a PE of a non-Japanese company which have conducted transactions with foreign related parties must prepare the local file on a contemporaneous basis. A local file will contain specific transfer pricing information for each relevant country of operation.
BEPS related compliance: Country-by-Country (CbC) reporting requirement for domestic entities with consolidated group revenue of JPY 100 billion or more for the preceding fiscal year. A Japanese company which is the ultimate parent of a multinational group and companies not submitting in a country with a tax treaty with Japan must submit a CbC reporting for fiscal years beginning on or after 1 April 2016.
Parent company: The Country-by-Country (CbC) report must be submitted by a company resident in Japan that is the parent company of a corporate group. A parent company is a company that is not a subsidiary of any other company in Japan.
Group definition: The country by country reporting requirement applies where the consolidated group revenue in the preceding year exceeded JPY 100 billion.
Profits and tax paid: The report must cover group revenue, distinguishing between related and unrelated parties; accounting results before corporate income tax (or similar taxes); and corporate tax (or similar taxes) paid or accrued, including withholding tax.
Employees: The average number of employees in each entity must be reported.
Assets: Tangible assets and real estate interests.
Timing: The CbC report must be submitted within twelve months after the end of the tax year.
Penalty for non-compliance: The tax reform also implements penalties for a failure to file the CbC report by the due date. The exact nature of these penalties and to whom they apply will be clarified in a later Order or Directive.
Further amendments were made for the following items:
(i) the deductible amount of tax losses;
(ii) depreciation methods; and
(iii) deductible directors’ compensation.
