On 28 March 2023, Japan enacted its tax reform bill 2023 shortly after it passed in the Japanese Diet. The bill incorporated laws to implement the international tax reform in alignment with the OECD BEPS 2.0 Pillar Two initiative, based on the model rules established by the OECD. The income inclusion rule (IIR) will apply to fiscal years starting on or after 1 April 2024, while other amendments apply to fiscal years starting on or after 1 April 2023, and have been integrated into Japan’s Corporate Income Tax Law. However, the application of the IIR in Japan is consistent with the Model Rules established by the OECD. This means that if an MNE Group has a Constituent Entity, which is the Ultimate Parent Entity located in Japan, that owns an Ownership Interest (directly or indirectly) in a Low-Taxed Constituent Entity during the Fiscal Year, then the Ultimate Parent Entity must pay a tax equivalent to its share of the Top-Up Tax of that Low-Taxed Constituent Entity for the same Fiscal Year.
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