Japan’s ruling party released the 2016 Tax Reform outline on 16 December 2015. The Outline includes a further corporate tax rate reduction and introduction of a new transfer pricing documentation rule. A tax reform bill will be prepared based on this Outline. The bill will be submitted to the Diet (Japan’s legislative body) and enacted by the end of March 2016.
The main changes are summarized below:
Corporate tax rate reductions: The national corporate tax rate will 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 to 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. Further, 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%.
International taxation: A new documentation condition for certain multinational companies will be introduced, following the OECD’s Guidance on the TP Documentation and Country by Country Reporting (CbCR) as a part of the base erosion and profit shifting (BEPS) project. The new documentation requirement will apply to Japanese-based multinational companies (MNCs).
Under the new proposal, the Japanese-based MNCs must submit to the Japanese tax authority within one year from the end of a fiscal year, the ultimate parent company information on sales, current profit before tax, tax liabilities and others, by country, in accordance with CbCR, and a comprehensive international transaction report containing information on group organization and business activities for the group companies, pursuant to the Master File requirements.
In addition, the Japanese MNCs must prepare information on the computation of arm’s length prices for foreign related transactions, as specified in the Local File requirements, by the corporate income tax return filing due date. CbCR and Master File requirements apply for taxable years beginning on or after 1 April, 2016; while Local File requirements will be applicable for taxable years beginning on or after 1 April 2017.
