On 27 March 2019, Japan’s parliament approved the legislation for the government’s tax reform proposals for 2019. Some of the main measures are following:
Tax incentive:
- As from 1 April 2019, the tax credit rates will be revised to enhance incentives to increase R&D expenses, and the tax credit ceiling of a certain category of start-up companies will be raised from 25% to 40% of corporate tax; and
- The additional R&D expenditure ratio as compared to previous three years is increased from a 5% basis to 8% in determining the R&D tax credit amount, with a lower credit limit of 6% and an upper limit of 14% in the first two years and 10% from the third year (12% lower limit and 17% upper limit for SMEs).
CFC Rules:
As from 1 April 2020, the CFC rules will be amended to provide certain exclusions in relation to paper companies, which are CFCs that fail to meet substance or administration and control tests and are subject to full-inclusion and subject to tax rate below 30%. The new tax reform also proposed to amends the CFC rules by expanding the definition of a “cash box” entity, while narrowing the definition of a “paper company”, among other changes.
Restriction on interest deduction
- As from 1 April 2020, net interest payments will be subject to earnings stripping rules; however, interest payments taxable in Japan on the part of the recipient will be excluded from the scope of the earnings stripping rules. The ceiling for deductible interest payments will be reduced from 50% to 20% of adjusted income;
- The Bill also revises the scope of interest subject to the earnings stripping rules and the de minimis exceptions; and
- Dividends received which are not taxable will be excluded from adjusted income.
Transfer Pricing Rules:
As from 1 April 2020, the transfer pricing rules are to be amended in line with OECD guidelines (BEPS Action 8-10), which includes:
- A new definition of intangible assets subject to transfer pricing rules, meaning assets, other than physical assets or financial assets and investments, for which consideration would be paid for a transfer or lease of the assets if the transfer or lease was between independent parties under normal terms and conditions;
- The discounted cash flow recognized under the OECD Transfer Pricing Guideline is added as a new transfer pricing methodology;
- The Japanese tax authority will be allowed to make pricing adjustments where the results of transactions of hard-to-value intangibles are different from initial projections by more than 20%; and
- The current six-year statute of limitations for transfer pricing will be extended to seven years.
