Japan

DTA between Japan and Slovenia will enter into Force

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The Japanese Ministry of Finance on 26 July 2017 issued a press release announcing that the double taxation agreement (DTA) between Japan and Slovenia, signed on 10 September 2016, will enter into force on 23 August 2017.

The Treaty contains following treaty-based recommendations from the BEPS project:

  • Action 2 (neutralizing the effects of hybrid mismatch arrangements);
  • Action 6 (preventing the granting of treaty benefits inappropriate circumstances),
  • Action 7 (preventing the artificial avoidance of permanent establishment status); and
  • Action 14 (making dispute resolution mechanisms more effective).

In addition, its preamble clarifies that tax treaty is not intended to be used to generate double non-taxation or reduced taxation through tax evasion and avoidance and in cases where a person other than an individual is resident in both Japan and Slovenia, both competent authorities shall endeavour to determine by mutual agreement the Contracting State of which the person shall be deemed to be a resident. Furthermore, the Treaty contains a PPT.

On the PE front, the Treaty contains an anti-fragmentation rule and the new definition of agency PE. Moreover, the Treaty enables taxpayers to present a case for mutual agreement procedure to the competent authorities of either Contracting State and any unresolved issues arising from the case shall be submitted to arbitration if the person so requests.

Japan and Slovenia also have signed the MLI. Given that the treaty already incorporated the treaty-related BEPS minimum standards, it can be expected that this treaty will not be listed as a covered tax agreement and thus will not likely be further modified by the MLI.

IMF report comments on economic position of Japan

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The IMF issued a report on Japan’s economic position on 31 July 2017 following the conclusion of discussions under Article IV of the IMF’s articles of association.

The report notes that Japan’s economy is growing above potential with positive private consumption growth and stronger private investment. There are however labor shortages, weak wage growth and persistently low inflation. The IMF expects the growth to continue through 2017 but to fall back in 2018 if the fiscal stimulus support decreases as currently planned.

The IMF directors consider that the current favorable environment provides an opportunity to go ahead with a comprehensive reform package to sustain growth, raise inflation and deal with the medium term challenges including fiscal consolidation and increasing potential growth.

A selected issues paper published at the same time as the report looks at tax policy challenges of an aging and declining population. This notes that the consumption tax should remain the main part of revenue reform but that the timing of rate increases is important. Other potential tax measures should also be examined.

Consumption tax

The consumption tax is an important policy owing to the size of the public debt and the need for more health and social security spending for the ageing population. Although expenditure reform is also required Japan will need additional revenue. The consumption tax rate is currently low relative to other industrialized countries and there is therefore room for raising the tax rate. Also the efficiency of collection of the consumption tax is high so more revenue can be raised with low collection costs. Raising the consumption tax rate is likely to be less detrimental to economic growth than other tax options. A gradual increase each year would reduce any volatility of the impact on growth. The IMF is therefore proposing gradual increases to the consumption tax as part of a broader fiscal adjustment package.

Other potential tax measures

Other taxes such as a tighter personal income tax, property tax, inheritance tax or asset and wealth tax could also be examined to supplement the revenue gains that can be earned from the consumption tax increase.

Personal income tax

Tightening the personal income tax would contribute to revenue growth. The top rate of personal income tax is currently one of the highest in the OECD but reforms could focus on addressing inequality and eliminating disincentives to work. The low collection level of the tax indicates that there are a large number of deductions and these enable the higher earners to obtain benefits. The deductions could be replaced with more progressive measures such as targeted tax credits.

This could be linked to other reforms such as eliminating disincentives to full-time or regular work resulting from the operation of the spousal tax deduction. Exemptions for pension income could be reduced and targeted tax credits for elderly workers could increase incentives for them to remain in the labor market.

Property tax

In Japan only 30% of local tax revenue is raised from recurrent property tax, compared with 100% in the UK and Australia, 90% in Canada and 75% in the US. Raising property taxes would provide a more stable revenue base for local governments and reduce the level of transfers from the center. This could encourage growth and raise revenue as property tax is the most efficient tax.

Asset or wealth tax

Only a few countries currently use wealth taxes and one important motivation for them has been as a temporary measure in a broader fiscal consolidation. Countries that scrapped their wealth taxes cited high administrative costs compared to revenue collected and problems of capital flight as reasons for its discontinuance. Generally a wealth tax is best structured with very few exemptions, a high threshold of liability and a flat marginal rate set at a low level.

 

Japan: DTA with Slovenia will enter into force on 23 August 2017

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The Japanese Ministry of Finance on 26 July 2017 issued a press release announcing that the double taxation agreement (DTA) between Japan and Slovenia, signed on 10 September 2016, will enter into force on 23 August 2017.

Japan: amendments to CFC rules in 2017 tax reform

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The 2017 tax reform bills were passed by the 193rd ordinary session of the Japanese National Diet on 27 March 2017. Accordingly, the Japanese regulations on controlled foreign companies (CFC) have been fundamentally revised, taking into account the recommendations of Action 3 of the BEPS Final Reports in October 2015. Compared to the previous CFC rules, which adopted an entity approach with a trigger rate to determine whether a foreign subsidiary is to be treated as CFC, the amended new CFC regulations adopt an income-oriented approach by applying the “trigger rate” test In order to assess whether the foreign corporation should be treated as a CFC.

Current CFC Rules:

  • Income earned by a foreign related corporation (FRC) which satisfies the Economic Activity Tests will not be subject to CFC rules regardless of the corporate tax rate (passive income may be subject to CFC rules when the corporate tax rate is less than 20%);
  • Income earned by an FRC which does not satisfy the Economic Activity Tests and which is subject to a corporate tax rate of less than 20% will be subject to the CFC rules on an entity level basis; and
  • Income earned by a FRC which is a Paper Company, a Cash Box or a Black List Company and which is subject to a corporate tax rate of less than 30% will be subject to the CFC rules on an entity level basis.

According to the new CFC rules, the de minimis exemption rule for passive income is also reviewed.

Japan issues guidance concerning customs valuation opinion

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Japan’s customs bureau has recently issued guidance “customs valuation opinion” concerning how retroactive transfer price adjustments are to be addressed from a customs valuation perspective. The customs agency will consider adjustments as part of the customs value, whether the adjustments were upward or downward.

The customs authority also proposed a regime that would allow customs declarations to be filed from any customs area, provided that the importer or exporter is certified as an Authorized Economic Operator. The changes are expected to take effect in October 2017.

Japan: DTA with Lithuania signed

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The Japanese Ministry of Finance on 14 July 2017 issued a press release announcing that the Government of Japan and the Government of the Republic of Lithuania have signed a Double Taxation Agreement (DTA). The agreement provides for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. This Convention is the first tax convention to be concluded between Japan and the Republic of Lithuania in the light of an increasingly close economic relationship between the two countries.

The Treaty contains a number of treaty-based recommendations from the BEPS project and contained in Actions 2 (neutralizing the effects of hybrid mismatch arrangements), 6 (preventing the granting of treaty benefits inappropriate circumstances), 7 (preventing the artificial avoidance of permanent establishment status) and 14 (making dispute resolution mechanisms more effective).

Both Japan and Lithuania have signed the OECD MLI. Given that the Treaty already incorporated the treaty-related BEPS minimum standards, it can be expected that this treaty will not be listed as a CTA and thus will not likely be further modified by the MLI.

Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalised in both countries.

Japan: DTA with Latvia entered into force

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The Japanese Ministry of Finance issued a press release on 5 July 2017, announcing that the exchange of diplomatic notes between the Government of Japan and the Government of the Republic of Latvia for entry into force of the Convention between Japan and the Republic of Latvia for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (signed on January 18, 2017) has taken place in Tokyo.