Country update: Japan

Transcription

1 Country update: Japan Jack Bird Partner, Japan Yoko Kawasaki Partner, Japan

2 Agenda Section one Tax reform basic plan Section two 2015 tax reform proposal highlights - Corporate income tax - International tax - Consumption tax - Individual tax Section three Update on tax treaties 2

3 Tax reform basic plan 3

4 2015 tax reform fundamental principles Overcome deflation and regenerate economy Energise the local economy Delay the consumption tax rate hike Enact anti-abuse rules related to international taxation (i.e. BEPS) Enact legislation to help recover from the Tohoku Earthquake 4

5 Corporate tax reform Reduce corporate tax rate from 34.62% Expand tax base NOL limitations Current: 80% of current income Limit dividend exclusion rules Enhance size-based enterprise tax Current: 2/8 of enterprise tax Special taxation measures 32.11% ( 2.51%) 65% of current year income Reduce exclusion ratio 31.33% ( 3.29%) 3/8 of total 4/8 of total Revisit from scratch 50% of current year income less than 30%? 5

6 Comparison of corporate effective tax rates Global changes in corporate effective tax rates 45.00% 40.00% 35.00% 33.10% 30.00% 25.00% 20.00% 15.00% 40.69% (-2011) 38.01% (2012-) 35.64% 33.10% 11.93% 10.63% 40.75% 5.75% 33.33% 38.36% (-2008) 13.76% 29.59% 30.00% (-2008) 21.00% (-2014) 20.00% 33.00% (-2007) 25.00% 2.20% National taxes Local taxes New rate Target rate 24.20% 20.00% (-2007) (2010-) 17.00% 10.00% 5.00% 23.71% 22.47% 31.91% 33.33% 15.83% 21.00% 21.00% 22.00% 17.00% 0.00% Japan 2014 Japan 2015 US France Germany UK China Korea Singapore Current headline rates for countries other than Japan as of March 2014 except for the UK (April 2015). Japan rates are for Tokyo headquartered corporations. 6

7 Comparison of corporate effective tax rates Current corporate effective tax rates 45.00% National taxes 40.00% 35.00% 33.10% 30.00% 25.00% 20.00% 35.64% 11.93% 10.63% 33.10% 40.75% 5.75% 33.33% 29.59% 13.76% 20.00% 25.00% 24.20% 2.20% Local taxes New rate Target rate 17.00% 15.00% 10.00% 5.00% 23.71% 22.47% 31.91% 33.33% 15.83% 21.00% 21.00% 22.00% 17.00% 0.00% Japan 2014 Japan 2015 US France Germany UK China Korea Singapore Current headline rates for countries other than Japan as of March 2014 except for the UK (April 2015). Japan rates are for Tokyo headquartered corporations. 7

8 Corporate tax reform Government is signalling future tax reform including: Expand size-based enterprise tax Change depreciation schedules Change SME taxation - SMEs, as defined, have a number of tax breaks compared to non- SMEs. Revisit special taxation measures Change tax status of public interest corporations and cooperative kumiais 8

9 2015 tax reform proposal highlights 9

10 Corporate income tax

11 Corporate income tax Reduction in statutory tax rates For large corporation with paid-in capital exceeding JPY100 million (standard rate): Previous Fiscal years commencing between 1 April 2015 and 31 March 2016 National tax Corporate tax 25.50% 23.90% Local corporation tax (Corporate tax amount 4.4%) 1.122% % Local tax Enterprise tax (applicable to companies with paid-in capital exceeding JPY100 million) New Fiscal years commencing on or after 1 April 2016 JPY4 million or less 2.20% 1.60% 0.90% - Income More than JPY4 million to JPY8 levy million 3.20% 2.30% 1.40% More than JPY8 million 4.30% 3.10% 1.90% - Value added levy 0.48% 0.72% 0.96% - Capital levy 0.20% 0.30% 0.40% Local corporate special tax 67.40% 93.50% % 11

12 Corporate income tax Reduction in effective corporate tax rate For large corporation with paid-in capital exceeding JPY100 million headquartered in Tokyo. April 2013 April 2014 April 2015 April 2016 April 2017 Corporate rate reduction Plus New corporation surtax Corporate tax reduced from 30% to 25.5% for fiscal years beginning on or after 1 April % tax uplift (25.5% x 10%) Corporate tax reduced from 25.5% to 23.9% for fiscal years beginning on or after 1 April 2015 Equals April 2014 April 2015 April 2016 Effective tax rate for March year ends 38.01% 35.64% 33.10% January 2013 January 2015 January % January 2017 Effective tax rate for December year ends 40.69% 38.01% 35.64% 33.10% 32.34% 12

13 Corporate income tax Limitation on utilisation of carried forward tax losses Old New Fiscal years beginning between 1 April 2015 and 31 March 2017 Fiscal years beginning on or after 1 April 2017 Percentage of current year income that may be offset by tax losses 80% 65% 50% Tax loss carry forward period 9 years 9 years 10 years¹ 1. Applicable to tax losses incurred in fiscal years beginning on or after 1 April Newly established corporations will have seven years from establishment date in which full deduction is allowed, unless listed on a stock exchange. 13

14 Corporate income tax Reduction in dividend income exclusion Current Type of investment Wholly owned domestic subsidiary Affiliated domestic corporation Other domestic corporation Proposal Ownership % Exclusion % Type of investment 100% 100% 25% or more Less than 25% 100% less allocable interest 50% less allocable interest Wholly owned subsidiary Affiliated corporation Other domestic corporation Portfolio investment Ownership % Exclusion % 100% 100% More than 1/3 More than 5% but less than 1/3 5% or less 100% less allocable interest 50% 20% (40% for insurance companies) 14

15 Corporate income tax Changes to special taxation measures Special taxation measures should be reviewed and limited to necessary tax incentives. 1. Tax incentives which will be allowed to expire Investment incentive for increased investment in machinery Taxation of an accredited corporation engaged in R&D Reduced real estate registration tax upon a corporate bunkatsu (de-merger) 2. Tax incentives to be narrowed Rollover relief for newly acquired qualified assets Investment incentive granted to SMEs which acquire facilities and equipment for the improvement of operational efficiency 3. Certain high priority incentives to be enhanced R&D tax credit Reduced corporate tax rate applicable to SMEs (2 year extension) 15

16 Corporate income tax Changes to R&D tax credit Amendment Increased type Increased amount of R&D costs x rate of increase (5-30%) Open innovation type tax credit Special R&D costs x 20% or 30%** **Joint R&D with university or public research institution: 30% Joint R&D between corporations: 20% Note abolishment of the one year carry over rule High level type Elect R&D costs over 10% of the sales x creditable rate* * (R&D ratio 10%) X Significant increase of creditable rate (currently at 12%) + Total amount tax credit Gross R&D costs X 8% to 10% 12% of the gross R&D for SME Note abolishment of the one year carry over rule Creditable limit 10% of corporate tax amount Creditable limit 5% of corporate tax amount A combined credit limit of 30% 25% of corporate tax amount 16

17 Corporate income tax Amendments to tax credit for salary growth Current Proposal Large companies 2% increase 3% increase 5% increase 5% increase 2% increase 3% increase 5% increase 4% increase 5% increase 31 March March March March 2018 Condition 1 Total salary payment: equal to or greater than Base Year multiplied by specified ratio Condition 2 Total salary payment: equal to or greater than prior fiscal year Condition 3 Average salary payment: greater than prior fiscal year 31 March March March March 2018 SMEs 2% increase 3% increase 3% increase 3% increase 31 March March March March 2018 Tax credit = Salary payments in current fiscal year less salary payments in Base Year x 10% [limited to 10% of corporate tax liability (20% for SMEs] 17

18 Corporate income tax New incentive to encourage transfer to local hubs Local hubs tax incentives includes (i) special depreciation or tax credit; or (ii) tax credit for increasing headcounts. Expansion of local hub Transfer from areas such as Tokyo to local hubs Large cities Tokyo 23 wards Local hub Local hub Local hub Local hub Employee Employee Employee Employee Newly hired Tokyo HQ Employee Newly hired Transferred from Tokyo 18

19 International tax

20 International tax Eliminate dividend income exclusion for hybrid financial instruments Based upon the recommendation of BEPS Action Plan 2, the dividend received by a Japanese corporation from a foreign affiliate would be excluded from the dividend exclusion regime. Dividend exclusion Ordinary dividend Equity Nondeductible Dividend* 3 Japanese parent Foreign affiliate Foreign affiliate Dividend Deductible Dividend dividend No double taxation Dividend 60 Deductible dividend Dividend 60 Corporate tax rate at 30%** Tax cost in Japan is 0.9 (= 3 X 30%) * Exclude from income tax calculation as expenses for receiving the dividend. ** For simplicity, the corporate tax rate is 30% in the current case. Total tax cost is 8.9 Retained earnings 32 Corporate tax 8 Corporate tax rate at 20%, withholding tax at 0%, domestic tax cost is 8 (= 40 X 20%) Taxable income 40 Total tax cost is 20.9 Retained earnings 20 Corporate tax 20 Corporate tax rate at 20%, withholding tax at 0%, domestic tax cost is 20 (= 100 X 20%) 20

21 International tax Changes to the controlled foreign corporation tax regime The changes proposed by the 2015 Tax Reform Proposal under the controlled foreign corporation (CFC) tax regime are as follows: 1. The trigger rate changed from 20% or less to less than 20% 2. Expand scope of holding companies 3. Relaxation of tax return filing requirements; and 4. Changes related to the amounts subject to tax related to tax deductible dividends from foreign corporation. The proposed changes in the trigger rate, the treatment of foreign holding companies, and the relaxation in the filing requirements will apply for foreign affiliates whose tax years begin on or after 1 April The proposed changes related to the definition (i.e. taxable income including deductible dividends) will have an effective date of 1 April 2016 (with some grandfathering). 21

22 International tax Changes to the controlled foreign corporation tax regime Resident/ domestic company Family shareholders group Resident/ domestic company Specially related party (corporation /Individual) Resident/ domestic company hold more than 50% (directly or indirectly) Scope of taxable person (i) Resident or domestic corporate shareholder that owns, directly or indirectly, 10% or more equity interest (ii) Resident or domestic corporate shareholder as part of a family shareholder group that owns, directly or indirectly 10% or more equity interest Foreign affiliates Specified foreign subsidiaries Foreign affiliates located in a jurisdiction with effective tax rate of 20% or less Reform Change the triggering tax rate from 20% or less to less than 20% Reform Transactions between regional headquarter company (with wholesale business as its main business) and its controlled Japanese subsidiary are considered to be with a related party Reform Reform of business test for regional headquarter company, controlled corporation, holding corporation (corresponding to change in business form) Active business exemption All conditions must be met 1. Business Purpose Test The main business should not be holding equity securities (excluding regional headquarter company whose main business is to hold the shares in the controlled company 2. Substance Test A place necessary to conduct its main business in the country where its head office is located 3. Admin & Control Test Manages and controls its main business in the country where its head or main office is located 4. Local Country Test (for those industries other than 7 types referred to below) Conducts its business mainly in the country where its head or main business is located Unrelated Party Test (7 types of industry including wholesale) The corporation would be considered to conduct its business mainly with third parties if its conducts business with parties other than related party (capital relationship of more than 50%) (exclude transaction between a regional headquarter company, with wholesale as its main business, and its controlled subsidiaries) Fail to meet Outside of CFC scope Aggregate income of sub Meet all Exempt conditions Reform Relaxation in the filing requirements With investment income No investment income Aggregate investment income No income aggregated 22

23 International tax Introduction of authorised OECD approach AOA Principles Align Japanese domestic rules with 2010 version of OECD Model Tax Convention, which attributes income to a PE using the functionally separate approach. Effect of change is that income attributable to a PE will be calculated based on functional and factual analysis of the PE by (i) allocating assets, risks and capital to the PE and (ii) recognising intra-entity dealings as if the PE were a separate enterprise. Definition of domestic source income will change to include income attributable to a PE, while income of the foreign entity not attributable to the PE will be excluded. Current AOA Principle Entire method Attribution method Taxable domestic source income All domestic source income of a foreign corporation with a PE is subject to Japanese corporate tax 1. Business (attributable) income of a PE 2. Non-attributable income will be treated in the same way as current taxation of a foreign corporation without a PE in Japan 23

24 International tax Changes to the Attribution of Income method for a permanent establishment Attribution Method (Standard) (attributable income of a PE) Offshore Japan Inter-company transaction recognised Attributable to Japan Branch Offshore Corporation (Headquarter) Japan Branch (PE) Subject to filing Japan source business income Attributable to Japan Branch Japan withholdable income not attributable to Japan Branch (Note 1, 2) Third Country Attributable to headquarter Subject to filing Withholdable income from Third Country Foreign tax credit available to Japan Branch 2015 Tax Reform Proposal It will be clarified that interest received by a foreign corporation without Japanese branch related to accounts receivable for goods or services outstanding for less than 6 months will not be subject to corporation tax in Japan. Any Japan real estate owned by the head office of a foreign company with a PE in Japan shall be considered to have been transferred to the Japanese PE at the book value of the asset in the hands of the head office. In calculating the foreign tax credit for a Japanese company, rules will be issued to clarify the amount of foreign source income attributable to a foreign branch. Further, the amount of foreign taxes attributable to the foreign branches will be in a separate basket for foreign tax credit calculation purposes. Note 1 Headquarter invested in Japan directly (not through Japan Branch) Note 2 In general, withholding tax would be final tax (i.e., no further tax). 24

25 Consumption tax

26 Consumption tax Postponement of increase in tax rate Increase of consumption tax rate from 8% to 10% will be postponed from 1 October 2015 to 1 April A multiple rate system will be introduced when the consumption tax rate is 10% and this system will provide lower consumption tax rates to necessities. Consumption tax rate April 2014 April % before 1 April 2014 Currently 8% April 2014 April 2017 Increase to 10% beginning 1 April

27 Consumption tax Cross border service transactions Cross border electronic services such as download of e-books/ music will be subject to consumption tax in Japan from 1 October Onshore Offshore Service Provider B Service Provider A Download e-books/ music Subject to consumption tax Download e-books/music Currently no consumption tax is imposed Consumer 27

28 Consumption tax Cross border services Scope of cross border electronic services Definition of electronic services Services provided via electronic telecommunication lines Includes provision of copyrighted products and licensing of copyrighted products via electronic telecommunication lines Excludes services to mediate other s communications through telecommunications facilities such as telephone and telegraph Excludes notifying the result of other services and services accompanying other services 28

29 Consumption tax Cross border services Electronic services to consumers (B2C) Consumer (or business) Onshore Electronic service Offshore Service Provider A Tax filing and payment Service Provider A will collect consumption tax from Consumer. Service Provider A will file consumption tax return with the tax office and pay the tax. If business purchases the services, no input consumption tax credit is available, unless Service Provider A is a registered foreign service provider. The registration of foreign service provider will start from 1 July Tax Office 29

30 Consumption tax Cross border services Electronic services to business (B2B) Reverse charge mechanism Company B Tax filing and payment Onshore Input tax credit Electronic service Tax Office Offshore Service Provider A Service Provider A will not collect consumption tax. Company B will report the consumption tax and pay the tax. Company B may claim input consumption tax credit on the purchase. (Reverse Charge Mechanism) Service Provider A should notify Company B that the transaction is subject to the reverse charge. If the taxable sales ratio of Company B is 95% or more, no reporting is required for the time being. Electronic service will be B2B if it is clear from the nature or conditions of the services that the recipient is a business. 30

31 Consumption tax Performing arts and sports attractions by foreign entertainment providers For provision of services such as performing arts and sports attractions in Japan by foreign entertainment providers, the Japanese sponsor will be subject to Japanese consumption tax via the reverse charge system from 1 October Domestic sponsor Subject to consumption tax under the reverse charge system Foreign entertainment provider Receives revenue, net of consumption tax, from domestic business operator for provision of performing arts and sports attractions in Japan 31

32 Individual tax Exit tax

33 Individual tax exit tax The 2015 Tax Reform Proposals introduced a new exit tax for certain individuals leaving Japan. At the time of the exit, the individual will be subject to tax on gains on securities and derivative transactions as if the individual sold or settled the transactions at fair market value. The new rule will be applicable to exits and donations and inheritances of property made by a Japanese residents on or after 1 July

34 Individual tax exit tax (cont d) Proposed Rules Taxpayer Assets subject to exit taxation Filing requirements for tax report Rescission of taxation by return to Japan within 5 years Transfer by donation or inheritance to a non-resident The resident would be subject to this tax if both of the following conditions are met: 1. Value of assets subject to taxation at the time of the exit is JPY100 million or more; and 2. Within 10 years of exit, the individual has been a Japanese resident for more than 5 years. For foreign nationals, the five out the last ten years clock does not start until July 1, Time living in Japan under a visa status under Table 1 of the Immigration Control Law is not included (e.g. specialists in the humanities or international services, intracompany transferee, temporary visitor, etc.) Securities as defined in the individual tax law, ownership of tokumei kumiai contracts and unsettled derivative transactions, credit transactions and hedging transactions of stock risks trading By the due date of the final tax return to be filed by a registered agent of the taxpayer (valuation date is the exit date); OR In a short period tax return which is due upon exit (if no tax agent is appointed) (valuation date is 3 months prior to the expected exit date) If the taxpayer returns to Japan within 5 years of exit and retains assets continuously from the date of exit, taxation of such assets will be cancelled upon filing by the taxpayer within 4 months of the return date. Donor is deemed to sell or settle the derivative or transfer the securities on the date of transfer for purposes of the tax return filing. 34

35 Update on tax treaties 35

36 Update on tax treaties 1. Japan-Oman Tax Treaty Dividend Interest Royalties New Convention 5% (shareholding of 10%)* 10% (in all other cases) 2. Japan-UK Tax Treaty 10% Exemption (governmental or financial institution) 10% Dividend Interest Royalties Amended Convention 0% (shareholding of 10%)* 10% (in all other cases) Exempt in principle Out of scope *If a dividend is tax deductible by a payer company, a 10% tax rate is applied. 36

37 Update on tax treaties (cont d) 3. Japan-Sweden Tax Treaty Dividend Interest Royalties Amended convention 0% (shareholding of 10%)* 10% (others) Exempt in principle 0% 4. Japan-UAE Tax Treaty Dividend Interest Royalties New convention 5% (shareholding of 10%) 10% (others) 10% Exemption (governmental or financial institution) 10% *If a dividend is tax deductible by a payer company, a 10% tax rate is applied. 37

38 Update on tax treaties (cont d) 5. Japan-US Tax Treaty* Dividend Interest Royalties Protocol 0% (shareholding of at least 50%)** Nil - *Introduction of arbitration procedures. **Not applicable if a dividend is tax deductible by a payer company. 38

39 Q&A 39

40 Contact us Jack Bird Partner, Japan jack.bird@jp.pwc.com Yoko Kawasaki Partner, Japan yoko.kawasaki@jp.pwc.com 40

41 Thank you. The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Ltd. (""). has no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual client service team or your other advisers. The materials contained in this presentation were assembled in May 2015 and were based on the law enforceable and information available at that time All rights reserved. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.