Financial Services Tax News

Transcription

1 Financial Services Tax News 2014 tax reform for the financial services industry & real estate market in Japan April 2014 In this newsletter, we focus on the 2014 Tax Reforms and their impact in relation to the financial services industry and real estate market in Japan. The 2014 Tax Reforms were promulgated on March 20, with the subsequent Enforcement Orders and Enforcement Regulations were published on March 31 ( 2014 Tax Reforms ). This newsletter provides a summary of the 2014 Tax Reforms specifically affecting Japan s financial services industry and real estate market.

2 I. Principle of International Taxation Summary The Japanese tax principle of international taxation based on the entire entity approach is to be replaced with an attribution approach in line with the 2010 update to the OECD s model tax convention (under the principle of what is generally referred to as the functionally separate entity approach). Under the attribution approach, income attributed to a permanent establishment ( PE ) of a foreign corporation is included in one of the categories of Japan source income of the PE. This reform will be effective from fiscal years beginning on or after April 1, Japan source income 1. Definition Before the 2014 Tax Reforms, the scope of business income in Japan arising from specific transactions or a business enterprise were as enumerated in the enforcement order. For example, if a foreign corporation transferred goods into Japan purchased outside Japan without manufacturing them, all income derived from this transaction was regarded as Japan source income. Another example, this time with respect to life insurance or non-life insurance business, is that income attributable to contracts concluded through business offices or agents of insurance contracts in Japan was regarded as Japan source income. The 2014 Tax Reforms seek to introduce a unified approach, whereby income attributed to a PE, based on a functional and factual analysis of the PE, is to be recognized as Japan source income. The attributable income of a PE (that is, the business income of the PE) is to be included in one of the categories of Japan source income. The sourcing rules will then treat the attributable income of the PE separately from income of the foreign corporation not otherwise attributable to the PE (where the taxation of the nonattributable income remains effectively the same as the taxation of a foreign corporation without a PE in Japan prior to the 2014 Tax Reforms). In simple terms, a PE s attributable income will then be calculated based on: (i) a functional analysis of the PE; (ii) based on (i), allocation of assets to the PE; and (iii) recognition of intra-entity dealings, etc., as if the PE were a separate and independent enterprise. 2. Japan source income not attributable to a PE Prior to the 2014 Tax Reforms, where a foreign corporation with a PE in Japan transfers assets located in Japan, capital gains arising from transferring the assets was included in Japan source income of the PE and subject to taxation in Japan, regardless of whether this gain was attributed to the PE. Following the 2014 Tax Reforms, income of a foreign corporation not attributable to its PE will be considered and treated separately from the attributable income of the PE. For example, only capital gains from such a transfer of assets which is attributed to the PE shall be included in Japan source income of the PE. 3. Foreign source income attributable to a PE Prior to the 2014 Tax Reforms, where a PE in Japan of a foreign corporation holds assets outside Japan, the investment income arising was not subject to taxation in Japan provided foreign corporation tax was imposed on the income. Following the 2014 Tax Reforms, the PE s investment income arising from assets outside Japan attributable to the PE will be included in Japan source income and so subject to taxation in Japan. When a foreign corporation s PE in Japan is subject to taxation in Japan as well as in jurisdictions other than its country of residence, double taxation may however arise. To alleviate an unfair tax burden, a direct foreign tax credit regime will be applied to PEs in Japan similar to that which applies to Japanese corporations. 4. Definition of PE for Local tax purposes Following the 2014 Tax Reforms, a PE under local tax laws will now be defined in the same manner as under the national corporation tax law. Accordingly, a foreign corporation having a PE in Japan for national tax purposes will also have a PE for local tax purposes. Intra-entity dealing 1. Definition Following the 2014 Tax Reforms, intra-entity dealing is to be defined as a fact, such as transfer of assets or provision of services, etc., between a foreign corporation s PE in Japan and its head office, etc., which could be recognized as a transaction, such as sale of assets, purchase of assets or provision of services, etc., between PwC 2

3 business enterprises if they should be hypothetically separate and independent enterprises. The intra-entity dealings however excludes loan guarantees and assumed reinsurance in order to manage insurers liability, etc., between a foreign corporation s PE in Japan and its head office, etc. 2. Intra-entity dealing of interest Prior to the 2014 Tax Reforms, profit and loss arising from intra-entity dealings was not recognized, including intra-entity dealings of interest and royalties. Following the 2014 Tax Reforms, profit and loss arising from intra-entity dealings will now be recognized in the calculation of a PE s attributable income. In the same manner as transactions with related entities, transfer pricing rules will now apply, where a functional analysis of intra-entity dealings will be required to support that intra-entity dealings are at arm's length as if they were separate and independent enterprises. For a PE whose enterprise is a resident of a jurisdiction whose treaty with Japan retains the old Article 7 of the OECD Model Tax Convention prior to the 2010 update, interest arising from loans between the PE in Japan and its head office, etc., will not be included in intra-entity dealings in the calculation of the PE s attributable income. Nevertheless, certain financial institutions will be excluded from this treatment where interest between its PE in Japan and its head office, etc., will be recognized as intra-entity dealing even if the old Article 7 in the respective treaty applies. 3. Interest deduction limitation to a PE Following the 2014 Tax Reforms, where capital of a PE in Japan of a foreign corporation is less than the capital to be attributed to the PE, and the PE makes payment of interest, including intra-entity dealing of interest, on a debt incurred by the business of the PE, the interest corresponding to deficient capital (i.e., free or notional capital) will not be deductible in the calculation of the PE s attributable income. Prior to the 2014 Tax Reforms, a payment of interest from a PE in Japan of foreign banks to its head office, etc., was in practice considered to be deductible up to the rate of LIBOR. The 2014 Tax Reforms introduce a new interest deduction limitation as above, which will also be applied to payments of interest between a PE in Japan of foreign banks and its head office, etc. Foreign corporations, excluding financial institutions, such as banks and securities corporations, will be able to apply simplified methods when calculating its free or notional capital to be attributed to its PE in Japan. 4. Thin capitalization rules In accordance with the introduction of the new interest deduction limitation as described above in 3, interest paid by Japanese branches of foreign corporations will no longer be subject to thin capitalization rules. 5. Tax avoidance If the Japanese tax authorities realize that admission of intra-entity dealing of a foreign corporation would result in an improper decrease in the burden of corporation tax of the foreign corporation, the Japanese tax authorities will be able to impute the corporation tax base or the amount of corporation tax on the PE s attributable income of the foreign corporation, notwithstanding the actual transactions or book entries made by the foreign corporations. Documentation Where a foreign corporation conducts a transaction with other parties and income arising shall be attributable to its PE, details of the transaction and intra-entity dealings between the foreign corporation s head office, etc., and its PE in Japan should be documented. As a PE s attributable income will be calculated based on recognition of intra-entity dealings, the Japanese tax authorities will be able to request a foreign corporation to present or submit documentation clarifying the nature of and pricing of intra-entity dealings. Furthermore, where intra-entity dealings are concealed or disguised in the books and documents, or there are other similar reasons to doubt the veracity of the PE s statements or records, the approval of blue form returns might be revoked by the Japanese tax authorities. Foreign tax credits of Japanese corporation 1. Foreign source income As described above, following the 2014 Tax Reforms, the introduction of attribution rule will significantly change the current Japanese tax principle applying to foreign corporations. It will also change the foreign tax PwC 3

4 credit regime applied to Japanese corporations as well. In the same manner as the meaning of Japan source income in the taxation of foreign corporations changes, the definition of foreign source income in the foreign tax credit regime applied to Japanese corporations is also amended. The attributable income of a Japanese corporation s PE in foreign jurisdictions is to be included in foreign source income, based on which, the amount of foreign tax credit of the Japanese corporation is to be calculated. 2. Documentation Where a Japanese corporation conducts a transaction with other parties and income arising from the transaction shall be attributable to PEs in foreign jurisdictions, details of the transaction and intra-entity dealings between the Japanese corporation s head office, etc., and its PE in foreign jurisdictions should be documented. Where a Japanese corporation applies the foreign tax credits regime, the Japanese tax authorities are able to request the Japanese corporation to present or submit documentation clarifying its calculation of attributable income of its PEs in foreign jurisdictions. II. One year early termination of the Restoration Corporation Surtax As a part of the Special Measures to Secure the Financial Resources to Implement the Restoration from the Tohoku Earthquake ( Special Tax Bill ) in 2011, a Corporation Surtax was introduced for a three year period from the first fiscal year beginning on or after April 1, To help enable the revitalization of the Japanese economy, the 2014 Tax Reforms targets to lower the corporate tax burden by terminating the Corporation Surtax one year earlier than planned. It should be noted that the Income Surtax and the Withholding Surtax (2.1% surtaxes on individual income taxes and withholding taxes) will remain the same as was originally legislated. Following the 2014 Tax Reforms, the effective corporate tax rate will change as summarized in the table below: (Tokyo-based) Corporations subject to the sizebased enterprise tax regime From first fiscal year beginning on or after April 1, 2012 From first fiscal year beginning on or after April 1, % 35.64% Other than above 39.43% 37.11% III. Creation of a national local corporate tax Effective from fiscal years commencing on or after October 1, 2014, a new national local corporate tax will be introduced. Corporate taxpayers will be obliged to file and pay the national local corporate tax at a fixed rate of 4.4% of their national corporate tax liabilities. Accordingly, when a foreign corporation without a PE in Japan is subject to taxation in Japan, the tax rate applied to its Japan source income will be higher than before, as summarized in the table below: Fiscal years Tax rate From first fiscal year commencing on or after April 1, % From first fiscal year commencing on or after April 1, % From first fiscal year commencing on or after October 1, % Since a corporate inhabitant tax (local tax) will be lowered at the same rate as a new national local corporate tax, there will be no impact on a Japanese corporation and a foreign corporation with a PE in Japan. IV. Specific measures for J-REITs 1. Specified assets As described in the 2014 tax reform proposal (Taiko), to coincide with revisions to the Law concerning Investment Trust and Investment Corporation ( ITIC Law ), an additional condition to the dividend deductibility tests for J-REITs and special investment trusts was required. That is, the value of specified assets stipulated by Article 2 (1) of the ITIC Law other than electricity production facilities utilizing renewable energy and concessions of public facilities of a J-REIT or a special investment trust must be more than 50% of its total assets. This additional requirement does not however apply to a J-REIT which acquires and leases electricity PwC 4

5 production facilities utilizing renewable energy from the revision date of the Order for Enforcement of the Law through March 31, 2017 for fiscal years ending within 10 years from the date when the J-REIT leases the facilities, provided that the following conditions are met: (i) The value of concessions of public facilities of the J-REIT does not account for more than 50% of total assets; (ii) Issuance of shares at the establishment of the J-REIT is by public offer or where the shares are listed; and (iii) The certificate of incorporation (kiyaku) of the J-REIT for electricity production facilities utilizing renewable energy is held solely for the purpose of leasing. To reflect the above, the 2014 Tax Reforms adds conditions to the dividend deductibility tests for J-REITs and special investment trusts, i.e., the book value of specified assets stipulated by Article 2 (1) of the Order for Enforcement of the ITIC Law, such as securities, real properties and other assets, must be more than 50% of total assets at the end of each accounting period. 2. Subscription right to investment units Following the 2014 Tax Reforms, subscription right to investment units of J-REITs will be deemed as subscription right to shares in applying the corporate tax law, etc., to J-REITs. 3. Dividend deductibility test - positive goodwill The 2014 Tax Reforms also revise the terms of one of the dividend deductibility tests which requires a J-REIT to distribute more than 90% of its distributable profit ( Distributable Profit ). 70% of depreciation of positive goodwill (sei-no-noren) will be now excluded from the meaning of Distributable Profit of a J-REIT. PwC 5

6 For more detailed information, please do not hesitate to contact your financial tax services representative or any of the following members: Zeirishi-Hojin PricewaterhouseCoopers Kasumigaseki Bldg. 15F, 2-5, Kasumigaseki 3-chome, Chiyoda-ku, Tokyo Telephone: , Financial Services Partner Sachihiko Fujimoto Katsuyo Oishi Yuka Matsuda Akemi Kito Hiroshi Takagi Raymond Kahn Stuart Porter Nobuyuki Saiki Director Kenji Nakamura Akiko Hakoda Kyoko Imamura Satoshi Matsunaga Senior Manager Takashi Nonaka Nobuyoshi Hiruma Manager Kohei Kobayashi Transfer Pricing Consulting Group Partner Teruyuki Takahashi Ryann Thomas Director Naoki Hayakawa PwC Japan Tax (Zeirishi-Hojin PricewaterhouseCoopers), a PwC member firm, is one of the largest professional tax corporations in Japan with about 500 people. Within this practice, our Financial Services Tax Group is comprised of approximately 70 professionals, dedicated specifically to advising the financial services industry. In addition to tax compliance services our tax professionals are experienced in providing tax consulting advice in all aspects of domestic/international taxation including financial and real estate, transfer pricing, M&A, group reorganisation, global tax planning, and the consolidated tax system to clients in various industries. PwC firms help organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with close to 184,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors Zeirishi-Hojin PricewaterhouseCoopers. All rights reserved. PwC refers to Zeirishi-Hojin PricewaterhouseCoopers, a member firm in Japan, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. PwC 6