2016 Japan tax reform: Taxation related to financial businesses

Transcription

1 5 February 2016 Financial services tax alert Ernst & Young Tax Co Japan tax reform: Taxation related to financial businesses EY Global tax alert library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: International-Tax/Tax-alert-library%23date Contents 1. Taxation of financial transactions 2. Revision of corporate taxation 3. International taxation 4. Other revisions 5. Concluding remarks The 2016 tax reform outline ( Outline ) was released on 16 December 2015 by the LDP/Komeito. Against the backdrop of broad issues that Japan is facing, including the recovery of the economy to shake off deflation and renew growth, policy challenges such as responses to declining birth rates and an aging population, promotion of the BEPS project led by the G20 and the OECD, and support for the recovery from the 2011 earthquake and tsunami, the reform agenda includes items that have a significant impact on companies taxable income such as the continuation of the phased lowering of the effective corporate tax rates to below 30% and accompanying measures to expand the taxation base including size-based taxation and limits on the net operating loss (NOL) deduction in the NOL carry-forward system as well as the revision of depreciation method. Moreover, there are other revisions that will have a direct impact on the business of financial institutions in the areas of taxation of financial transactions and international taxation, such as measures to simplify the procedure for the submission of tax exemption application to further promote the NISA (Nippon Individual Saving Account) program and the revision of domestic laws related to the tax agreement with Taiwanese nongovernment association. Therefore, financial institutions are advised to pay close attention to the details of these revisions that will be clarified going forward.

2 Among the revisions proposed in the Outline, this alert focuses on major revisions in taxation related to financial businesses and those that are particularly applicable to financial institutions. For the discussion of the overall content of the Outline, please refer to Japan tax newsletter 2016 Japan tax reforms dated 5 February Taxation of financial transactions a. Simplification of the NISA program procedures In relation to NISA, which is a tax exemption system for dividends and capital gains arising from small investments in listed shares in tax-exempt accounts, the following measures will be taken for further promotion and acceptance of NISA and in view of the social security and tax number system which comes into effect in 2016: (i) To confirm the nonexistence of redundant accounts, NISA applicants are currently required to submit an application for tax-exempt status for each effective period to open an account by submitting a copy of the certificate of residence or other equivalent documents as of the base date of each effective period, which is the day one year before the start date of the effective period (e.g., for the effective period from 1 January 2018 to 31 December 2021, the base date is 1 January 2017). The revision will eliminate the need for attaching a copy of the certificate of residence as of the base date to an application for tax-exempt status with regard to the effective periods starting in or after In conjunction with this measure, the second and third effective periods starting in and after 2018 will be combined so that the new effective period will be from 1 January 2018 to 31 December (ii) If a resident individual who has opened, as of 1 October 2017, a tax-exempt account for which a taxexempt investment account has been established for 2017, has notified the financial institution with which the tax-exempt account has been opened of his or her individual number on the same date, the resident individual will be deemed to have submitted to the financial institution an application for tax-exempt status for the effective period from 1 January 2018 to 31 December Financial services tax alert 5 February 2016 It should be noted that the financial institution which has been notified of the individual number is required to inform the resident individual by 15 October 2017 to the effect that the application for tax-exempt status is deemed to have been submitted. (iii) In the case where a resident individual who has opened a tax-exempt account closes the tax-exempt account due to departure from Japan, if the resident individual is subject to exit tax based on the price of securities as of the day three months before the date of departure (special provision on capital gains in the case of departure from Japan), the tax exemption for capital gains will be applied as if the resident individual transferred the listed shares in the taxexempt account at the price on the day three months before the date of departure and acquired them again. This treatment will also be applied to junior NISA (taxexempt accounts for minors). In line with the intent of the introduction of NISA to promote the flow of funds from savings to investment, the revision intends to improve the convenience of NISAs for further application by streamlining the procedure for the confirmation of nonexistence of redundant accounts. With this revision, the NISA program, including junior NISAs, is expected to further promote the participation of individual investors in the securities market and the wealth accumulation of households. b. Revision of the scope of the transfer of listed shares for further unification of the taxation of financial income Since the offset of capital gains and losses on the transfer of listed shares is permitted only for certain types of transfer such as transfer by way of consignment of sale to a financial institution, deemed transfers under the application of special provisions on capital gains in the case of departure from Japan or the special provisions on capital gains on transfer of assets to non-resident individuals by way of donation (so-called exit tax) are not included in the scope. This revision will expand the scope of listed shares eligible for the offset of capital gains and losses, including losses carried forward, on the transfer

3 of listed shares to include deemed transfers pertaining to exit tax. The unification of the taxation of financial income has been expanded since the 2013 tax reform. Exit tax, which was created last year and applies to financial assets including securities, has been incorporated in the regime of unified taxation of financial income in the course of its development. c. Revision of the special provisions on the taxation of miscellaneous income from futures transactions The scope of futures transactions that are eligible for the application of the special provisions on the taxation of miscellaneous income from futures transactions and the loss carryforward system pertaining to settlements of differences of futures transactions will be revised to exclude the following transactions: (i) Over-the-counter (OTC) commodity derivative transactions with a person other than a commodity futures firm (ii) OTC derivative transactions with a person other than a financial instruments firm, etc. (financial instruments firms engaging in Type 1 Financial Instruments Business or registered financial institutions). This revision will be applied to futures transactions commencing on or after 1 October Revision of corporate taxation a. Gradual lowering of the corporate tax rates The current corporate tax rate of 23.9% will be lowered to 23.4% for the fiscal years starting on or after 1 April 2016 and to 23.2% for those starting on or after 1 April b. Revision of the NOL carryforward system The 2015 tax reform introduced the revision of the carryforward system for blue form loss, loss on disaster and consolidated loss to gradually lower the maximum percentage of NOL which can be offset against taxable income. The current revision proposes to modify the system further as follows: After the 2015 Japan tax reform Fiscal year start date April 2015 to March 2017 In and after April 2017 Maximum deductible percentage 65% 50% Fiscal year start date April 2015 to March 2016 April 2016 to March 2017 April 2017 to March 2018 In and after April proposals Maximum deductible percentage 65% 60% 55% 50% The NOL carryforward period mentioned above, the retention period of the books and documents pertaining to the application of the NOL carryforward system, and the extension of the deadline for the reassessment of the NOL amount and for the submission of a reassessment request (from 9 years to 10 years), which were introduced by the 2015 tax reform, will take effect on 1 April 2018 and be applied to the amount of NOL for the fiscal years starting on or after the same date. For further details, please refer to the Japan tax newsletter 2016 Japan tax reforms dated 28 January c. Revision of the depreciation method For the depreciation of building improvements and land improvements, and buildings used for mining operations acquired on or after 1 April 2016, the declining balance method will be abolished and the depreciation methods of these assets will be changed as follows: For further details, please refer to the Japan tax newsletter 2016 Japan tax reforms dated 5 February Financial services tax alert 5 February

4 Asset category Building improvements and land improvements (excluding those used for mining operations) Depreciable assets used for mining operations (limited to buildings, building improvements and land improvements) Current Straight-line method or declining balance method Straight-line method, declining balance method or units of production method Depreciation method Proposed Straight-line method Straight-line method or units of production method Other methods such as lease period straight-line method, replacement method, etc., will be retained. In view of the deviation between the economic reality of use and the depreciation method selected, the recent introduction of the IFRS, the unification of group accounting for globalized enterprises, and international developments, etc., there has been much debate about depreciation method, and in particular, the abolition of the declining balance method has drawn much attention. This revision proposes to abolish the declining balance method only for building improvements and land improvements and retains it for machinery and equipment, furniture and fixtures, etc. As a result, financial institutions and others that have applied the declining balance method to building improvements and land improvements need to make appropriate responses in consideration of the business and operational aspects. However, the overall impact on taxable income including taxable income of lease companies is expected to be moderate. d. Expansion of size-based taxation of corporate enterprise tax The standard tax rates of size-based taxation applicable to ordinary corporations whose capital is more than JPY100 million will be changed as follows and will be applied to them for fiscal years starting on or after 1 April 2016: Current Proposed Fiscal years starting on or after 1 April 2015 Fiscal years starting on or after 1 April 2016 Per value added levy 0.72% 1.2% Per capital levy 0.3% 0.5% Corporations whose value added amount is less than JPY4 billion will be entitled to the reduction of the change in the tax burden arising as a result of the change in the corporate enterprise tax rates shown above for the fiscal years starting on or after 1 April 2016 until 31 March Specifically, if the amount of corporate enterprise tax for these fiscal years exceeds the amount that would have been calculated applying the tax rates as of 31 March 2016, the amount obtained by multiplying the excess amount by the following percentage as appropriate for the level of the value added amount that is applicable to each corporation will be deducted from the amount of corporate enterprise tax for these fiscal years. Fiscal years starting: On or after 1 April 2016 until 31 March 2017 On or after 1 April 2017 until 31 March 2018 On or after 1 April 2018 until 31 March 2019 Value added amount JPY3 billion or less Over JPY3 billion, under JPY4 billion 75% A percentage in the range of 75% to 0% 50% A percentage in the range of 50% to 0% 25% A percentage in the range of 25% to 0% The expansion of tax base of corporate enterprise tax in conjunction with the lowering of the effective corporate tax rates has been discussed. In the course of the discussion, the 2015 tax reform raised the tax rates of size-based taxation and the Outline raises them further under the aim of the corporate tax reform to lower tax rates while expanding the tax base. While financial institutions such as banks and financial instruments firms are required to secure certain levels of capital by the Banking Act and other applicable laws as well as the Basel capital adequacy rules, they may need to reconsider their capital adequacy taking into consideration the tax burden based on per capital levy from the perspective of ensuring the appropriate levels of capital and tax costs. e. Revision and enhancement of the special provisions on investment corporation taxation Given the need to ensure a fair balance between the taxation of ordinary corporations and that of investment corporations, the scope of the investment assets has been under review in consideration of the purpose of the 4 Financial services tax alert 5 February 2016

5 special provisions and the significance from the policy perspective of the promotion of investment through the infrastructure fund market. The Outline proposes the following revisions including the change in the scope of specified assets: (i) Restrictions on investment assets relating to tokumei kumiai contracts (TK) One of the requirements of the special provisions on investment corporation taxation and the special provisions on the taxation of trustee corporations of specified investment trusts is that the percentage of specified assets to the total assets should exceed 50%. Under the Outline, the rights pertaining to TK will be considered to be such specified assets only if the TK mainly invests in securities, real estate, etc. (ii) Extension of the effective period of the special provisions on renewable power generation facilities With regard to the above requirement that the percentage of specified assets to the total assets should exceed 50%, the period during which a renewable power generation facility can be included in the scope of specified assets will be the fiscal years ending within 20 years (currently 10 years) from the day on which the renewable power generation facility had been made available under the first lease contract. (iii) Adjustment pertaining to net assets deduction items with regard to the requirement for investment corporations to pay more than 90% of distributable profit With respect to the requirement for investment corporations to pay more than 90% of distributable profit as dividend, the amount of distributable profit will be subject to an adjustment to deduct the difference between the amount of net assets deduction items and the amount of retained earnings in principle if the former exceeds the latter. This revision will be applied to dividends paid on or after 1 April International taxation a. Enhancement of the tax exemption for interest on margins for OTC derivative transactions From the perspective of international harmonization, a tax exemption for interest on margins for OTC derivative transactions was created by the 2015 tax reform under the Special Tax Measures Law. The Outline requires the revision of the scope of OTC derivative transactions that are eligible for this tax exemption system subject to the revision of the Cabinet Office Ordinance on Financial Instruments Business, etc. This tax exemption system had practical issues including the scope of the eligible OTC derivative transactions that does not include FX forward contracts and commodity derivatives. The proposed revision of the scope of the transactions eligible for this tax exemption system is expected to facilitate transactions with foreign financial institutions and to reduce the administrative burden. b. Extension of the effective period of the withholding tax exemption for interest on book-entry transfer corporate bonds The withholding tax exemption for interest on the following book-entry transfer corporate bonds received by non-resident individuals and foreign corporations is applicable to such bonds issued on or before 31 March 2016, but the effective period will be extended for three years under the Outline: (i) Book-entry transfer bond-type specific purpose trust beneficial interests (ii) Profit-linked bonds issued by a domestic corporation fully controlled by a specified local government prescribed by the Act on Special Zones for Reconstruction in Response to the Great East Japan Earthquake (limited to those without guarantee of debt by the local government). Financial services tax alert 5 February

6 In conjunction with the extension of the effective period of this tax exemption system, the effective period of the exemption of registration and license tax on the registration of ownership transfer in the case where trust property is repurchased at the expiration of a specific purpose trust pertaining to the bond-type beneficial interests mentioned in (i) above will also be extended for three years. This tax exemption system for so-called Japanese sukuk ((i) above) and Japanese revenue bonds ((ii) above) has been introduced as a tax treatment to attract investment capital from foreign investors, although there are few instances for now. With the proposed extension of the effective period, the tax exemption system is expected to attract a wide variety of financing opportunities and restoration funds from foreign investors. c. Revision of domestic laws related to the nongovernmental tax agreement between Japan and Taiwan On 26 November 2015, the Interchange Association (Japanese side) and the Association of East Asian Relations (Taiwanese side) signed the Agreement between the Interchange Association and the Association of East Asian Relations for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Japan-Taiwan Tax Agreement). 2 As there is no formal diplomatic relation between Japan and Taiwan, their relationship is maintained through working-level relations between these private associations and agreements are entered into by and between them. As such agreements do not have the same effect as international treaties in Japan, Japanese relevant laws need to be revised to put them into effect in Japan. The Outline proposes to take the following measures in the main, on condition that the rights are equally granted in Taiwan to Japanese resident individuals and domestic corporations (principle of reciprocity): (i) The establishment of rules to treat the dual resident (rules based on the location of one s permanent residence) (ii) Exemption, reduction or refund of income tax or corporation tax on income of Taiwanese resident individuals (in principle, 10% on dividends, interest or royalty) (iii) Adjustments corresponding to transfer pricing taxation in Taiwan (iv) Special provisions on the request for reassessment by Taiwanese resident individuals in Japan (v) Provision of information to the Taiwanese tax authority (vi) Other necessary measures These measures will be implemented at the time Taiwan completes the necessary procedure to ensure the principle of reciprocity. The Japan-Taiwan Tax Agreement basically follows the OECD Model Tax Convention and reduces (10%) or exempts (only for certain organizations) taxes on dividends, interest and royalty. In addition, capital gains on the sale of shares will be subject to tax only in the resident country except for certain cases such as the sale of shares of real property holding corporation, whose assets comprise of 50% or more of Japanese real estate. With the proposed revision of Japanese laws, it is expected that investment activities and financial transactions between Japan and Taiwan will expand, although the timing of the completion of the necessary procedure in Taiwan, the timing of the enforcement of the revised laws in Japan, the effective date of the enforcement of the Japan-Taiwan Tax Agreement as well as any related procedures need to be watched carefully going forward. d. Documentation requirements pertaining to transfer pricing taxation On 5 October 2015, the OECD published the final report on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting as part of the final package of the 15 BEPS Actions. In view of the recommendations of the final report (three-tiered approach), the Outline proposes to introduce the following requirements: 2 Japan tax alert dated 3 December 2015: 6 Financial services tax alert 5 February 2016

7 (i) Submission of CbCR (Country-by-Country Report) to the tax office through e-tax (ii) Submission of the master file (business overview) to the tax office through e-tax (iii) Preparation and retention of documents necessary for the calculation of arm s length price (local file) The requirements (i) and (ii) will be applied to the fiscal years of the ultimate parent of the group starting on or after 1 April 2016 and the requirement (iii) will be applied to corporate tax for fiscal years starting on or after 1 April For further details, please refer to the Japan tax newsletter 2016 Japan tax reforms dated 28 January Other revisions a. Revision of tax reports requirements for individual beneficiaries of Japanese ESOP 3 trusts An increasing number of companies have recently introduced a Japanese ESOP trust (a share-based incentive plan using a trust under a money trust agreement in which the settler is the issuer corporation of the shares and the trustee acquires the shares and delivers them to the employees of the settler in accordance with certain standards such as service years and share delivery rules) for the purpose of raising the motivation and morale of employees to improve performance. Under the current Japanese ESOP trust system, companies with such a trust are required to file a withholding tax receipts with respect to the delivery of shares to employees pursuant to the provisions of the Income Tax Act, while the trustees of such a trust are also required to file a trust tax report for each individual beneficiary pursuant to the provisions of the Inheritance Tax Act. As a result, the two kinds of report on the same income are required by a tax office. Under the Outline, the trustees of Japanese ESOP trusts will no longer be required to file a trust tax report for each individual beneficiary. As a result of this revision to eliminate the filing trust tax reports for individual beneficiaries, the administrative burden of the trustees (i.e., trust banks and others) will be reduced. b. Extension of the effective period of the special provisions on catastrophe loss reserve of insurance companies pertaining to fire and other disaster insurance The effective period of the special reserve rate (basic rate of 2% + special rate of 3%) applicable to catastrophe loss reserve of insurance companies pertaining to fire and other disaster insurance and fire mutual aids is going to expire on 31 March 2016, but will be extended for three years. The extension of the effective period is expected to help insurance companies from a tax perspective to secure sufficient funds to pay insurance claims in preparation for any natural disasters such as a typhoon or heavy rain and large-sale disasters such as an earthquake that might occur in the future. c. Revision of the criteria for determining the domestic/foreign status of businesses for consumption tax purposes concerning the provision of BtoB cross border digital services Since October 2015, the domestic/foreign status of businesses concerning the provision of cross border digital services using telecommunication lines such as the internet is determined based in principle on the address or the location of the head office of the party receiving the services. Therefore, the domestic corporation that has received the provision of cross border digital services from a foreign corporation has been required to pay consumption tax. As a result, services that a foreign branch of a Japanese corporation receives from a foreign corporation, for example, are subject to consumption tax in Japan under the reverse charge mechanism while such a Japanese corporation may also be subject to the imposition of value added tax in a foreign state, resulting in double taxation. 3 ESOP stands for employee stock ownership plan. Financial services tax alert 5 February

8 To resolve this issue, the Outline proposes to take the following measures including the revision of the criteria for determining the domestic/foreign status of domestic branches of foreign businesses: (i) In the case of BtoB cross border digital services that a domestic business receives at its place of business in a foreign state which are necessary only for its business carried out abroad, the specified purchase pertaining to such provision of BtoB cross border digital services will be deemed to have been carried out abroad (ii) In the case of BtoB cross border digital services that a foreign business receives at its permanent establishment in Japan which are necessary for its business carried out in Japan, the specified purchase pertaining to such provision of BtoB cross border digital services will be deemed to have been carried out in Japan. This revision will be applied to specified purchases carried out on or after 1 January Concluding remarks In addition to the lowering of the effective corporate tax rates, the Outline includes a number of revisions that will affect financial institutions including revisions that will increase the tax burden such as the revision of depreciation methods and rises in the tax rates under size-based taxation that are designed to expand the tax base; revisions aimed to address tax reform requests from financial institutions such as the revision and enhancement of the special provisions on investment corporation taxation and the enhancement of the tax exemption system for interest on margins for OTC derivative transactions; revisions that have a direct impact on business such as the revision of domestic laws in response to the Japan-Taiwan nongovernmental Tax Agreement; and the introduction of new transfer pricing documentation requirements that are in line with the BEPS Action Plans. Financial institutions need to take appropriate responses by referring to the provisions of the applicable laws and regulations to be finalized going forward. For additional information with respect to this alert, please contact the following: Contacts Ernst & Young Tax Co. Business Tax Services, Financial Services Group Shinichi Tanimoto Partner shinichi.tanimoto@jp.ey.com Kazuhiro Ebina Partner kazuhiro.ebina@jp.ey.com Ichiro Suto Partner ichiro.suto@jp.ey.com Takehiro Furukawa Executive Director takehiro.furukawa@jp.ey.com Tetsuya Suzuki Executive Director tetsuya.suzuki@jp.ey.com Mayumi Nishikawa Executive Director mayumi.nishikawa@jp.ey.com Mikihito Kuroya Executive Director mikihiro.kuraya@jp.ey.com EY Law Co. Yutaka Kitamura Partner yutaka.kitamura@jp.ey.com Yuki Sakamoto Executive Director yuki.sakamoto@jp.ey.co 8 Financial services tax alert 5 February 2016

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