Global Tax Alert | 3 December 2013

Japan reduces corporate tax rate

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Executive summary

On 2 December 2013, the ruling coalition parties’ tax system research councils (Councils) decided to repeal the special reconstruction surtax effective for taxable years beginning on or after 1 April 2014. As a result, the effective corporate tax rate will be reduced from 38.01% to 35.64%. The tax reform bill which includes this earlier repeal of surtax is expected to be passed by the Diet and enacted by 31 March 2014.

Detailed discussion

Earlier repeal of special reconstruction surtax

The 10% special reconstruction surtax on corporate tax (i.e., 2.55% on taxable income) was introduced in April 2012 to raise funds for reconstruction of areas damaged by the 11 March 2011 earthquake and tsunami. This surtax was originally intended to be levied for three years. On 1 October 2013, however, the Government had proposed to repeal the surtax a year earlier to mitigate potential negative economic impacts due to the increase of consumption tax rate from 5% to 8%. After discussions within the Councils, on 2 December 2013, the Councils have decided to adopt the earlier repeal of the surtax, effective for taxable years beginning on or after 1 April 2014. Following this decision, the Government will complete on 5 December 2013 its economic package by including the early repeal of the surtax. The Government is also contemplating measures to further reduce the effective corporate tax rate.

Effective tax rate

As a result of the repeal of the surtax, the effective corporate tax rate (Tokyo area, with capital of more than JPY100 million (US$1 million), including local taxes) will be reduced from 38.01% to 35.64% for taxable years beginning on or after 1 April 2014. Details of the tax rates are as follows:

Current

After the repeal

Effective tax rate1

38.01%

35.64%

National corporate tax rate

25.5%

25.5%

Surtax rate2

2.55%

N/A

Local inhabitant tax rate3

5.2785%

5.2785%

Local enterprise tax rate4

7.552%

7.552%

Legislative processes

The Council will prepare a 2014 tax reform proposal by the end of December, which includes the early repeal of the surtax. Based on the proposal, a 2014 tax reform bill will be prepared and submitted to the Diet in January 2014. The bill is expected to be passed by the Diet and enacted by the end of March 2014.

Endnotes

1. To reflect the impact of deduction of enterprise tax, the effective tax rate is calculated as “(total tax rates) / (1+enterprise tax rate).”

2. 10% on corporate tax (i.e., 25.5% x 10% = 2.55%).

3. 20.7% on national corporate tax (i.e., 25.5% x 20.7% = 5.2785%).

4. Including Special Local Corporation Tax.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Shinnihon Tax, Tokyo
  • Emi Kono
    +81 3 3506 2182
    emi.kono@jp.ey.com
  • Hiroyuki Nishida
    +81 3 3506 2026
    hiroyuki.nishida@jp.ey.com
Ernst & Young LLP, Japanese Desk, New York
  • Kojiro Oka
    +1 212 773 0228
    kojiro.oka@ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM4007