Global Tax Alert | 4 October 2013
Japan's tax reform outline announced
On 1 October 2013, the Japanese government formally decided to increase the rate of consumption tax from the current 5% to 8% from 1 April 2014. It also provided a five-trillion yen (US$50B) economic stimulus policy that aims to alleviate burdens resulting from the consumption tax increase and avoid a negative impact on the economy. This policy includes the ruling parties’ outline of various tax cut measures for businesses, that was also released on the same day. This Alert summarizes main corporate tax cuts and incentives.
Earlier repeal of special reconstruction tax
The 10% special reconstruction surtax on corporate tax was introduced in April 2012 and was intended to last for three years. The government has proposed to repeal the tax a year early and will make a final decision in December of this year. Under this proposal, the effective corporate tax rate (Tokyo area, including local taxes) would be reduced from 38.01% to 35.64% for taxable years beginning on or after 1 April 2014.1 The government is also contemplating further measures to reduce the effective corporate tax rate.
Tax incentives to promote capital expenditure on productivity-enhancing equipment
According to the proposed provisions of an Industrial Competitiveness Enhancement Act, if productivity-enhancing equipment is acquired and placed in service between the effective date of the Act and 31 March 2017, a special bonus depreciation of 50% or 25%2 of the acquisition cost or a tax credit of 4% or 2%3 of the acquisition may apply. The maximum tax credit available would be capped at 20% of the corporate tax liability for that fiscal year. Equipment acquired before 31 March 2016 could either be deducted immediately or a tax credit of 5% or 3%4 of the acquisition cost could be allowed. Productivity-enhancing equipment is defined as:
- • Cutting-edge equipment which means that the equipment must be the latest model and must improve productivity by at least 1% in average annual productivity
- • Equipment that improves production lines or operations5
Tax incentives to promote venture investment
For the period from the effective date of the Industrial Competitiveness Enhancement Act through 31 March 2017, a corporate investor would be allowed to accelerate an investment loss if it enters into an agreement with an investment limited partnership (venture fund) approved pursuant to the Act, and the venture fund acquires shares or other interest in a venture business. The claimable loss would be limited to 80% of the book value of the investment. In each of the succeeding years, the loss would be recaptured but would be offset by claiming another investment loss. Accordingly, if the loss reserve amount remains constant throughout the qualified period, the initial year would benefit from the loss claim but would have no effect in the succeeding years.
Tax incentives to promote corporate reorganization
A corporation which obtained approval for its reorganization plan based on the Industrial Competitiveness Enhancement Act between the period from the effective date of the Act through 31 March 2017 would be able to deduct a maximum of 70% of the acquisition cost of shares or interest, or of the book value of a loan to a specified company that is set up in accordance with the reorganization plan. The loss would be recaptured in a 5-year period beginning after the earlier of completion of 3 consecutive profitable years or 10 years from the date of the approval.
Tax incentives to promote capital expenditure for small and medium enterprises (SMEs) extended and enhanced
Under the current incentives, when an SME6 acquires certain specified machinery or equipment, an accelerated depreciation of 30% of the acquisition price or a 7% tax credit (only for corporations with capital of JPY30M (US$300K) or less) is available. The applicable period for this incentive would be extended for another three years to 31 March 2017. In addition, SMEs (including SMEs with capital of more than 30M yen (US$300K) could apply for an immediate full deduction or a 10% or 7%7 tax credit when acquiring certain equipment for business use, if the equipment falls under the productivity-enhancing equipment category as stated in Item #2 above.
R&D tax credits extended and enhanced
The expiring sunset provision for additional research and development (R&D) tax credits would be extended for three years to fiscal years beginning on or before 31 March 2017. In addition, the current credit that is equal to 5% of the increased R&D cost may be revised by applying a rate of increase (maximum 30%, minimum 5%) to a cost increase,8 allowing a proportionate increase in a tax credit, capped at 10% of the corporate income tax liability.
Tax incentives for increasing wages extended and enhanced
The current sunset provision for the increase in wage incentive9 would be extended by two years to 31 March 2018 and some requirements would be relaxed.
1. For more details, please refer to International Tax Alert, Update on Japan’s tax bill, dated 8 December 2011.
2. The lower bonus depreciation and tax credit rates apply to buildings and structures.
3. See above.
4. See above.
5. An investment plan must first be approved by the Ministry of Economy, Trade and Industry.
6. The term SME refers to a Japanese corporation with a capital of 100M yen (US$ 1M) or less but the term “capital” means an amount paid for shares or interest and therefore excludes additional amounts paid in such as additional paid in capital. However, an SME is not eligible for this incentive if 1)at least 50% of whose issued shares are owned by a large company that is defined as a corporation with a capital of more than JPY100M (US$1M) or 2) at least two third (2/3) of whose issued shares are owned by multiple large companies.
7. A 10% rate applies to an SME with 30M yen (US$300K) or less capital; a 7% rate is applicable to an SME with more than 30M yen in capital.
8. For example, if the actual cost is 250 and the 3-year average cost is 200, the cost increase is 50 multiplied by 25% (50/200), resulting in a credit of 12.5, which may be further limited to the 10% cap.
9. For more details, please refer to International Tax Alert, Japan enacts 2013 tax reform bill, dated 1 April 2013.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Tokyo
- • Emi Kono
+81 3 3506 2182
- • Hiroyuki Nishida
+81 3 3506 2026
Ernst & Young LLP, Japanese Desk, New York
- • Kojiro Oka
+1 212 773 0228
Ernst & Young LLP, Asia Pacific Business Group, New York
- • Chris Finnerty
+1 212 773 7479
- • Jeff Hongo
+1 212 773 6143
- • Kaz Parsch
+1 212 773 7201
- • Bee-Khun Yap
+1 212 773 1816
EYG no. CM3842