2022 Japan tax reform outline

Japan tax newsletter 17 February 2022

The ruling parties (a coalition comprised of the Liberal Democratic Party and Komeito) released an outline of the 2022 tax reforms (hereinafter, “Outline”) on 10 December 2021. This newsletter provides an overview of the major amendments and revisions contained in the Outline.

The Kishida Cabinet, which was formed in October aims to establish a new form of capitalism under the concepts of “a virtuous cycle of growth and distribution” and “developing a new post-COVID-19 society.” To this end, it is vital that companies achieve sustainable growth by increasing investments such as R&D and personnel, and returning profits to a diverse range of stakeholders. It was from such a perspective that it was decided through the 2022 Japan tax reform to further enhance tax reduction measures for companies that proactively increase employee wages. The tax incentive to promote open innovation will also be enhanced to encourage business transformation and encourage increasing the added value of companies.

The new tax regimes, incentives, etc. that will be enforced in the upcoming months will also be partially revised or enhanced. The investment tax book value adjustment rules, which is part of the group profit and loss sharing regime (the group relief system), will be revised. Out of consideration for the plight of business operators, a grace period of 2 years will be granted in regard to the obligation to retain electronic transaction data that is scheduled to start from January 2022. Measures in preparation of the consumption tax invoice system, which is scheduled to be enforced in October 2023, will be implemented. As for tax administration, new measures will be introduced to address flagrantly malevolent unrecorded expenses and taxpayers that do not fulfill their book-keeping obligations. Meanwhile, the consideration of revisions to revise the financial income taxation was postponed to the next fiscal year or thereafter.

In October, under the OECD/G20 Inclusive Framework on BEPS, an international agreement was reached concerning new international taxation rules. It is declared in the Outline that Japan will also establish tax rules in accordance with the international agreement. The government states that it will deliberate on revising domestic law to fulfill this objective while keeping in mind its effects on existing rules in order to avoid placing excessive burdens on Japanese companies.

Please note that the contents of this newsletter may be partially revised, deleted or supplemented in response to future Diet deliberations on the reform bill.

This newsletter is a translation of the comprehensive Japanese explanation of the 2022 tax reform that was issued by EY on 27 December 2021. For an explanation focused on aspects of the tax reform important to inbound companies in Japan, please see our other newsletter issued on 15 March 2022.

Contents

Corporate taxation

1. Enhancement of the tax incentives to encourage wage increases
2. Extension and enhancement of the tax incentive to promote open innovation
3. Revisions to the group profit and loss sharing regime (the group relief system)
4. Other

International taxation

1. Revisions to the special measure on tax book value reduction of subsidiary shares
2. Other

Individual taxation, asset taxation and consumption taxation

1. Revisions to the housing loan tax credit
2. Revisions to the consumption tax invoice system
3. Other

Tax administration

1. Electronic ledger retention (e-retention) rules
2. Measures addressing flagrantly malevolent taxpayers and taxpayers that do not fulfill their book-keeping obligations
3. Other