Japan’s 2023 tax reform proposals include an outline for Pillar Two legislation

In brief

Japan’s Liberal Democratic Party and Komeito Party released the 2023 tax reform proposals on December 16, 2022. The proposals include a legislative outline (the ‘Outline’) to implement a global minimum corporate tax based on the Global Anti-Base Erosion Model Rules (‘Pillar Two’) published by the OECD (the ‘GloBE Model Rules’). The Outline introduces an Income Inclusion Rule (IIR) that broadly aligns with the GloBE Model Rules. The IIR would apply to fiscal years beginning on or after April 1, 2024.

The Outline excludes other features of the GloBE Model Rules, such as the Undertaxed Payments Rule (UTPR) and the Qualified Domestic Minimum Top-up Tax (QDMTT), but they may be included in the 2024 tax reform proposals or later. This Insight provides an overview of the IIR proposed in the Outline and how it may affect taxpayers. We will share additional information after the legislation is published.

Tax base

The IIR incorporates a new Global Minimum Corporate Tax calculated based on the Global Minimum Taxable Amount; and a new Global Minimum Local Corporate Tax, technically a national tax, calculated based on the Global Minimum Corporate Tax liability (together, the ‘Top-up Tax’). The Global Minimum Taxable Amount is equivalent to GloBE income described in Chapter 3 of the GloBE Model Rules. The calculation of the Top-up Tax also is similar to the calculation of the Top-up Tax described in Chapter 5 of the GloBE Model Rules. The Top-up Tax may arise in a jurisdiction even when the Global Minimum Taxable Amount for that jurisdiction is nil or negative as described in Article 4.1.5 of GloBE Model Rules.

Safe harbor 

In addition to the de minimis exclusion rule described in Article 5.5 of the GloBE Model Rules, the Outline states that the calculation of the effective tax rate for each jurisdiction may be simplified by using information in the MNE’s Country-by-Country Report (CbCR). Although additional details have not been provided, Japan might follow the transitional safe harbor rules announced by the OECD in December (See PwC’s Tax Policy Insight).

The takeaway

While the IIR in Japan would closely align with the GloBE Model Rules, the Outline does not contain detailed guidance on the calculation of the Global Minimum Corporate Taxable Amount, adjustment items, or the CbCR safe harbor. As the IIR would apply to accounting periods beginning on or after April 1, 2024, there is time before the rules are finalized and the legislation is published. However, taxpayers should start preparing by evaluating the potential impact of the IIR and developing processes and systems to collect the information required to calculate the Top-up Taxes and prepare information returns.

For calendar-year taxpayers, the IIR would first apply in Japan in the fiscal year ending December 31, 2025. However, some jurisdictions could implement legislation based on the GloBE Model Rules for accounting periods beginning on or after January 1, 2024. If Japanese MNEs have subsidiaries in such jurisdictions that announce the introduction of rules that would apply earlier than the IIR in Japan, they should consider how these rules, including the UTPR, may affect Japanese MNE subsidiaries. Furthermore, taxpayers must carefully monitor the introduction of new rules in other countries.