Tax News Update    Email this document    Print this document  

March 30, 2023
2023-0613

Japan enacts 2023 tax reform bill including legislation to implement IIR to align with OECD BEPS 2.0 Pillar Two

  • Japan's 2023 tax reform bill was enacted after it was passed by the Japanese Diet on 28 March 2023.
  • The income inclusion rule (IIR) will apply to fiscal years beginning on or after 1 April 2024.

Executive summary

Japan's 2023 tax reform bill (the Bill) was enacted almost immediately after passing the Japanese Diet on 28 March 2023. Recall that Japan's 2023 tax reform outline (the Outline)1 was announced on 16 December 2022, and then submitted as draft legislation (the Legislation)2,3 to the Japanese Diet4 on 3 February 2023. As the Outline noted, the Legislation contained laws to implement the IIR to align with OECD5 BEPS6 2.0 Pillar Two initiative. Generally reflecting the model rules (the Model Rules)7 established by the OECD, the law has been incorporated into the existing Japanese Corporate Income Tax Law. The amendments generally apply to fiscal years beginning on or after 1 April 2023, but the IIR will apply to fiscal years beginning on or after 1 April 2024.

Detailed discussion

The Legislation as it relates to the IIR provides:8

  • The application of the IIR is principally the same as the Model Rules such that a Constituent Entity, that is the Ultimate Parent Entity of an MNE Group, located in Japan that owns (directly or indirectly) an Ownership Interest in a Low-Taxed Constituent Entity at any time during the Fiscal Year shall pay a tax in an amount equal to its Allocable Share of the Top-Up Tax of that Low-Taxed Constituent Entity for the Fiscal Year.
  • Computation of the Global Anti-Base Erosion (GloBE) Income or Loss, Adjusted Covered Taxes, Effective Tax Rate and Top-up Tax are also intended to be in line with the Model Rules.
  • The IIR will apply to fiscal years beginning on or after 1 April 2024.

Next steps

Legislation is being considered in Japan, to be included in tax reform for 2024 at the earliest, involving items that the OECD is expected to discuss in detail this year, such as the undertaxed profits rule (UTPR) and the qualified domestic minimum top-up tax (QDMTT).

____________________________

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

Ernst & Young Tax Co., Tokyo

  • Koichi Sekiya | koichi.sekiya@jp.ey.com

Ernst & Young LLP (United States), Japanese Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

____________________________

ENDNOTES

1 See EY Japan Tax Alert, 2023 Japan Tax Reform Outline: Detailed Review, dated 23 March 2023.

2 https://www.mof.go.jp/about_mof/bills/211diet/st050203h.pdf (in Japanese only).

3 See EY Global Tax Alert, Japan submits draft legislation to implement IIR to align with OECD BEPS 2.0 Pillar Two, dated 10 February 2023.

4 Japanese bicameral legislature.

5 Organisation for Economic Co-operation and Development

6 Base Erosion and Profit Shifting

7 Tax Challenges Arising from Digitalisation of the Economy — Global Anti-Base Erosion Model Rules (Pillar Two): https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf.

8 Capitalized terms that are not otherwise defined herein have the same or similar meanings provided in the Model Rules.

 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 1996 – 2024, Ernst & Young LLP

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

EY US Tax News Update Master Agreement | EY Privacy Statement