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June 26, 2023
2023-1140

Japan promulgates 2023 tax reform enforcement order to implement IIR to align with OECD BEPS 2.0 Pillar Two

  • Japan's 2023 tax reform enforcement order associated with the income inclusion rule (IIR) was promulgated on 16 June 2023.
  • The IIR will apply to fiscal years beginning on or after 1 April 2024.

Executive summary

On 16 June, 2023, the enforcement order associated with the income inclusion rule (IIR) was promulgated as part of Japan's 2023 tax reform.1 The enforcement order provides supplemental details of the law that had been enacted on 28 March 2023 2 to implement the IIR to align with OECD 3 BEPS 4 2.0 Pillar Two initiative.5 Generally reflecting the model rules (the Model Rules)6 established by the OECD, the enforcement order has been incorporated into the existing Japanese Corporate Income Tax Law Enforcement Order. Further details should be provided in the enforcement regulations at a later date. The IIR will apply to fiscal years beginning on or after 1 April 2024.

Detailed discussion

The law and enforcement order as they relate to the IIR provide:7

  • 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).

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

Ernst & Young Tax Co., Tokyo

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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

1 https://kanpou.npb.go.jp/20230616/20230616t00049/20230616t000490010f.html (in Japanese only).

2 See EY Global Tax Alert, Japan enacts 2023 tax reform bill including legislation to implement IIR to align with OECD BEPS 2.0 Pillar Two, dated 30 March, 2023.

3 Organisation for Economic Co-operation and Development

4> Base Erosion and Profit Shifting

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

6 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.

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

 

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