March 30, 2021
Japan enacts 2021 tax reform bill
On 26 March 2021, Japan’s 2021 tax reform bill (the Bill) was enacted following passage of the Bill by the Japanese Diet.1 The Bill generally follows the tax reform outline announced by Japan’s coalition leading parties in December 2020.2 The amendments generally apply to taxable years beginning on or after 1 April 2021 unless otherwise specified.
This Alert summarizes the key provisions relevant to multinational corporate taxpayers.
Digital transformation investment incentives
A digital transformation-related investment under a certified business adaptation plan made by 31 March 2023 up to JPY30 billion (US$300 million) will be eligible for 30% special depreciation or a 3% to 5% tax credit (capped at 20% of corporate income tax payable together with the carbon-neutral investment incentives). Digital transformation-related investment includes software, machinery and equipment that contributes to improved productivity and marketing development.
Research and development (R&D) tax credit
Increased employee compensation credit
The existing increased employee compensation credit will be refined to encourage businesses to hire new employees such that if compensation paid to newly hired employees in the current year increases by 2% or more as compared to compensation paid to newly hired employees in the previous year, the compensation paid to newly hired employees in the current year is eligible for a 15% to 20% tax credit subject to certain conditions (capped at 20% of corporate income tax payable).
Increased limit for deductions of net operating losses (NOLs)
Under the existing law, NOLs carried-forward can only shelter up to 50% of the current year’s taxable income (except for certain SMEs). Under the 2021 reform, an increased NOL limit will be provided for eligible NOLs, which is up to the ”outstanding amount of accumulated qualified investment” for the applicable fiscal years. This measure is intended to stimulate new investment associated with digital transformation, carbon neutrality and business restructuring.
Tax treatment of share-for-share acquisitions
Certain share-for-share acquisitions will qualify for tax neutral (i.e., tax deferred) treatment for existing shareholders, subject to certain conditions including that 80% or more of the acquisition consideration must be the acquirer’s shares.
Incentives to attract foreign financial services companies and fund managers
Carbon neutral investment incentives
Carbon neutral-related investment under a certified environment adaptation plan made by 31 March 2024 up to JPY50 billion (US$500 million) will be eligible for 50% special depreciation or a 5% to 10% tax credit (capped at 20% of corporate income tax payable together with the digital transformation investment incentives). Carbon neutral-related investment includes equipment that contributes to reduced greenhouse gas emissions.
Digitalization of tax compliance
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