April 15, 2021
Japanís 2021 Tax Reform introduces tax incentives for carbon neutrality and digital transformation
The Japanese Government has set goals to reach zero greenhouse emissions by 2050 and to promote the digital transformation of the Japanese economy. To achieve these goals, certain tax incentives have been introduced. These incentives have been introduced as part of the wider Industrial Competitiveness Enhancement Act.
On 26 March 2021, Japan’s 2021 tax reform bill (the Bill) was enacted following passage by the Japanese Diet. Under the provisions of this Bill, certain Carbon Neutral and Digital Transformation investments qualify for tax incentives amounting up to a maximum of JPY1.5b for Digital Transformation and up to JPY5b for Carbon Neutrality. The amount of the respective tax credit depends on the investment amount as well as satisfying specific conditions.
This Alert summarizes the key provisions relevant to these incentives and also highlights action points for taxpayers.
The Japanese Government will incorporate Carbon Neutrality and Digital Transformation related measures into the Increased Competitiveness Enhancement Act (The Act). The amendments to the Act are expected to take legal effect during July 2021.
Taxpayers will have access to these tax incentives if the following conditions are met:
Digital transformation investment tax incentive
The use of digital technology should contribute to the business transformation of the taxpayer, resulting in substantial changes in business processes, strategies leading to improvement in productivity and the development of new products, production and sales methods. Projects that could qualify for tax incentives are, for example, plant automatization and E-commerce automated warehouse solutions. Digital transformation-related investments include software, machinery and equipment.
Digital transformation-related investments of up to JPY30b (US$300m) as certified under a business adaptation plan made by 31 March 2023 will either be eligible for a 3% to 5% tax credit or for 30% special depreciation.
Carbon neutral investment incentive
Carbon neutral-related investments reduce greenhouse gas emissions in the production process and contribute to making products that accelerate decarbonization. There are specific decarbonation benchmarks that need to be achieved for the tax incentives to become available.
Carbon neutral-related investments of up to JPY50b (US$500m) as certified under an environment adaptation plan made by 31 March 2024 will either be eligible for a 5% to 10% tax credit or for 50% special depreciation.
Whereas the exact details of the Act will only become known at a later date and the amended Act is expected to take legal effect during July 2021, taxpayers should consider the following actions at this time:
It is important to note that these incentives may be subject to various limitations. For example, the sum of the carbon neutrality tax credit and the digital transformation tax credit cannot exceed 20% of the corporate income tax payable.
Profile of a potentially qualifying taxpayer
Taxpayers with a substantial corporate tax liability in Japan and investment plans for Carbon Neutrality and Digital Transformation will potentially find these incentives attractive. The timeframe for the qualifying investments is relatively tight and there is a certification process, therefore taxpayers should start the initial assessment promptly.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Tokyo
For inquiries in relation to tax matters for Japan inbound investments, please contact any of the following members of our Inbound Tax Advisory Services Team:
EY Tax Japan – Inbound Japan Tax Advisory Services Team