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February 10, 2023

Japan submits draft legislation to implement IIR to align with OECD BEPS 2.0 Pillar Two

  • Draft legislation for the 2023 tax reform has been submitted to the Japanese Diet. The draft legislation includes provisions to implement the Income Inclusion Rule to align with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two initiative.

  • The Legislation is expected to be passed by the Diet in March 2023, and to be legally effective as of 1 April 2023.

Executive summary

Following the announcement of Japan’s 2023 tax reform outline (the Outline)on 16 December 2022, the draft legislation (the Legislation)2 for the 2023 tax reform was submitted to the Japanese Dieton 3 February 2023. As the Outline noted, the Legislation contains the laws to implement the income inclusion rule (IIR) to align with OECD BEPS 2.0 Pillar Two initiative. The law generally reflects the model rules (the Model Rules)4 established by the OECD. The law will be incorporated into the existing Japanese Corporate Income Tax Law.

Detailed discussion

The Legislation as it relates to the IIR provides:5

  • 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

The Legislation is expected to be passed by the Diet in March 2023, and to be legally effective as of 1 April 2023. Items expected to be discussed by the OECD in detail this year, such as the undertaxed profits rule (UTPR) and the qualified domestic minimum top-up tax (QDMTT), are being considered for legislation in the 2024 tax reform at the earliest.


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



  1. See EY Japan Tax Alert, 2023 Japan tax reform outline, dated 23 December 2022.

  2. (in Japanese only).

  3. Japanese bicameral legislature.

  4. Tax Challenges Arising from Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two):

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


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