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March 30, 2023

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

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: Detailed Review, dated 23 March 2023.

  2. (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):

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


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