Japan - response to BEPS

Japan - response to BEPS

Japan is highly engaged in the OECD’s BEPS consultations due to its G20 and the OECD memberships. Tsugumasa Asakawa, Director General of the International Bureau of Japan’s Ministry of Finance (MOF) for Policy Planning and Co-ordination, is the current chair of the OECD’s Committee on Fiscal Affairs. The minister is not only leading the discussion of international tax matters at the OECD level, he and other MOF officials are actively working to garner support for the BEPS initiative domestically.

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Japan currently has tax rules in place that specifically address three OECD BEPS Action Plan items:

Limitation of deductibility:

Under Japan’s 2012 tax reform, an earnings-stripping regime was introduced to prevent companies from taking excess interest deduction. The regime limits the deductibility of interest, royalty, lease and other payments where the interest payments to foreign related parties are excessive in comparison with the company’s income (Action 4).

Anti-treaty shopping:

Under its tax treaty policy, Japan generally seeks to include limitation on benefits clauses in tax treaties. Japan’s current tax treaties with Australia, France, the Netherlands, New Zealand, Sweden, Switzerland the United States and the United Kingdom include such clauses (Action 6).

Digital economy taxation:

In November 2013, the MOF submitted the report Consumption Tax Treatment of Cross-Border Supplies of Services and Intangibles to the International Taxation Discussion Group of the government’s Tax Commission. The report discusses how cross-border supplies of services and intangibles should be treated for consumption tax purposes from the perspective of ensuring both tax neutrality and the taxing rights of Japan. The consumption tax for cross-border digital services was implemented as of 1 October 2015. The tax treatment of other cross-border services than digital services is still under discussion (Action 1).

Other anti-avoidance rules

Japanese tax law also includes a general anti-avoidance rule for closely held companies that allows the Japanese tax authorities to deny a transaction that, in their view, improperly decreases the company’s tax burden due to improper or unique terms and conditions. Specific anti-avoidance provisions are in place for all companies related to corporate reorganization transactions and transactions. These rules give Japanese tax authorities similar rights as the general anti-avoidance provisions.

Rising interest in tax planning techniques

For international Japanese-headquartered companies, the current BEPS debate and BEPS-related actions by emerging countries is spurring an unexpected attitudinal change. Historically, Japanese companies have not undertaken tax planning. Rather, they have viewed their tax contributions as a source of pride. A shift is occurring as Japanese companies contend with several factors: 

  • Despite recent corporate income tax rate reductions, Japan’s current rate of 33.06 percent (as of 31 March 2016) is relatively high.
  • As Japan’s economy has begun to improve, taxable profits of Japanese companies are rising, creating more incentive to take steps to reduce the effective tax rate.
  • Despite their historical lack of tax planning, Japanese companies are finding longstanding international tax structures under increasing threat of double taxation from aggressive tax audit practices and BEPS-related measures of countries such as India and China.

As beleaguered Japanese companies perceive their share of tax as increasing, many of them are showing more interest in ways to minimize their tax burden on a global basis.

Resisting different notions on allocation of profit

The stance of emerging economies toward allocations of profit is also driving many of Japan’s positions as the OECD BEPS Action Plan proceeds. For example, as emerging economies have increasingly sought to allocate profit for treaty purposes based on beneficial ownership (e.g., looking through holding companies in low-tax jurisdictions), Japan has become increasingly interested in preserving allocations based on legal ownership.

Similarly, it is in the interest of Japanese companies to maintain transfer pricing principles that, for example, attribute value creation to intangible asset holdings developed and held by the parent company rather than value drivers in emerging economies, such as low-cost labor pools, extensive manufacturing operations and large consumer markets.

Japanese companies also have concerns that emerging countries will use data from detailed country-by-country tax reporting to further challenge the profit allocations among international groups.

However, even as Japan advocates for international tax principles best suited to global companies based in the country, Japan is expected to fully embrace the OECD BEPS Action Plan’s final outcomes.

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