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.
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Executive summary
Following the announcement of Japan’s 2023 tax reform outline (the Outline)1 on 16 December 2022, the draft legislation (the Legislation)2 for the 2023 tax reform was submitted to the Japanese Diet3 on 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.
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
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.