The updates of the tax system in Japan

In the context of corporate globalization as well as active international transactions of large corporations, small and medium-sized enterprises, the tax system in Japan is constantly being revised annually and is becoming more sophisticated. The tax reform brings significant influences to the domestic and foreign enterprises in Japan. The major tax reforms are as follows: 

1. Reduction in corporate income tax rate 

The corporate income tax rate has been reduced from 30% to 25.5% since 2011 aiming to enhance the international competitiveness of enterprises. Yet, to ensure funds for post-disaster  reconstruction after the massive earthquake in North-eastern Japan, the Japanese government put forward the proposal on ‘Tax Increase for Rehabilitation’, which stipulates tax increases for 3 consecutive years from 2012. 10% subtax will be added on top of the present Corporate Income Tax. Therefore, the effective corporate income tax rate for the following 3 years is 28.05% (Rehabilitation Special Corporate Income Tax). 

2. Losses carry forward 

Originally, the corporate income tax law in Japan permits losses to be carried forward for 7 years as a treatment for losses. However, according to the bill, an additional 2 years be extended for the losses to be carried forward, thus it will be 9 years effective from 2012. 

Yet, the bill also stipulates that the losses to be carried forward by large enterprises shall be limited to 80% of its recurring profit. So even though greater losses were incurred, 20% of the recurring profits are still necessarily be subjected to tax. Whereas small and medium-sized enterprises are not subject to this restriction, hence they will benefit more from this new provision. 

3. Increase in consumption tax rate 

In order to ensure financial sources for social security and other aspects, the Japanese government announced the bill related to the ‘Reform of integrating social security and tax system’ in August 2012. The consumption tax rate is currently 5%. The bill decided to raise it to 8% from April 2014 and further to 10% from October 2015. ‍

4. Obligating overseas assets declaration system 

Considering the expansion of Japan‘s overseas investments and overseas assets year by year, the Japanese government enhanced its system for taxing overseas assets in the 2012 revised tax draft. The obligating declaration system will be applicable to citizens’ overseas assets from 2014 onwards. 

The Revenue Bureau will impose the obligating declaration system annually to the individuals (who own more than 50 million Yen of overseas deposits, shares and real estates ) in order to ascertain their overseas assets and collect income tax and inheritance tax accordingly. Any individual who fails to declare their overseas assets honestly will be subject to an imprisonment of not more than one year.