After much public and press discussion, on 14 December 2010 the Japanese Tax Commission announced their main proposals for 2011 tax reform. These proposals – for individual, corporate, consumption and other taxes – are still subject to the drafting of detailed legislation and approval by the Japanese Diet in coming months and can be found on the Tax Commission website here (link in Japanese).
The corporation tax proposals are summarized in a brief four page document which can be found here (link in Japanese).
Little detail is given in the document, but the main proposals are the reduction in the corporate tax rate by an effective 5 per cent together with the restriction to offset of losses carried forward and sundry other reductions to depreciation, tax credits or similar intended to preserve some of the tax base. Incentives for foreign investment are also included. The proposals were as follows:
Reduction in the corporate tax rate and related measures
The basic rate of corporation tax would be reduced from 30 per cent to 25.5 per cent. Together with the reduction in the corporation tax rate the following measures to help preserve the tax base would be adopted:
A reduction or abandonment of various special depreciation measures as follows:
- abandonment of the system to encourage investment in energy demand and supply equipment
- a reduction in the scope of special depreciation for assets and is in concentrated asset production zones.
- abandonment of the system the special depreciation of new equipment
The scope of special reserves for improvement of assets would be revised. Special measures related to the special credit for corporation tax for research and development costs would not be extended. The rate of depreciation would be reduced.
The system of tax deductible statutory reserves for bad debts would be limited to banks, insurance companies and other similar financial companies and to small and medium-sized enterprises.
Offset of tax losses
The off-set of carry forward tax losses would be limited to 80 per cent of the taxable income of the year in which such offset was claimed (this measure would not apply to small and medium-sized enterprises). Along with this measure, the carry forward period for tax losses would be extended from seven to nine years.
The limitation for deductibility of certain donation expenses would be reduced by one half. The system for credit for foreign taxes would be revised appropriately (no details given).
Measures for small and medium-sized companies
Temporary measures reducing the rate of corporate tax for small and medium sized companies would allow for a further three-year period reduction of the current 18 per cent corporation tax rate to 15 per cent. The rate of corporation tax for such companies before the adoption of these special measures would be reduced from 22 per cent to 19 per cent.
Along with this reduction, the measures for strengthening the base of small and medium-sized companies would be abandoned. The measures allowing deductible bad debt reserves for public purpose companies and cooperative associations would be restricted. The system for special credit for residual income for certain defined commercial partnerships would be abandoned.
Measures to encourage employment
A system allowing a corporation tax credit of JPY200,000 for each person would be established for companies who meet the defined conditions for increasing employment, namely employing at least five additional staff (two for small and medium sized companies) and increasing the number of employees who receive employment or general social insurance by at least 10 per cent.
A system would be established allowing increased depreciation for enterprises purchasing related equipment where the company concerned had which received recognition under the law to promote and support the next generation of education.
The system allowing increased depreciation for machinery used to allow the employment of disabled people would be supplemented.
Tax system to encourage environmentally related investment
A system to allow specially accelerated depreciation related to investment in plant and equipment that could be foreseen to have an effect in reducing the level of CO2 emissions would be established
Incentives for foreign investment
A series of comprehensive investments zones (in Japanese the ‘総合特区制度’ or ‘sougou tokku seido’) and a related tax system to encourage companies to establishment their Asian base in Japan (in Japanese the ‘アジア拠点化推進制度’ or ‘ajia kyotenka suishin seido’) would be established. Tax incentives under this system would be as follows:
Either adoption of a system allowing accelerated depreciation of assets acquired by specified companies for the purposes of a business that had been recognized under an approved plan established under this system. Depreciation would be 50 per cent for acquired equipment (25 per cent for buildings) and tax credit of 15 per cent for equipment 8 per cent for building; or
A system allowing the deduction of 20 per cent of the income of a business of a specified company that was recognised under the law, limited to newly established companies inside the special zones concerned.
Qualifying companies would have to chose one of the two measures described above.
Measures targeting foreign investors specifically include an exemption from taxation of 20 per cent of the taxable income for domestic Japanese companies established by defined foreign enterprises for the purposes of regional control or for carrying out research and development.