Hello, I am Soga, a Certified Public Tax Accountant providing international tax services in Nagoya.
Recently, the ruling party’s Tax Reform Proposal for 2025 was released. This time, I would like to briefly introduce the main revisions in the field of international taxation.
The revisions in the area of international taxation are not numerous, and consist mainly of: 1. updating global minimum taxation in accordance with OECD discussions; and 2. reducing the administrative burden of the anti-tax haven taxation (Japan CFC rule: Controlled Foreign Company rule). Companies that are not subject to these tax regimes are not expected to be affected by the revisions.
1. Update of global minimum tax
First, multinational corporations (including group companies) with consolidated gross revenue of 750 million EUR (approximately 120 billion JPY) or more may be subject to global minimum taxation. If you are not such a large company, this revision will not affect you even if you have overseas subsidiaries.
Since some of the terms in the Tax Reform Proposal are unfamiliar and difficult to understand, I have summarized the outline of Japan’s response to global minimum taxation, including previous tax reforms.
- Established by the 2023 Tax Reform
- The rule will be applied from the fiscal year ending March 31, 2025.
- The tax rate in the country of the subsidiary is less than 15%, the parent company is subject to tax up to 15%.
- Proposed by this tax reform
- Applicable from the fiscal year ending March 31, 2027
- When IIR is not applied in the country where the parent company is located, the subsidiary company will be taxed by UTPR
- Possible application to Japanese subsidiaries of foreign companies whose ultimate parent company is located in a country where IIR does not exist
- Proposed by this tax reform
- Applicable from the fiscal year ending March 31, 2027
- Basically, companies will be taxed up to 15% in their home country
- Taxed amount by QDMTT in foreign countries will be excluded from the calculation of IIR in the home country
- Since the tax rate in Japan is not expected to be less than 15%, the application of QDMTT in Japan may be limited
For many Japanese companies, it seems that the main consideration will remain the already introduced IIR.
2. Reduction of administrative burden for the CFC rule
Under the Japan CFC rule, a Japanese parent company is subject to tax on income earned through subsidiaries in low-tax jurisdictions that have no actual economic status.
Companies that are not subject to the Japan CFC rule in the first place are not affected by this tax reform.
The tax reform will simplify taxation to a certain extent by 1) pushing back the timing of combined taxation and (2) easing the requirement for supporting documents.
1) Pushing back the timing of combined taxation
The timing for imposing combined taxation will be the fiscal year of the domestic corporation that includes the day on which four months (currently two months) since the end of the fiscal year of the foreign affiliated company.
In other words, if the Japanese parent company’s fiscal year end is March 31 and the foreign subsidiary’s fiscal year end is December 31, the income of the foreign subsidiary for the fiscal year ended December 31 will be captured in the next following March 31 fiscal year of the Japanese parent company, not the next March 31 fiscal year of the Japanese parent company.
In the current rule, the practice would have been to calculate the combined taxation based on estimated figures on the Japanese parent company’s side when the foreign subsidiary’s local financial statements and tax returns had not been completed. This tax reform is likely to reduce such practical handling.
The effective date of this revision will be as follows in the above example.
- (Current) Foreign subsidiary’s fiscal year ending December 31, 2023 → Captured in Japanese parent company’s fiscal year ending March 31, 2024
- (Current) Foreign subsidiary’s fiscal year ending December 31, 2024 → Captured in Japanese parent company’s fiscal year ending March 31, 2025 (However, as a transitional measure, the tax can be captured in the fiscal year ending March 31, 2026)
- (After revision) Foreign subsidiary’s fiscal year ending December 31, 2025 → Captured in Japanese parent company’s fiscal year ending March 31, 2027
For a company that applies the CFC rule every year, there will be a fiscal year in which the Japanese parent company will not be subject to the combined taxation.
2) Relaxation of documents to be attached and preserved
In cases where the Japanese parent company is subject to the combined taxation, certain documents such as financial statements and tax returns of the foreign subsidiary must be attached to the tax return of the Japanese parent company. The following documents will be excluded from such documents under this tax reform.
- Statement of changes in shareholders’ equity
- Statement of account breakdown
It seems that in some cases, notes to audited financial statements could be substituted for the statement of account breakdown, but even if there is no substitute, it will no longer be necessary to bother to prepare such a statement.
Conclusion
The above is a review of the major revisions in the field of international taxation in the 2025 Tax Reform Proposal.
Although there may not be many companies affected by this revision, we hope it will be of some help to you.
