In December of 2023, Prime Minister Kishida announced the upcoming 2024 Corporate and Personal Japanese tax reform and tax reductions. These come into effect in July of 2024, so employers and all businesses must be aware.
The Big Picture. These are the highlights of the upcoming changes:
- Driving Domestic Growth: The introduction of new tax credit incentives is intended to stimulate domestic production within strategic sectors, encompassing electric vehicles, semiconductors and certain other products.
- Innovation box incentives: introduction of an Innovation Box regime for AI-related intellectual property, offering a 30% income deduction on “qualified income” from domestic transfers or licensing. This tax measure applies to specific patent rights and copyrights linked to AI technology acquired or produced from 1 April 2024, with qualified income eligible for deduction from 1 April 2025 to 31 March 2032.
- Extended tax credits and restrictions: Extending and broadening tax credits for salary increments spanning three years, commencing on 1 April 2024 to 31 March 2027. Additionally, imposing extended restrictions on the utilization of special tax measures for sizable companies falling short of criteria for salary hikes and capital investments.
- Revision to global minimum tax rule: Revision to global minimum tax rules in alignment with the OECD’s latest guidance. Japan is set to review the Income Inclusion Rule (IIR) from its 2023 tax reform as needed. The OECD will engage in detailed discussions on relevant matters, such as the Qualified Domestic Minimum Top-up Tax (QDMTT), throughout and after 2024. These discussions may lead to the incorporation of these items into the 2025 tax reform legislation, marking a potential legislative update.
- Revisions to CFC rules: The 2024 tax reform brings about changes in the controlled foreign company (CFC) rules governing foreign subsidiary income inclusion. Typically, foreign affiliates labeled as “paper companies” due to a lack of substance are subject to CFC regulations if their effective tax rate is below a specific threshold. While certain exceptions exist to prevent this classification, the new regulations specify that, under the 2024 tax reform, if a CFC generates no income in its tax year, the requirement for percentage of income determination to fulfill exemption criteria is eliminated.
- Extension of carry-forward period: The extension of the carry-forward duration for excess interest under earnings-stripping rules (ESR) will now be prolonged from 7 years to 10 years.
- Online platform taxation: introduction of new consumption tax liability requirements for online platforms intermediating foreign service providers. The system will apply to platform operators of a particular magnitude who provide platform services to foreign businesses catering to Japanese customers.
- Crypto-Asset reporting framework Introducing reporting mandates for enforcing the Crypto-Asset Reporting Framework (CARF).
Focus on Income Tax Rate Reductions Coming in July 2024.
On February 5, the National Tax Agency (NTA) announced the “2024 Income Tax Reduction Q&A”.
Effective July 2024, all employers will need to incorporate the various aspects of the tax reductions depending on the characteristics of their workforce. Of course, such changes mean that numerous calculations, payroll source deductions and government remittance amounts will change.
The Q&A addresses these matters:
- Outline of flat-rate tax reduction
- Applicable persons
- Standard-day workers
- If a worker retires on the record date, etc.
- Pre-deduction tax amount
- Monthly tax reduction
- Method of monthly tax reduction, etc.
- Annual tax reduction
- Method of annual tax reduction, etc.
- Withholding slip, payment statement, collection statement
- Deduction record book for each person
- Various benefit measures
Japanese NTA Source Documents are these:
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reflect only basic information. Please always seek out a local Japanese Sharoushi for an accurate interpretation of these complex rules and laws.
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Some of the key questions being asked are the following:
- Submission of a declaration for monthly tax reduction
- Monthly tax reduction for dependent relatives under the age of 16 not listed in the
- If the number of dependents changes
- Monthly tax reduction related to unpaid salary (for 2020)
- Submission of a declaration form for 8-1 year tax reduction
- Annual tax reduction for spouses whose income is expected to exceed 480,000 yen
- How to write on the withholding slip
- If there is no space to describe the monthly tax reduction on the salary payment statement
- Whether it is necessary to create a deduction record book for each person
Once again, all businesses and employers must be aware of upcoming 2024 Corporate and Personal Japanese tax reform and tax reductions.
