Japan’s global minimum tax law: long road ahead

Japan is one of the early adopters of the OECD’s 15 percent global minimum tax proposal (also commonly known as GLoBE). In March, the Japanese Diet legislated the 2023 tax reform package setting out the basic framework for a global minimum tax, followed by governmental and ministerial regulations issued by the Cabinet and the Ministry of Finance in June 2023.

However, Japan is still in the middle of adopting the GloBE rules. This article provides an overview of what Japan has done so far, and what remains to be done on implementing the global minimum tax, especially in light of the guidance issued by the OECD on July 17, 2023.

Japan has largely completed the codification of the so-called “income inclusion rule” (IIR), a key component of the GloBE rules that will allow Japan to impose a “top-up” tax on Japanese parent companies with subsidiaries in low-tax jurisdictions. The Japanese IIR is not expected to deviate from the OECD’s proposal. The Japanese IIR will be effective for fiscal years beginning on or after April 1, 2024. For a multinational enterprise group with its fiscal year from January to December, the Japanese IIR won’t apply to this group for FY 2024; however, even in FY 2024, this group may be subject to GloBE rules in other jurisdictions, such as EU member states.

Despite Japan’s strong interest in implementing the GloBE rules, little has been done to implement the GloBE rules (except the IIR). Apparently, the majority view in Japan is that the GloBE rules would benefit Japan. It is believed that Japan-based multinational enterprise (MNE) groups do not engage in aggressive tax planning.

While no empirical estimates have been officially presented, it is intuitively said that the GloBE rules would be helpful for these Japan-based MNEs because the rules would level the playing field by preventing foreign-based MNE groups, who may be more sophisticated in tax planning than Japan-based MNEs, in taking advantage of low-tax jurisdictions.

No steps taken on QDMTT and UTPR

Japan has not engaged in the legislative process for the other two critical elements of the GloBE rules: commonly known as the QDMTT (preventing Japanese companies from being under-taxed) and the UTPR (allowing Japan to tax Japanese entities within a multinational enterprise group that is under-taxed due to the absence of QDMTTs or IIR taxes levied by other jurisdictions). Pertinently, Japan’s ruling coalition announced last December that they may include the QDMTT and the UTPR in the tax reform package for 2024 or later, depending on the development of the discussion at the OECD.

According to a Japanese international tax official, this delay is related to the traditional practice of tax rule drafting in Japan. Japan has a unique rule drafting policy that laws and regulations should be precise and meticulous. In their view, the OECD Model Rules and the Commentary did not elaborate on the QDMTT and the UTPR enough to formulate the Japanese laws and regulations, that must be precisely and meticulously drafted under Japan’s lawmaking policy.

As a result, the government has decided to pause the process until the OECD issued additional guidance setting out relevant details. Indeed, it was not until July 17, 2023, that the OECD published new guidance on further details of the QDMTT.

More work to be done on IIR

There is more work to be done even on the IIR. Japan must timely amend the relevant laws and regulations to update them to incorporate the progressively released new guidance by the OECD.

The Japanese version of IIR is not a word-for-word translation of the OECD model rules but a more meticulous set of rules that Japan prepared by making its own additions and edits to the model while considering the commentary and guidance available during drafting. For example, as far as the Japanese IIR is concerned, many of the items in the OECD’s February administrative guidance have been codified in regulations, making them legally binding norms rather than mere interpretive guidelines. This is obviously due to the Japanese rule-making tradition as highlighted above.

Likewise, some parts of the new guidance issued on July 17, 2023, may have to be codified.

The previous trends may suggest, for example, that some key aspects of the relevant information return (including the transitional simplified jurisdictional reporting framework) and some material elements in determining IIR tax liability (presumably including the treatment of the marketable transferable tax credits and some safe harbors) would be codified. Drafting the relevant amendments would be even more difficult than before, since one must ensure that the amended portions would not have unintended interactions with the complex rules already formulated.

Another concern is the mismatch with the available timeline for tax reform.

Japanese tax laws and regulations are usually revised only once a year, at the end of March. The OECD may issue additional guidance without having regard to the Japanese inflexible practice. It is true that some countries, such as New Zealand, may have a mechanism for almost automatic incorporation of OECD updates into their domestic laws, but that is not the case in Japan. This could be a never-ending process.

The article is authored by Takato Masuda. Masuda is an attorney-at-law and associate at Nishimura & Asahi, Tokyo. All opinions expressed in this article are those of the author and do not represent or reflect the opinions of any other entity.