Japan’s ruling parties announced the 2025 tax reform proposals on 20 December 2024, which include changes to the corporate tax, international tax, personal income tax, consumption tax, etc. This article focuses on the proposals for international tax, specifically plans to add an undertaxed profits rule (UTPR) and a qualified minimum top-up tax (QDMTT) to the existing income inclusion rule (IIR) and make some other changes to the global minimum taxation rules (for prior coverage, see the article in the February 2023 issue of Corporate Tax News, as well as BDO’s Pillar Two Tracker). The parliament is expected to approve the proposals by the end of March 2025.
Pillar Two legislation was first enacted in Japan in the 2023 tax reform; this legislation provides for an IIR that is aligned with the OECD Global Anti-Base Erosion (GloBE) rules and applies for financial years starting on or after 1 April 2024. The rules are incorporated into Japan’s Corporate Income Tax Law. The National Tax Agency (NTA) has published administrative and interpretative guidance on various aspects of the rules, as well as explanatory notes and a tax return form.
The global minimum taxation rules apply to specified multinational enterprise (MNE) groups where the worldwide gross revenue of the ultimate parent entity (UPE) in two or more of the four preceding fiscal years is EUR 750 million or higher. In-scope entities are subject to a global minimum tax rate of 15% on the adjusted gross income of the group, regardless of where the business is headquartered or operates.
As noted above, the 2025 tax reform proposals would introduce both a UTPR and a QDMTT that would be aligned with the GloBE rules and would apply for financial years beginning on or after 1 April 2026, giving potentially affected entities time to prepare for the new rules and filing obligations. In addition, changes would be made to the IIR to take into account administrative guidance issued by the OECD.
The IIR operates as the primary rule that allows Japan to apply a top-up tax on MNE parent entities located in Japan if the group's effective tax rate (ETR) in another jurisdiction is below 15%. The UTPR would function as a backstop rule that would allow Japan to apply a top-up tax on constituent entities (CEs) located in Japan if the MNE group’s ETR in another jurisdiction is below 15%; it would apply only to the extent that any top-up tax has not been levied though an IIR or a QDMTT. The QDMTT would provide Japan the ability to claim primary rights to impose top-up tax on any low-taxed profits in Japan.
Undertaxed Payment Rule
The following entities would be subject to the UTPR in Japan:
The filing and payment of the UTPR would be within 15 months (18 months in certain circumstances) from the day immediately after the last day of each financial year. No filing would be required if there is no UTPR top-up tax amount for the financial year.
Qualified Domestic Top-Up Tax
The following entities would be subject to the QDMTT in Japan:
The filing and payment due for the QDMTT would be within 15 months (18 months in certain circumstances) from the day immediately after the last day of each financial year. No filing would be required if there is no QDMTT amount for the financial year.
A system for providing QDMTT information would be introduced, and the group’s QDMTT information return would have to be filed with the NTA via the e-Tax system within 15 months (18 months in certain circumstances) from the day immediately after the last day of each financial year. Specific information would have to be provided in the QDMTT information return, such as the name of the UPE, the QDMTT amount, whether the de minimis exclusion or safe harbours apply, etc.
A return would not have to be filed if the tax authorities in the jurisdiction where the UPE (or a designated filing entity) is located can provide the group QDMTT information return for the NTA.
Changes to the Income Inclusion Rule
The existing IIR would be revised in several areas to align the rules with the OECD guidance issued in June 2024, such as the methodology to be applied to the recapture of deferred tax liabilities, allocation of cross-border deferred taxes in respect of controlled foreign company rules and clarification on the allocation of profits and taxes in structures including flow-through entities. The effective date for these revisions has not yet been determined.
Kenichiro Kishi
BDO in Japan
Global Minimum Taxation
Pillar Two legislation was first enacted in Japan in the 2023 tax reform; this legislation provides for an IIR that is aligned with the OECD Global Anti-Base Erosion (GloBE) rules and applies for financial years starting on or after 1 April 2024. The rules are incorporated into Japan’s Corporate Income Tax Law. The National Tax Agency (NTA) has published administrative and interpretative guidance on various aspects of the rules, as well as explanatory notes and a tax return form. The global minimum taxation rules apply to specified multinational enterprise (MNE) groups where the worldwide gross revenue of the ultimate parent entity (UPE) in two or more of the four preceding fiscal years is EUR 750 million or higher. In-scope entities are subject to a global minimum tax rate of 15% on the adjusted gross income of the group, regardless of where the business is headquartered or operates.
As noted above, the 2025 tax reform proposals would introduce both a UTPR and a QDMTT that would be aligned with the GloBE rules and would apply for financial years beginning on or after 1 April 2026, giving potentially affected entities time to prepare for the new rules and filing obligations. In addition, changes would be made to the IIR to take into account administrative guidance issued by the OECD.
The IIR operates as the primary rule that allows Japan to apply a top-up tax on MNE parent entities located in Japan if the group's effective tax rate (ETR) in another jurisdiction is below 15%. The UTPR would function as a backstop rule that would allow Japan to apply a top-up tax on constituent entities (CEs) located in Japan if the MNE group’s ETR in another jurisdiction is below 15%; it would apply only to the extent that any top-up tax has not been levied though an IIR or a QDMTT. The QDMTT would provide Japan the ability to claim primary rights to impose top-up tax on any low-taxed profits in Japan.
Undertaxed Payment Rule
The following entities would be subject to the UTPR in Japan:
- A domestic company that is a CE of an in-scope MNE group; and
- A foreign company that is a CE with a permanent establishment (PE) in Japan of an in-scope MNE group.
The filing and payment of the UTPR would be within 15 months (18 months in certain circumstances) from the day immediately after the last day of each financial year. No filing would be required if there is no UTPR top-up tax amount for the financial year.
Qualified Domestic Top-Up Tax
The following entities would be subject to the QDMTT in Japan:
- A domestic company that is a CE or a joint venture of an in-scope MNE group; and
- A foreign company that is (i) a CE entity or joint venture with a PE in Japan of an in-scope MNE group.
The filing and payment due for the QDMTT would be within 15 months (18 months in certain circumstances) from the day immediately after the last day of each financial year. No filing would be required if there is no QDMTT amount for the financial year.
A system for providing QDMTT information would be introduced, and the group’s QDMTT information return would have to be filed with the NTA via the e-Tax system within 15 months (18 months in certain circumstances) from the day immediately after the last day of each financial year. Specific information would have to be provided in the QDMTT information return, such as the name of the UPE, the QDMTT amount, whether the de minimis exclusion or safe harbours apply, etc.
A return would not have to be filed if the tax authorities in the jurisdiction where the UPE (or a designated filing entity) is located can provide the group QDMTT information return for the NTA.
Changes to the Income Inclusion Rule
The existing IIR would be revised in several areas to align the rules with the OECD guidance issued in June 2024, such as the methodology to be applied to the recapture of deferred tax liabilities, allocation of cross-border deferred taxes in respect of controlled foreign company rules and clarification on the allocation of profits and taxes in structures including flow-through entities. The effective date for these revisions has not yet been determined.
Kenichiro Kishi
BDO in Japan