The 2011 Tohoku disaster was the most powerful earthquake in Japan's history. The World Bank has estimated that more than $235 billion is needed to rebuild the country after the damage caused by the earthquake and the other disasters to have hit in recent ...
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The 2011 Tohoku disaster was the most powerful earthquake in Japan's history. The World Bank has estimated that more than $235 billion is needed to rebuild the country after the damage caused by the earthquake and the other disasters to have hit in recent years: the tsunami and nuclear reactor meltdowns.
Recovery programmes have been underway in 2012 and progress is being made, though slowly. The government needs funds to support these social security reforms and tax is an obvious source. As a result major tax reforms, such as reduction of corporate tax rates that was discussed before the Tohoku disaster, has been delayed.
The 2011 Tax Reform proposed cutting the corporate tax rate to create a more competitive environment. However, the government has introduced a temporary surtax on companies for three years instead, to cope with the damage and costs the disasters have inflicted.
The rationale behind the surcharge is understood, though advisers believe Japanese businesses should be incentivised too. "Corporate tax should be decreased, and we should try to keep Japanese clients and manufacturers to stay in Japan. There should be incentives given to manufacturers but the government does not have this focus or plan at the moment," said Atsushi Oishi of Mori Hamada & Matsumoto.
New earning stripping rules have been introduced in the 2012 Tax Reform, promulgated on March 31 2012. Under the earnings stripping provision, a corporation's deduction for net interest expense paid to a related party will be limited to 50% of adjusted income effective for tax years beginning on or after April 1 2013.
"The government did recognise that this in particular was going to take some time for multinational corporations operating in Japan to react to. They did push out originally to make this reform effective from April 2012, but due to various lobbying efforts, did delay the implementation of this until April 1 2013. The good news is there is time for people to react to these rules, and carefully consider what they need to do," said Marc Lim of PwC during one of his firm's webcasts.
The Tax Hike Bill was approved by the National Diet on August 10 2012 and will take effect on April 1 2014. Among other proposals, the bill intends to increase consumption tax incrementally. The consumption tax rate of 5% will apply until March 31 2014. It will then be go up to 8% from April 1 2014 to September 30 2015 and finally to 10% on October 1 2015. The revenue raised from tax hikes is planned to alleviate the increasing social security reform costs.
Though any raise in tax is hardly celebrated by taxpayers, the amount proposed "is still pretty low compared to other jurisdictions, notably in Europe," said Eiki Kawakami of Kojima Law – Taxand.
A number of factors contribute to Japan's tax environment. The aftermath of the earthquake in Japan and floods in Thailand has left businesses in Japan surprisingly resilient. "We are seeing an increase in foreign M&A activities, we are helping a lot on the structuring side and corporate integration, and activities relating to transfer pricing continue to be very strong," said Kai Hielscher of Ernest & Young.
"The Japanese economy condition has been changing in the past couple of years because of the high yen appreciation and some domestic economy matters, many Japanese companies are looking for opportunities in foreign countries, such as South East Asia," said Yoichi Ishizuka of Grant Thornton.
As more outbound transactions happen, it is inevitable that the areas of focus for tax are transfer pricing, anti-avoidance and tax implications resulting from M&A activities. The consequent emphasis for taxpayers relies heavily on proper business planning and rethinking global structures to avoid tax investigations.
Even so, tax authorities have been diligent in collecting tax to help build the local economy back to where it was and stronger before the natural disasters.
"The tax authority continues to vigorously challenge transactions motivated out of tax avoidance," said Yushi Hegawa from Nagashima Ohno & Tsunematsu
"Japanese authorities last year began efforts to encourage tax compliance as part of good corporate governance, based on OECD initiatives. In line with that initiative, this year they have expanded this effort to transfer pricing," said Gary Thomas of White & Case. "They want to reach out to the top management of Japanese companies and educate them that good corporate governance includes transfer pricing compliance. This is a positive step, because at the same time the authorities recognise that they have responsibility to ensure that it is possible for companies to comply based upon more clear guidance to taxpayers," he said.
A reason for this being that the tax authorities "want as many companies as possible to comply, because if they do comply, it allows the tax authority to focus their limited resources on those who do not," added Thomas.
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