Bloomberg Tax
Aug. 10, 2023, 7:00 AM

Japan Steadily Adopts Global Minimum Tax but Still Has Work to Do

Takato  Masuda
Takato Masuda
Nishimura & Asahi

Japan is steadily adopting the 15% global minimum tax proposed by the OECD. In March, the Japanese Diet legislated the 2023 tax reform package providing its basic framework, followed by governmental and ministerial regulations issued by the Cabinet and the Ministry of Finance in June.

These laws and regulations focus on establishing the main component of the Organization for Economic Cooperation and Development proposal. This component is the so-called income inclusion rule that allows Japan to impose additional taxes on Japanese parent entities with subsidiaries in jurisdictions where the effective tax rate is below 15%. The Japanese IIR will be effective for fiscal years beginning on or after April 1, 2024.

However, Japan still has work to do, as the OECD released follow-up publications after the Japanese IIR-related regulations were finalized in June. For example, Japan would have to enact another set of rules to codify the details of the information return that the OECD revealed on July 17.

Moreover, the remaining two components of the OECD proposal weren’t covered in 2023 and are expected to be addressed in the future tax reform package. One component is the additional taxation that prevents the effective tax rate in Japan from falling below 15%, known as the qualified domestic minimum top-up tax.

The other component is labeled the undertaxed profits rule, which is a mechanism for Japan to impose additional taxes on Japanese entities belonging to a multinational enterprise group that is undertaxed even after taking into account the applicable IIR taxes and QDMTTs.

Redesigning Tax Incentives?

In general, tax incentives reduce the effective tax rate. Suppose the effective tax rate falls below 15% due to tax incentives. In that case, the global minimum tax will be imposed, and the tax benefits will be effectively lost to that extent. Therefore, some countries may want to reconsider their existing tax incentives.

The key is that the OECD’s proposed rule divides tax credit incentives into two categories. The first category will be treated as a decrease in tax (the numerator of the effective tax rate). The other category will be treated as an increase in income (the denominator of the effective tax rate). Given the same amount of tax benefits, the first category of incentive would drastically lower the effective tax rate compared with the latter category. In other words, the latter tax credit incentive is less likely to be nullified by the global minimum tax. While the latter category includes so-called qualified refundable tax credits and marketable transferable tax credits, it doesn’t cover other tax credits.

As far as Japan is concerned, however, redesigning existing tax credits to fit into the latter category may not be an urgent priority. In general, the effective tax rate in Japan is said to be about 30%. According to an official from the Ministry of Finance, it is only in extremely rare cases that the effective tax rate in Japan falls below 15%. If that is the case, there may not be much motivation for Japan to restructure its existing tax incentives.

Moreover, Japan is believed to be quite far still from the “bottom” of its 15% effective tax rate, and there may even be room left to introduce a new tax incentive. For example, at the end of July, the Ministry of Economy, Trade and Industry released a study group report (in Japanese) recommending that it was time for Japan to introduce a new research and development incentive that would apply a preferential tax rate to certain income from intellectual property assets, known as the “innovation box.” One study group member expressed his view that, since Japan is currently a high-tax country, it is unlikely that the effective tax rate in Japan would fall below 15% even if the innovation box were to be introduced.

‘Decluttering’ Corporate Income Tax?

In the Tax Talks on July 19, the OECD presented an initiative to simplify, eliminate, or modify existing domestic tax rules that address “similar risks” to those addressed by their two-pillar solution. They named this project the “decluttering” of corporate income tax or the “post-pillars fitness check.”

This may be relevant to the issue of whether to declutter the controlled foreign company legislation upon introducing the global minimum tax. What would be the Japanese approach to this issue?

At a Japanese tax conference in September 2022, an official of the Ministry of Finance acknowledged that they wouldn’t consider abandoning or narrowing down the CFC regime upon introducing the global minimum tax. In the ministry’s view, the global minimum tax regime and the Japanese CFC regime should serve different objectives: the former to address the worldwide race to the bottom regarding corporate tax rates, and the latter to address the abuse of foreign subsidiaries without actual business activity and other similar ways of avoiding Japanese taxation.

This June, the Tax Commission, a tax policy advisory body established by the Japanese government, also emphasized the same argument in its report.

In short, Japan seems to consider that the CFC legislation can basically be outside the scope of the decluttering project, as it doesn’t address “similar risks.”

Nevertheless, the Ministry of Finance is reportedly aware of the increasing compliance costs of implementing the global minimum tax. Streamlining the Japanese tax regime and reducing compliance costs is a critical issue, but how to achieve that is still the subject of debate.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Takato 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.

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To contact the editors responsible for this story: Katharine Butler at; Daniel Xu at

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