Japan shows the way in global tax reform

Francis Mayebe & Virusha Subban

Baker McKenzie

Thedebatearoundtheimplementation of Pillar 2 has been wagedintheinternationaltax sphere for a few years now.

Essentially, Pillar 2 is a principal rule ofthe Organisation ofEconomic Cooperation and Development's (OECD) 15%global minimum tax proposal.As partof dealingwith thetaxchallenges arising fromdigitisation, as well as baseerosion and profitshifting, theOECDpro- posed theimplementation of a 15% globalminimum tax in 2019. The importanceof this proposal froman international taxperspective, which originatedin theinitialOECD BEPS (base erosion and profit shifting) project, is that it aims toend thedebate ondisparitiesin domestictaxrates between variousglobal jurisdictions.In essence,itensures multinational companiespay aminimumeffective corporate tax rate of 15% irrespective ofthe localtax rate or base, which may be less.

Japan’srulingcoalitionhas outlined its2023 taxreform package, whichincludes the implementation ofthe OECD’s 15%global minimum tax proposal.

The taxreform package includeslegislativeoutlinesof a globalminimum corporate taxbasedonPillar2.Itfurther introduces anincome inclusionrule(IIR) that,inbroad terms, aligns with the Global Anti-Base Erosion (GloBE) Model Rules.

This particulardraft legislation wastobesubmitted to the Diet (thenational legisla- tureofJapan)inJanuary2023 and, if passed,will become effective fromthe fiscalyear beginning in or after April 2024.

The incomeinclusion rule would applyto Japaneseheadquartered multinational enterprises and Japanese subsidiaries of foreignheadquartered multinational enterprises, ifthe worldwide gross revenueof theultimate parent entity intwo or more ofthe fourprecedingfiscal years is €750m or higher.

Together withthe EU, Japanhas beenone ofthe biggest advocatingstates for the implementationof Pillar 2. Ithas, onnumerous occasions, demonstratedits commitment tothe implementation of the GloBErules and, in our view,this stepby Japan moves the discussion on Pillar 2 to its next phase.

Itis possiblethatthis move by Japanmay further prompt theimplementation of Pillar 2among EU states, makingit morelikely thatthe Global Anti-BaseErosion rules willbe implemented across other states.

States that have signed up to,and committedtothe adoption of, theGloBE rules, which include SA and the US, willnow beundermore pressure toimplement them. Japan’s rulingcoalition has indeed shifted thePillar 2 debate towardsaffirming its global adoptionand confirms Japan’s intention tolead the implementation ofPillar 2as it gears up tohost the Group of Seven summit in October. Asthe Pillar1and Pillar2 debates continue,Japan has takena firmposition andwe expect thatother stateswill follow suit.