Japan: Consolidated tax return filing system; shift to Japanese group relief system
Japan: Consolidated tax return filing system
Included in the 2020 tax reform proposals of the ruling governing coalition (Liberal Democratic Party and new Komeito) presented in December 2019 are proposed revisions to the consolidated tax return filing system—specifically, proposals to revise the consolidated tax return filing system and to shift to a new “Japanese group relief system.”
The proposed group relief system is only an outline, and certain contemplated changes are unclear. Details of the measures are expected to be revealed when the actual bills to revise the tax law are introduced or in subsequent amended tax laws, cabinet orders, and ministerial ordinances. Thus, the final version of these measures could differ from those included in the outline proposal, and depends on the outcome of the discussions in the Diet.
Consolidated tax return filing system
The consolidated tax return filing system—introduced in 2002—treats group companies as a single tax unit. The system was introduced to enhance corporate reorganizations and to contribute to the maintenance and strengthening of international competitiveness of Japanese companies and structural reform of the economy.
The consolidated tax return filing system, thus, has been available for 18 years; however, the calculation of tax under this system is noted to be extremely complex and requires substantial time and resources for calculation of the amount of tax after a tax audit by the tax authorities. Thus, many groups have not elected to use the consolidated tax return filing system despite the benefit of aggregating profits and losses.
The Tax Commission of the Japanese government examined the consolidated return tax filing system with a view toward simplification and to reduce administrative burden and to provide neutrality and fairness. In August 2019, it was recommended that the consolidated tax return filing system be revised fundamentally to move toward the new “Japanese group relief system.”
Japanese group relief system
The Japanese group relief system generally would be available for a Japanese parent company and all Japanese subsidiaries having a 100% control relationship.
The main points of the Japanese group relief system include the following:
- Aggregation of profits and losses or current taxable income and tax net operating losses (NOLs) of companies belonging to a 100% group would be allowed, although each company in the group would continue to calculate and file tax returns separately.
- Treatment of “crystallization” of built in gains and losses and brought-forward tax NOLs of the aggregation group would be consistent with those under the corporate re-organization tax rules.
- NOLs brought forward by the parent company at the time immediately before the start of the Japanese group relief system would only be deductible from taxable income generated by the parent company as “specific tax NOLs” in the same manner as those of its subsidiaries.
- The effective date of the new system would be tax years beginning on or after 1 April 2022, but transitional measures would allow companies to go back to the single tax return filing system.
- On shifting to the Japanese group relief system, companies that had applied the prior consolidated tax return filing system and that had “specific consolidated tax NOLs” under the prior system would treat these NOLs as “specific tax NOLs” under the transitional measures. (“Consolidated tax NOLs” under the current system (including pre-consolidation tax NOLs of the parent company) would be deductible among the aggregation group as “non-specific tax NOLs” under the Japanese group relief system.)
- Companies that apply the current system would be allowed to determine whether to return to the single tax return filing system or to shift to the Japanese group relief system.
Read a February 2020 report [PDF 406 KB] (28 pages) prepared by the KPMG member firm in Japan
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