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.
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.”
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:
Read a February 2020 report [PDF 406 KB] (28 pages) prepared by the KPMG member firm in Japan
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