As part of 2023 Tax Reform, Japan implemented an Income Inclusion Rule (IIR) that will apply to fiscal years beginning on or after April 1, 2024, in line with the fiscal years of the vast majority of Japanese MNCs. Over 800 Japan-parented corporations are expected to be in scope. While Japan is expected to implement a QDMTT (Qualified Domestic Minimum Top-up Tax) and UTPR (Undertaxed Profits Rule) as well, the timing is still to be determined. Pillar Two’s interplay with Japan’s CFC regime is also critical in the application of the rules.　

Please find a quick update on the latest legislative and economic considerations. For a brief overview of Japan’s Pillar 2 legislation, here’s a 5-minute video, and for a deeper dive Cross-border Tax Talks podcast (Youtube).

Beyond Pillar Two, the 2023 Tax Reform also introduced measures to facilitate the transfer of household assets from savings to investments, a longstanding challenge for Japanese society, and to also bolster Japan’s start-up ecosystem, vital to driving much-needed innovation. 

In addition, the Ukraine crisis and heightened US-China tensions have raised new concerns for both business and government leaders around Japan’s challenges dealing with energy dependency, food security and supply chain resilience. On the domestic front, as the highest rate of inflation in decades is experienced, Japanese MNCs have recently begun to announce a long-awaited increase in wages.

As for the M&A market, Japanese conglomerates have been selling off their non-core businesses, with a greater focus on future growth areas. In this regard, foreign private equity funds have been increasing their presence in Japan, with significant acquisitions across industries. In addition, decarbonization and digital transformation remain key themes in Japanese M&A as Japan seeks to make further strides in these areas. 

Please refer to two videos on  Pillar 2 (policy framework & operational readiness) and on the US Inflation Reduction Act (specifically impacts on non-US parented MNCs).

For further details please feel free to contact

Shintaro Yamaguchi  山口 晋太郎

PwC | International Tax Services / Deals Tax | Partner, Japan Inbound Tax Leader

Direct: +81 (0)80 4171-5438 

Email: shintaro.yamaguchi@pwc.com