Japan’s Corporate Tax Measures in Response to Covid-19

The Cabinet released the “Emergency Economic Measures for Covid-19" (Covid-19 Tax Measures) on April 20, 2020, which passed the Diet and was enacted on April 30, 2020. In addition to the Covid-19 Tax Measures, the Japanese government has also introduced a number of other economic measures. Furthermore, the National Tax Agency (NTA) periodically issues detailed guidelines with regard to Covid-19 response.

Overview of Covid-19 Tax Measures

The Covid-19 Tax Measures consist of 11 items, the more important of which for companies—especially Japanese subsidiaries of foreign multinational corporations (MNCs)—are listed below (other measures are individual income tax related measures, etc.):

• grace period for tax payments (generally applicable to any national level and/or local level taxes with a few exceptions, such as stamp duty and registration tax);
• expansion of loss carryback;
• tax credit for small- and medium-sized entities (SMEs) with regard to purchase of assets used for telework;
• election or termination of status of a voluntary Japanese Consumption Tax (JCT) taxpayer;
• exemption from stamp duty;
• exemption or 50% exemption from fixed assets taxation.

In addition, the NTA’s announcements provide:

• details regarding application for tax filing extension; and
• guidance for practical concerns (e.g., practical treatment in case an overseas tax resident cannot obtain a tax residency certification, which is necessary for tax treaty applications, due to quarantine measures in the country).

Despite the “OECD Secretariat Analysis of Tax Treaties and the Impact of the Covid-19 Crises” issued on April 3, 2020, which concerns the creation of a permanent establishment (PE) due to the current situation, the NTA’s announcements are silent as to concerns in connection with the creation of a PE in Japan.

Extension of Tax Filing

Extension of tax filing, such as for corporate income taxes (CIT), JCT, etc., may be granted for businesses impacted by Covid-19. Tax filing is not required for withholding taxes (WHT), but if a corporate taxpayer is in a situation impacted by Covid-19 (as described above), tax payment would be extended until the events that make it difficult for the taxpayer to settle taxes are lifted. Generally, applications to the in-charge tax offices will be considered on a case-by-case basis. Once such extension of tax filings is granted, tax payment in connection with the tax filings would automatically be extended.

Based on the announcement from the NTA on April 8, 2020 (as amended by the NTA’s announcement on July 1, 2020), an extension of tax filing (and tax payment) deadlines would be available by submitting a tax return, within two months after the event cited as the reason for extension ceases, by including prescribed wording indicating that the delay in tax filing is due to Covid-19.

Events that could be considered as reasons for extension include, for example:

• the inability to sustain the company’s business operations;
• the need to cut back on the company’s business activities; and
• closing of the accounting book takes time, making it difficult for the company to meet filing deadlines, for the following reasons:
  • a director or an employee of the company and/or a business contact remains indoors due to being unwell;
  • a director or an employee of the company and/or a business contact lives in an area where the local government requires work-from-home arrangement during weekdays;
  • a director or an employee of the company and/or a business contact works from home in compliance with the company’s decision to help prevent disease transmission;
  • a director or an employee of the company and/or a business contact remains indoors in order to avoid the epidemic.

Grace Period for Tax Payments

The Covid-19 Tax Measures provide a grace period for tax payments for taxpayers who are suffering from economic difficulties. Such grace period (generally one year) is granted for tax payments whose deadlines fall between February 1, 2020 and January 31, 2021. During the grace period, any collateral or payment of interest tax is not required for taxpayers.

The conditions for the grace period are as follows:

• the company’s revenue has dropped sharply (i.e., revenue for a month (during the period from February 2020 to January 2021) has dropped 20% compared to the same period of the previous year);
• the tax liability is considered difficult to pay at the time (considering the cash inflow and cash needs of the taxpayer in next six months);
• the taxpayer files an application for the grace period by the original tax payment due date.

Expansion of Loss Carryback

Under the current rule, the loss carryback for one year can be availed of only by an SME for CIT purposes (or Chusho Hojin tou—a company: (i) whose paid-in capital is 100 million yen ($947,000) or less; and (ii) that is not wholly controlled by a company whose paid-in capital is 500 million yen or more).

The scope will be expanded to include a company: (i) whose paid-in capital is 1 billion yen or less; and (ii) that is not wholly controlled by a company whose paid-in capital is over 1 billion yen according to the Covid-19 Tax Measures.

Tax Credit for SMEs—Purchase of Assets Used for Telework

The Covid-19 Tax Measures provide tax credit (7% or 10%) or instance depreciation with regard to expenditure of certain assets (e.g., used for telework). This measure is for SMEs for Special Taxation Measures Act (STMA) purposes (or Chusho Kigyosya tou—a company: (i) whose paid in capital is 100 million yen or less and whose number of employees is 1,000 or less; and (ii) that is not controlled by a certain large entity (or large entities)). A company must obtain approval from the government in advance for the investment plan to enhance its business.

Election or Termination of Status of a Voluntary JCT Taxpayer

Generally, a taxpayer cannot become a voluntary JCT taxpayer unless it submits a tax report expressing its intent to become a voluntary JCT taxpayer before the commencement of the fiscal year in which the taxpayer wants to become a voluntary taxpayer. Once the tax report to become a voluntary JCT taxpayer is filed, the JCT taxpayer status cannot be terminated for two years (“Two-Year Restriction”).

Under the Covid-19 Tax Measures, permission for late filing of the tax report to become a voluntary JCT taxpayer will be available for enterprises that experience a large drop in revenue (i.e., revenue for a month (during the period from February 2020 to January 2021) drops 50% compared to revenue for the same period in the previous year). In addition, a voluntary JCT taxpayer who suffers from such large drop in revenue can terminate its status as a voluntary JCT payer by submitting a tax report by the due date of its consumption tax return, regardless of the Two-Year Restriction.

Exemption from Stamp Duty

The special loan agreement between banks, etc., and enterprises whose businesses have suffered damages due to the Covid-19 situation will not be subject to stamp duty.

Exemption or 50% Exemption from Fixed Assets Taxation for SMEs

A 50% exemption from fixed assets taxation for 2021 is available to an SME, for STMA purposes, whose sales during any three consecutive months in the period from February 2020 to October 2020 decreased by at least 30% but not more than 50% compared to the sales for the same three-month period in the previous year. If the company’s sales decreased by 50% or more, exemption from the fixed assets taxation for 2021 is also available. To enjoy the exemption, the taxpayer must obtain permission from the Support Agency for Business Innovation at the Ministry of Economy, Trade and Industry, and file the fixed assets tax return by January 31, 2021.

Edwin Whatley is a Partner and Akihiro Kawasaki is an Associate at Baker McKenzie, Japan.

This article is intended for information purposes only. Nothing herein is to be considered as creating an attorney-client relationship or indeed any contractual relationship or as rendering legal or professional advice for any specific matter.

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