Chairman Yasunaga’s Comments on the Ruling Coalition’s Tax Reform Outline for FY2025

December 25, 2024

The Ruling Coalition’s Tax Reform Outline for FY2025 establishes a policy to review the tax system with the aim of ensuring appropriate and equitable taxation in response to various structural changes in our economy and society, including the declining birthrate and aging population, diversification of work styles and life courses, and the globalization and digitalization of economic activities. The Basic Policy on Economic and Fiscal Management and Reform 2024 outlines plans to promote a comprehensive review of the tax system while strengthening Evidence-Based Policy Making (EBPM) initiatives to establish a tax system suitable for a digital society and secure a stable tax revenue base that does not impede economic growth. We view this as a positive step toward our organization’s goal of achieving a level playing field with other countries.

In particular, in the field of international taxation, Japan and other countries and regions have begun to implement a global minimum corporate tax rate of 15% (Pillar Two of digital taxation) based on what has been described as a “once-in-a-century” comprehensive international agreement. While this system is expected to establish a fair competitive environment between Japanese and foreign companies, Japan already has a complex anti-tax avoidance measure in its Controlled Foreign Company (CFC) rules. The partial overlap in the scope of taxation between these two systems risks significantly increasing the already substantial burden on Japanese companies. This situation, combined with the fact that even companies not engaged in tax avoidance may be subject to taxation, raises concerns about severely undermining Japanese companies’ competitiveness against foreign enterprises.

Given these circumstances, our organization strongly advocated for the rationalization and simplification of the CFC rules in our tax reform proposals for FY2025. The CFC rules require enormous time and effort from companies for filing procedures and preparatory work, while also generating substantial investigative and verification work for tax authorities. We see it as imperative to improve time efficiency in both the public and private sectors to redirect that time toward enhancing productivity. While we appreciate that the outline explicitly indicated intent to review the timing of income aggregation, which was one of our requests, this will only help to distribute the workload more evenly rather than achieve the desired reduction and simplification of the overall work volume.

The Ministry of Economy, Trade and Industry has launched the Study Group on International Taxation Systems Based on Japanese Companies’ Overseas Business Development Trends, in which our organization is participating. This study group serves as a forum for industry, academia, and government to discuss the optimal structure of the global minimum tax and CFC rules in an environment where they coexist. The outline states that in tax reforms for FY2026 and beyond, the government will consider revisions based on forthcoming guidance while examining existing tax systems to ensure appropriate taxation in relation to Pillar Two. Furthermore, these future tax reforms will include necessary deliberations on properly addressing taxation issues arising from international economic activities, taking into account the changing environment accompanying the implementation of Pillar Two and other factors.

We hope these discussions will lead to the development of systems that enable Japanese companies to expand overseas more proactively, demonstrate competitiveness in international markets, and effectively channel overseas growth back into Japan.