BEPS Enhanced Earnings Stripping Rules
Japan Inbound Tax & Legal Newsletter June 2019, No. 39
Japan’s revised earnings stripping rules, included in the 2019 tax reform enacted on 27 March 2019, introduce a number of major changes to align with recommendations under action 4 of the OECD BEPS project and further restrict the potential deductibility of interest for taxable years beginning on or after 1 April 2020.
In particular, the new rules:
- Reduce the current 50% of “adjusted income” to 20% in computing interest expense disallowance;
- Modify the definition of adjusted income to exclude certain income, such as exempt dividends, which currently are included in the adjusted income calculation;
- Expand the scope of “harmful” interest expense to include third-party interest in addition to related party interest; and
- Revise the exceptions to the interest deduction limitation by introducing a new de minimis threshold for net interest expense of JPY 20 million or less, abolishing the current exclusion for interest paid to related parties (50% or less of total interest paid) and adding an exception for interest paid by group companies.
This alert highlights some of the significant changes, including the new group exception and the revised scope of harmful interest, and provides examples to show how the updated provisions potentially may impact foreign multinationals doing business in Japan.
This newsletter explains the following topics;
1. New group exception
2. Expanded scope of “harmful” interest expense
* This Article is based on the relevant Japanese or specific country’s tax law and other authorities in effect on the date of this Article. This Article would not be guaranteed updating if there are any changes in Japanese tax law, any other law, or interpretations by the courts or tax authorities thereof after the date of this Article.