What is Japan’s New Tax Rate?

As everyone knows by now, Japan’s corporate tax rate is scheduled to be cut on April 1st, but there is considerable confusion on what that new rate is. A lot of this confusion stems from the different ways in which Japan’s combined national and subnational rate is calculated. The OECD calculates the combined rate for 2011 at 39.5 percent while Japanese documents frequently cite a combined rate of 40.69 percent.

While the OECD has yet to reveal their estimate for Japan’s new combine rate, the official word from the Japanese Ministry of Economy, Trade, and Industry (METI) is that the new rate will be 38.01 percent, at least for the next three years.

We’ll get to the detailed math in a minute, but here are the basics. On April 1, 2012, the Japanese federal rate will be cut from 30 percent to 25.5 percent. When the average sub-national rates are factored in, Japan’s overall “normal” rate will be 35.6 percent. However, the Japanese government approved a temporary surtax of 10 percent, which adds 2.37 percentage points to the overall rate for 2012, 2013, and 2014 tax years. This brings the total rate to 38.01 percent. In 2015 and beyond, the combined rate in Japan will return to 35.64 percent.

According to METI, the effective corporate tax rate will be as follows [found here]:

40.69% (current rate) → 38.01% (FY2012 to FY2014) → 35.64% (In and after FY2015)

For those of you who are interested in how the math is done, Deloitte produced a nice fact sheet on the new rate calculation [found here]:

“The Japanese effective corporate income tax rate for a company located in Tokyo that is subject to a factor-based enterprise tax (i.e. a corporation in Tokyo whose share capital is more than JPY 100 million) would be as follows:

Current effective corporate income tax rate

30% (corporation tax) + (30% x 20.7% (inhabitant tax)) + 7.552% (enterprise tax)
1 + 7.552% (enterprise tax)

= 40.70%

Temporary effective corporate income tax rate during designated period

25.5% (corporation tax) + (25.5% x 10% (surtax)) + (25.5% x 20.7%) + 7.552%
1 + 7.552% (enterprise tax)

= 38.01%

(Designated period:
31 March year-end companies: 1 April 2012 – 31 March 2015
31 December year-end companies: 1 January 2013 – 31 December 2015)

Permanent effective corporate income tax rate after designated period

25.5% (corporation tax) + (25.5% x 20.7%) + 7.552%
1 + 7.552% (enterprise tax)

= 35.64%

A company’s actual combined effective tax rate may vary from the above rates depending on its particular enterprise tax circumstances.”