202101.20
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~DX Investment Promotion Tax Incentive, Carbon Neutral Investment Promotion Tax Incentive, and Special Measures for Deduction Limits on Net Operating Losses~

1. Introduction

tax-reform-proposal
The Tax Reform proposal for fiscal year 2021 was released on December 10, 2020. This year’s tax reform plan focuses on tax measures related to overcoming deflation and revitalizing the economy as measures of handling and moving forward with COVID-19, addressing the delay in digitalization revealed by the pandemic, promoting digital transformation (DX) to attain a greener, environment-friendly society, decarbonization, and promoting mergers and acquisitions.

Among the many revisions in the proposal, we would like to focus on DX Investment Promotion Tax Incentive, the Carbon Neutral Investment Promotion Tax Incentive, and Special Measures for Deduction Limits on Net Operating Losses.

These reforms are made on the premise that there will be a revision to Act on Strengthening Industrial Competitiveness and the establishment of a new plan approval system under the said law.

2. DX (Digital Transformation) Investment Promotion Tax Incentive

In order to achieve digital transformation (DX) during and after the COVID-19 pandemic, it is essential to implement management and digital strategies in a unified manner.

Therefore, after the relevant cabinet minister approves a plan for DX at the company-wide level, (as opposed to individual departments or branches) measures will be established to provide tax support for digital-related investments using cloud technology necessary to achieve digital transformation.

Specific details of the program are as follows.

Digital Transformation (DX) Investment Promotion Tax Incentive

Target Blue-form Tax Filers that have received approval for a “business adaptation plan (tentative name)” under the Act on Strengthening Industrial Competitiveness.
Requirements Acquisition, etc. of software, etc. (cloud-type system, etc.) to be used for “business adaptation (tentative name)” to be implemented in accordance with the business adaptation plan from the date the tax reform takes effect to March 31, 2023.
Target Facilities
  • Software
  • Deferred assets (initial costs incurred to migrate to cloud systems)
  • Furniture and fixtures
  • Machinery and equipment
Tax Measures
(Options)
① Special depreciation: Acquisition cost x 30%
② Tax Deduction: Acquisition cost x 3% (5% if data is to be connected or shared with other corporations outside the group)
※ The maximum amount of tax credit is 20% of the current corporate tax amount for the current fiscal year, including tax deductions from the Carbon Neutral Investment Promotion Tax Incentive.
Minimum Investment Amount 0.1% or more of net sales
Maximum Investment Amount 30 billion JPY

As a prerequisite for the application of the DX (Digital Transformation) Investment Promotion Tax Incentive, the business adaptation plan must be approved by the relevant minister for the digital (D) and corporate transformation (X) requirements listed below.

Certification Requirements for DX Investment Promotion Tax Incentive

dx_investment_promotion_tax_incentive

Reference: Ministry of Economy, Trade and Industry: FY2021 Tax Reforms Related to the Economy, Trade and Industry

3. Carbon Neutral Investment Promotion Tax Incentive

In order to achieve “carbon neutrality by 2050,” it is essential for private companies to accelerate their investment in decarbonization. Therefore, taxation support measures will be provided for the introduction of production equipment and processes that create products with high decarbonization effects and increase added value. Specific details of the program are as follows.

Carbon Neutral Investment Promotion Tax Incentive

Target Blue-form Tax Filers that have received approval for a “medium- to long-term environmental adaptation plan (tentative name)” under the Act on Strengthening Industrial Competitiveness.
Requirements Acquisition, etc. and application of facilities that contribute to decarbonization based on the environmental application plan from the date the tax reform takes effect to March 31, 2024.
Target Facilities ① Introduction of production facilities for products with significant decarbonization effects
[Machinery and equipment] Used exclusively for the production of products that are expected to create or contribute to an increase in demand.
② Introduction of equipment to both decarbonize production processes and increase value
Machinery, equipment, furniture and fixtures, building fixtures, and structures] required for a plan to improve the carbon productivity (value-added/energy-origin CO2 emissions) of business facilities, etc. to a significant degree
Tax Measures
(Options)
① Special depreciation: Acquisition cost x 50%
② Tax Deduction: Acquisition cost x 5% (10% if contribution to reduction of greenhouse gases is significant)
※ The maximum amount of tax credit is 20% of the current corporate tax amount for the current fiscal year, including tax deductions from the Digital Transformation (DX) Investment Promotion Tax Incentive.
Maximum Investment Amount 50 billion JPY

4. Special Measures for Deduction Limits on Net Operating Losses

In order to maintain Japan’s economic growth even in the midst of the harsh business environment caused by the COVID-19 pandemic, companies are pushed to boldly make investments and engage in business restructuring.

For those companies that do engage in restructuring, measures will be taken to increase the maximum deduction for net operating losses carried forward to up to 100% (*), to the extent that the investment (either for digital transformation or carbon neutrality) is related to business restructuring and reorganization. These measures are as follows:

※ For medium and large companies, up to is 50%. For small and medium-sized companies, 100% deduction is still possible under the current system.

Special Measures for Deduction Limits on Net Operating Losses

Target Blue-form Tax Filers that have received approval for a “business adaptation plan (tentative name)” under the Act on Strengthening Industrial Competitiveness within 1 year of the tax reform coming into effect and have implemented their plan.
Eligible Losses In principle, losses incurred in fiscal years 2020 and 2021 (losses incurred in fiscal year 2019 are also covered if they are deemed to be the result of the COVID-19 pandemic. In this case, the maximum number of covered fiscal years is two.)
Allowed Period Maximum of 5 years
Maximum Deduction Up to 100% deduction is possible within the amount of investment made in accordance with the business adaptation plan.

The Ministry of Economy, Trade and Industry (METI) has provided an easy-to-understand diagram, which is shown below for reference.

METI

Reference: Ministry of Economy, Trade and Industry: FY2021 Tax Reforms Related to the Economy, Trade and Industry

5. Conclusion

In this issue, we focus on the new corporate taxation items in the 2021 tax reform, such as the DX Investment Promotion Tax Incentive, Carbon Neutral Investment Promotion Tax Incentive, and Special Measures for Deduction Limits on Net Operating Losses. There are also a number of other important items in the revision of corporate taxation, such as tax deferral measures for M&As compensated through shares and other measures to promote M&As for SMEs, a revision on how R&D is taxed, and revision of taxation for wage increase and investment promotion.

The intention of these tax reforms is to support companies that actively promote capital investment, business restructuring, etc., expected to be seen post-COVID-19. Although the impact of the coronavirus has been severe, we hope that companies considering new investments will take advantage of this opportunity to introduce structural changes by taking a look at the revised items and actively using the related tax incentives.