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On September 30th, 2021, through its official website, the Japanese Ministry of Economy, Trade and Industry (METI) published a note regarding “the tax reform to be implemented during the third year of Reiwa era”.

The tax reform should be effective from April 1st, 2021 and remains subject to changes.

This article focuses on the aspects which may affect the Research & Development Tax Credit.

Overall, there is one main change (tax credit ceiling raise) and one addition (cloud computing services) from the previous system.

Tax credit ceiling raise

The major change is the raise of the tax credit ceiling.

The current standard deduction rate (applied from the corporate tax amount) is set to 25%. In order “to incentivize R&D-related investments”, the METI has decided to raise its rate by 5%, reaching a ceiling of 30% starting April 1st, 2021. If you are eligible to the Open Innovation incentive (additional ceiling of 10%) and the High R&D intensity incentive (additional ceiling of 10%), you will be able to claim up to 50% of your Corporate Tax off as an R&D Tax Credit. Compared to previous years, it is an increase of 5%.

This change should apply to all types of companies.

You can find below an example of how it can affect your tax report:

Company A
When?Until March 31st 2021From April 1st 2021
Eligible R&D expenses (standard)30,000,000¥30,000,000¥
Corporate tax amount100,000,000¥100,000,000¥
Tax credit ceiling25%30% 
Tax credit amount25,000,000¥30,000,000¥ 

The R&D venture companies’ specific case

In the specific case of R&D venture companies, the standard deduction rate is and will remain 40%. If eligible to Open Innovation and High R&D Intensity incentives, an R&D Venture company can claim up to 60% off its Corporate Tax.

Inclusion of cloud computing services

The need to develop could services to coordinate real data and artificial intelligence is rising. To include activities focusing on providing cloud computing services through algorithmizing, or similar activities, the METI made a proposition to enlarge the scope of potential eligible R&D activities.

Other steps

In addition, the High R&D intensity bonus※ (上乗措置制度, previously known as 高水準型) will be extended for two years. Therefore, companies can apply for it until the end of the fourth year of Reiwa era (until March 31st, 2023).

  • If R&D expenses overcome the average sales by 10%, a company is eligible for the High R&D incentive.
  • You can find below an example of how it can affect your tax report:
Company A
When?Until March 31st 2021From April 1st 2021
Eligible R&D expenses (standard)40,000,000¥40,000,000¥
Corporate tax amount100,000,000¥100,000,000¥
Average sales over 3 years300,000,000¥300,000,000¥
Is High R&D intensity applicable?Yes※Yes
Tax credit ceiling25% + 10% = 35%30% + 10% = 40% 
Tax credit amount35,000,000¥40,000,000¥ 

(40,000,000¥ / 300,000,000¥ = 13.3% > 10%)

The procedure to claim Open Innovation is planned to be reformed to make claims for Joint Research & Development cases easier. We will make sure to share with you the details in a near future.