Share on

The new fiscal reform has been published

On February 10, we published the article ‘Outline of the tax reform for the 3rd year of Reiwa’ on our website.

The METI recently disclosed the full content of the new fiscal reform, effective since April 1, 2021. please find below our revised article.

In comparison with the previous system, we pinpointed five main changes. You can find the main information, listed in a decreasing level of importance.

1. Tax credit ceiling raise

You can find the details in our previous article. This measure was already discussed a few months ago.

2. Deduction rate global review

Both deductions rates respectively applicable to large and small and medium-sized companies have been reviewed.

For SMEs*, the deduction rate remains within 12% to 17%.

The deduction rate was set within 6% to 14% for large-sized companies until now. From now on, the deduction rate is set from 2% to 14%. For instance, if your R&D expenses drop by 37% or more from previous years, your deduction rate would be floored to 2%.

The standard rate (applicable when using the R&D tax credit system for the very first time) remains 8.5%.

For both large and SME companies, the standard rates were automatically upgraded in case of an R&D expenses raise of more than 8 % (from previous years). However, from now on, you must raise your R&D expenses by more than 9.4 % (i.e. 1.4 % higher than before) to achieve a deduction rate upgrade.

Also, please note that the slope visible on the upper part of the deduction rate calculation curve has been increased (from 0.3 to 0.35). In other words: it is now faster to reach the cap (i.e. 14% for large companies, 17% for SMEs), provided you substantially raised your R&D expenses from the previous years.

The graph below sums up these changes (in Japanese only).

graficoJP

*According to the NTA’s definition, SMEs are companies hiring less than 1,000 employees and holding a capital not exceeding ¥100 million.

3. Cloud computing services = eligible projects!

To promote the digital transformation in Japan, initiatives aiming at developing cloud computing services are encouraged.

Until now, only ‘packaging software’ (physical copies given away to the end users) were eligible.

To promote a wider use of artificial intelligence and real data, the Japanese government wishes to foster the development of cloud services. Consequently, software provided through cloud computing are eligible from now on.

4. R&D activities aiming at improving the internal operating cycle = eligible projects!

Such activities were already eligible before the reform was enforced. The METI reassessed the fact that the R&D costs incurred to improve the internal operation cycles and technologies can be viewed as eligible expenses (even though you may think these costs are related to day-to-day engineering).

For instance, R&D costs incurred to develop algorithms or data platforms (artificial intelligence tools) to automate the factory processes are eligible.

5. Open Innovation system review

Open Innovation relates to joint research activities led together with universities, public research institutes or private companies.

Four changes can be observed:

  • The tax audit process could be sometimes confusing for both the zeirishi (licensed tax accountants) and the auditors. The guidelines have been streamlined. For instance, official documents listing labor and other costs have been reviewed and clarified.
  • The guidelines related to the auditor’s report verification step (to be performed by the research partner) have been reviewed. Remember that the verification step must be performed between the audit step and the tax declaration step.
  • The deduction rate for joint research activities led by external corporations linked to public universities or public research institutes has been raised by 5%, to 25%.
  • For SMEs, it was reassessed that ‘mere outsourcing’ activities are excluded from the scope of eligible expenses.

Sum up

The five following measures were enforced:

  • The tax credit ceiling has been raised (from 25% to 30% for standard declarations).
  • The deduction rate has been reviewed.
  • It was stated that cloud computing services are potentially eligible projects.
  • It was reassessed that R&D costs incurred to improve the internal operation cycles and technologies can be viewed as eligible expenses.
  • The Open Innovation system has been streamlined for efficiency.