Will Japan’s recent implementation of the Global Minimum Tax accelerate the debate on the implementation of GloBE rules?
in a nutshell
The implementation of Pillar 2, the main rule of the Organization for Economic Co-operation and Development (OECD)’s 15% global minimum tax rate proposal, has been under discussion for several years. Japan recently took a firm step to confirm adoption of Pillar 2, with the country outlining her 2023 tax reform package. The package also introduced income inclusion rules that broadly align with the Global Anti-Base Erosion (GloBE) Model Rules, which are expected to come into force in 2024. This positive action by Japan will put some pressure on other states that have pledged to implement. Especially her GloBE regulations in the European Union (EU), the United States (US), and South Africa.
* Francis Mayebe Attorney Candidate overseen by Johannesburg Partner and Tax Officer Virusha Subban.
What is Pillar 2 and why is it important?
Discussions on the implementation of Pillar 2 have been ongoing in the area of international taxation for several years. Essentially, Pillar 2 is the main rule of the Organization for Economic Co-operation and Development (OECD)’s 15% global minimum tax rate proposal. As part of a process to address tax challenges arising from digitalisation, base erosion and profit shifting, the OECD in 2019 proposed to introduce a global minimum tax rate of 15%.
The importance of this proposal from an international tax perspective stems from the OECD BEPS (Base Erosion and Profit Shifting) project, which essentially put an end to the debate on domestic tax rate disparities among various global nations. It is intended to hit Essentially, it ensures multinational corporations pay a minimum effective corporate tax rate of 15%, regardless of local tax rate or base.
Overview of Japan’s Tax Reform Package
Japan, the ruling coalition, outlined the 2023 tax reform package, which includes the implementation of a proposed global minimum tax rate of 15%. The Tax Reform Package contains an outline of Pillar 2 global minimum corporate tax legislation. In addition, broadly speaking, an Income Inclusion Rule (IIR) has been introduced, in line with the GloBE model rules. This particular bill will be submitted to the National Assembly in January 2023 and, if approved, will come into force for fiscal years beginning after April 2024.
The IIR applies to multinational corporations (MNEs) headquartered in Japan and Japanese subsidiaries of multinational corporations headquartered abroad. This applies if the total worldwide revenue for at least two of the last four financial years of the ultimate parent company is at least €750 million.
Impact of Japanese Implementation on Pillar 2 Discussions
Japan, along with the EU, is one of the strongest advocates for Pillar 2 implementation. Japan has repeatedly expressed its commitment to implementing the GloBE rules. Take the discussion on Pillar 2 to the next level. This move by Japan could further facilitate Pillar 2 implementation among EU member states, making it more likely that the GloBE rules will be implemented among other member states.
In essence, states that have signed and pledged to adopt the GloBE rules, including South Africa and the United States, will come under greater pressure to enforce those rules going forward. Indeed, Japan’s ruling party has shifted Pillar 2 discussions toward confirming global adoption, and in October 2023, he said, as he gears up to host the G7 summit, he said that the implementation of Pillar 2 confirms Japan’s intention to lead the
Japan has established a strong position as the Pillar 1 and Pillar 2 debate continues, and several other states are expected to follow suit.
relevant content: Japan: Corporate and Tax Quarterly Update | December 2022
