Statutory definition

tax sparing credit, when the partner country or the like reduces or exempts taxes for the purpose of attracting investment or the like, regards the tax amount that would have been paid had the reduction or exemption not taken place as having been paid even though it was not actually paid, and on the Japanese sideforeign tax creditrefers to a mechanism for including in the target.

The starting point is the requirement for the foreign tax credit itself. The Corporation Tax Act defines the taxes eligible for the credit as follows:

it means a tax equivalent to corporate tax imposed by foreign laws, as specified by Cabinet Order.

The Income Tax Act also defines foreign income tax in the same manner as follows.

It refers to taxes corresponding to income tax imposed by foreign laws and specified by a Cabinet Order.

Furthermore, neither article [shall] these taxescases where payment will be requiredIt is written in a way that a deduction arises. How to treat the tax amount that has been reduced and is not actually paid becomes a question of where to apply this requirement.

Overview

the requirement of "cases where payment is to be made"

The scope of foreign corporate taxes eligible for deduction is stipulated by the Enforcement Order of the Corporation Tax Act.

A tax levied on a corporation's income based on foreign laws by a foreign country or its local government.

The same enforcement ordinance sets forth the following provisions regarding taxes for which the tax rate is determined by agreement between the taxpayer and the other country's side.

A tax whose tax rate is determined by agreement between the person who is to pay the tax among multiple tax rates and a foreign country, its local government, or a person authorized by them to agree on the tax rate (limited to the portion exceeding the lowest tax rate among such multiple tax rates [or the tax rate that should be applied if such agreement does not exist, in cases where such lowest tax rate exceeds that tax rate]).

What is excluded is not the entire tax, but, as noted in the parentheses, only the portion exceeding the lowest tax rate. What domestic law is structured to subject to a credit is the tax actually imposed.

Where is it stipulated to "deem"?

General provisions stipulating that a tax reduction or exemption shall be deemed to have been paid are not found in the main texts of the Corporation Tax Act, the Income Tax Act, the Act on Special Measures Concerning Taxation, or the Act on Special Provisions for the Implementation of Tax Treaties, etc. The Act on Special Provisions for the Implementation of Tax Treaties, etc., is a law for implementing treaties domestically, and after defining a "tax treaty" as follows, it focuses primarily on procedural provisions such as procedures for the application of rate limits, information exchange, and mutual assistance in collection.

means a treaty concluded by our country for the avoidance of double taxation or the prevention of fiscal evasion with respect to taxes on income.

On the other hand, the Order for Enforcement of the Corporation Tax Act contains provisions based on the premise that the deemed amount can actually occur.

the amount of the tax of the other contracting state, etc., which has been reduced or exempted and which is deemed to have been paid by a domestic corporation pursuant to the provisions of the tax convention

The enforcement order for this amount isamount of deemed paid foreign corporation taxprovides such a definition. A provision to the same effect, using the phrasing "the amount deemed to have been paid," is also included in the Order for Enforcement of the Income Tax Act.

The division of roles that can be understood from this is clear.It is the provisions of the tax treaty that stipulate "deeming," while the Cabinet Order under domestic law prescribes the treatment when the amount so deemed arises.

However, what the enforcement ordinance provides for is a rule treating it on the premise that the deemed amount has arisen, and it is not a provision that determines in what cases it is to be deemed. The provision to deem something and its scope are, after all, written on the side of the individual tax treaty provisions.

how the deemed amount is treated under domestic law

Regarding cases where the amount of corporation tax enforcement order includes the amount of deemed paid foreign corporation tax,high-rate burden portionwhich are stipulated in such an order as to consist first of the amount of deemed-paid foreign corporation tax. Being the limit for deductionDeduction limitHey,carryover deductionThe core mechanism of the foreign tax credit, such as including the deemed amount, operates on that basis.

Points that require care in practice

The confusion tends to arise from viewing this mechanism as a standard feature inherent to the foreign tax credit. The location of the statutory provisions has a two-tiered structure. It is the provisions of individual tax treaties that determine whether or not it is deemed, and no such general provision is placed in the main body of domestic law. On the other hand, the treatment after the deemed amount arises—especially its relationship with the high-tax burden portion—is written in the Enforcement Order. Reading only one or the other makes it seem as though there is no basis, or conversely, that the matter is completed entirely within domestic law.

In addition, provisions specifying which counterparties are deemed to be parties to a treaty vary from treaty to treaty. Since this article does not examine the provisions of individual treaties, country names are not listed.

Legal basis

• Article 69, Paragraph 1 of the Corporation Tax Act (Foreign Tax Credit)
• Article 95, Paragraph 1 of the Income Tax Act (Foreign Tax Credit)
• Article 141, Paragraph 1 and Paragraph 3, Item 3 of the Order for Enforcement of the Corporation Tax Act (Scope of Foreign Corporation Tax)
• Article 142-2, Paragraph 3 of the Order for Enforcement of the Corporation Tax Act (Amount of Foreign Corporation Tax Not Subject to Foreign Tax Credit, Amount of Deemed Paid Foreign Corporation Tax)
• Article 142, Paragraph 4, Item 1 of the Order for Enforcement of the Corporation Tax Act
• Article 222-2, Paragraph 1, Item 2, Sub-item (b) of the Order for Enforcement of the Income Tax Act
• Article 2, Paragraph 1, Item 1 (Definitions) of the Act on Special Measures Concerning the Income Tax Act, the Corporation Tax Act, and the Local Tax Act Incidental to the Implementation of Tax Treaties, Etc.