Quick Review

R&D Tax Incentives

Japan is one of the most attractive places for R&D activities. Multinational corporations like Apple are launching R&D centers in Japan where you can get access to talented engineers. 
The government made a fine tune on the R&D Tax Credit Program [1], which have been playing a significant role in attracting innovative foreign corporations. New incentives will cover R&D in IoT, AI, and big data. SMEs should be aware of and apply for more powerful R&D Tax Credit Program for SMEs [2] to stimulate innovation and boost competitiveness. Plus, the government provides the Open Innovation Program [3], a strong incentive for corporations who collaborate with specific organizations and universities.

[1] R&D Tax Credit Program (as of Apr 2017):   

 

What are R&D expenses?   

In addition to the traditional R&D expenses in manufacturing industry, new program extends to the expenses in the 4th industrial revolution type services like big data services.
Government shows some unique examples.

  • Notification services providing more detailed and real-time natural disaster prediction by combining and analyzing image data and weather data collected using drone.

  • Information services distributing agricultural support information that farmers can do optimal farming work, which are provided by combining data of agricultural products and soil and weather data.

  • Advisory services proposing suitable fitness plan, recommendation of dietary habits or hospitalization by analyzing individual health data including exercise, sleeping situation, meal, body weight, heart beating rate, etc.

  • Information services for tourists providing precise prediction of rarely-happening precious natural phenomena like aurora and whales by analyzing weather and ecological data and image data collected using drone.

 

Standard tax credit   

  • Tax credit rate (TCR) is 6% - 14% of R&D expenses, which will be deducted from federal income tax.

  • Keep higher average growth rate (AGR1) of R&D cost, and higher TCR is applicable.

  • Capped with 25% amount of federal income tax

Average growth rate (AGR): Increase rate compared to the average R&D cost over the past 3 years

Additional tax credit   

You can enjoy additional tax credit program of either;
Cap Extension: 

  • If R&D/Revenue ratio (RRR) is more than 10%, cap is extended up to 35% amount of federal income tax. [RRR – 10%] × 2 is added up to 35%.

High Level R&D: 

  • If RRR is more than 10%, additional tax credit on excessive portion can be granted.

[R&D expenses – (Average revenue × 10%) ] × [RRR – 10%] × 0.2 is added to tax credit, capped with 10% amount of federal income tax.

 

To see the Case Study, click the button!

 

[2] R&D Tax Credit Program for SMEs (as of Apr 2017):   

The higher tax credit rate and the more-easily-triggered cap extension are offered to SMEs. In addition, R&D tax credit applies to regional income tax as well.

Who are SMEs?   

In R&D incentive programs, you fall on SEM category if the company do not meet all the conditions below:

  • Capital amount is more than 100 million;

  • A majority of shares is held by one corporation with capital amount of more than 100 million yen.

  • More than two thirds of shares are held by two or more corporations with capital amount of more than 100 million yen

Standard tax credit  

  • Tax credit rate (TCR) 12% - 17% of R&D expenses will be deducted from federal income tax

  • Keep higher average growth rate (AGR1) of R&D cost, and higher TCR is applicable

  • Capped with 25% amount of federal income tax

Average growth rate (AGR): Increase rate compared to the average R&D cost over the past 3 years

Additional tax credit   

You can enjoy additional tax credit program of either;

Cap Extension: 

  • If AGR is more than 5%, tax credit is Capped with 35% amount of federal income tax.

High Level R&D: 

  • If R&D/Revenue ratio (RRR) is more than 10%, additional tax credit on excessive portion can be granted.

[R&D expenses – (Average revenue × 10%) ] × [RRR – 10%] × 0.2 is added to tax credit, capped with 10% amount of federal income tax.

To see the Case Study, click the button!

 

[3]Open Innovation Program:   

Strong incentives are provided for corporations who collaborate with specific organizations and universities.

  • Collaborative research study expenses and R&D contracting fees will be covered. 

  • Tax credit rate (TCR) is as high as 20% - 30% of R&D expenses, which will be deducted from federal income tax.

  • Capped with 5% amount of federal income tax

  • Expenses applied to the Open Innovation Program cannot be applied for R&D Tax Credit Program mentioned above

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