On Thursday 21 October 2010 the Nikkei Keizai Newspaper reported that the Japanese government was considering introducing preferential tax rates for foreign companies investing into Japan, lowering the corporation tax rate between 10 to 15 percentage points over a five year period.
The article noted that both Japanese government and opposition parties had already progressed discussions on lowering the Japanese corporate tax rate for all companies by 5 per cent. This additional proposal, if passed, would introduce significant new tax preferences to encourage foreign investment into Japan. The government’s aim would be to develop concrete proposals for introduction in the following year.
In June of this year the government had identified the encouragement of foreign business as one of the preferred issues in its new growth strategy. Further to this view, in around the middle of November the “Roundtable Committee for the Encouragement of Domestic Investment” (in Japanese the 国内投資促進円卓会議, chaired by the Minister for Economics and Industry) will distribute its comprehensive report on “Program to Encourage Japanese Domestic Investment” (in Japanese the ”日本国内投資促進プログラム”) including steps to support this growth strategy.
A main item in the above program is expected to be corporate tax preference. For foreign companies which would want to establish a regional base or research and development center, for the first five years the effective tax rate may be reduced to around 25 to 30 percent. This would be approximately the same tax rate as the average tax rate for countries in the developed world, China, Korea and other countries in the Asia region.
The measures would be aimed at high tech, medical, biotechnology and similar technologically advanced industries which wished to either establish a new presence in Japan or move industry into Japan. Whether or not the measures would apply to mergers or acquisitions of businesses in Japan was subject to further discussion along with further detail for the measures.
Also, whether or not the above program for encouraging foreign investment would include, in addition, support for office rental or the acquisition of land or buildings was also under consideration. Measures allowing highly qualified foreign individuals to acquire visas more easily and other steps to promote a better environment for foreign individuals coming to work in Japan were also under discussion. Other measures required to promote establishing research centers in Japan, such as accelerating required procedures under relevant Japanese pharmaceutical law, would also be considered.
The Nikkei article went on to note that, with the exclusion of Japan, competition among countries in the Asia region to encourage foreign investment had increased. Korea had introduced measures to reduce income taxes paid by foreign technologists. China had introduced corporate tax incentives for high tech manufacturing. In contrast, foreign investment had been flowing out of Japan in that in 2008 125 foreign companies had withdrawn from Japan with, in recent years, each year more than one hundred foreign companies exiting the country, a trend that seemed to be continuing.
Comment: A small step in the right direction, but far too late
Recent months have seen ongoing reporting of discussion surounding the reduction of the Japanese corporate tax rate by 5 per cent to the extent that, in the opinion of the editor, it seems very likely this step will be introduced in the 2011 tax reform package. However this step in itself shows typical bureaucratic timidity. Reducing the Japanese effective tax rate from 42 percent or so to 37 per cent means reducing it from the highest effective corporate tax rate in the developed world to…the highest effective corporate tax rate in the developed world. As such this measure may do little to promote foreign investment in Japan.
Regrettably the proposals outlined for tax preferences for foreign companies in Japan also compare poorly to similar tax preferences available in other Asian jurisdictions. Even if a foreign company could avail themselves of the Japanese tax preferences outlined in the Nikkei article, the Japanese preferential tax rate would still be higher than the non-preferential tax rate in Hong Kong or Singapore. Singapore also offers a range of tax incentives that reduce tax rates for preferred foreign investors to 10 per cent or less as well as, in many cases, not taxing profits earned outside of Singapore. Measures such as these are why Singapore is likely to continue to attract up to twenty times the amount of per capita foreign investment that Japan attracts.
At best measures such as these may do little more than slow the net decline in number of foreign companies investing in Japan. In fact, especially given recent changes in the Japanese tax code such as the exclusion from taxation of dividends from overseas subsidiaries, with measures as timid as these the challenge for the Japanese government in a few years time may rather be preventing Japanese companies withdrawing from Japan to invest in more attractive lowly taxed overseas jurisdictions instead.