On 26 October 2010 the Nikkei Keizai Shimbun reported on proposals to introduce into Japan tax preference zones (in Japanese.’総合特区’ or ‘sougou tock’ translated below as ‘Comprehensive Special Zones’) that give preferential tax treatment to certain industries, likely to include medical, environmental, agricultural and similar growth areas. The intention of the proposals would be to bring taxes on such business in Japan to a level comparable with China and Korea.
A menu of tax preferences
The outline proposals would give companies established in the zones a menu of tax preferences from which they could chose. The Nikkei article outlined three options from which a taxpayer established in the zones could choose:
- An increase in the limitation of tax deduction for depreciation of facilities, plant and equipment.
- A deduction from corporate taxes payable of part of the acquisition costs of plant and equipment.
- The inclusion of some part of taxable income into tax deductible expenses [Note: this would seem equivalent to a de-facto exemption from taxation of some part of the income of the company, reducing the effective tax rate. Further details were not given in the Nikkei article.]
An extension of the limit for credits available for research and development expenses would also be available.
Extent of preference
The Nikkei article noted that there were a number of different elements to the proposals that still had to be decided. A tax credit for the acquisition cost of facilities, plant and equipment may be between 8-15 per cent while the exemption from taxation of income may be up to 35 per cent. The ceiling of credit available for research and development expenses may be raised from 30 per cent of total corporate taxes payable to 40 per cent.
Other tax preference measures may also be introduced such as reductions in registration and similar taxes and even preferences for individual investors in the businesses in the zones.
The ‘Committee for Comprehensive Special Zones and for the Design of Future Environmental Cities’ (in Japanese 「総合特区制度、環境未来都市構想に関する会議」), a sub-committee of Committee responsible for realizing the Government’s future growth strategy, would be concluding on the proposals by the end of the year to be put before an ordinary resolution of the Diet as early as January 2011. It is possible that the locations of the Comprehensive Special Zones could be designated as soon as the summer of 2011.
The Nikkei article suggested that locations considered for the zones may include areas where there is an existing concentration of large businesses such as around the Tokyo Bay area or near Osaka and its coastal area.
These proposals, if accepted into law, would be very welcome for foreign investors. Tax credits and an exemption of tax from income would allow a permanent reduction in the effective tax rate of foreign investors that in many cases may be reflected in a foreign group’s reported results as well as allowing cash flow savings.
It would help if these measures could be applied in combination with more general proposals to reduce tax rates for foreign companies setting up in Japan reported here. Would a foreign company be able to establish a research and development facility in the preference zones and a marketing and distribution entity outside them that could take advantage of the benefits proposed more generally for foreign companies for example?
The question remains, though, whether the measures are sufficient to compete with China and Korea and make a difference at this stage in the economic cycle. Realistic steps to encourage foreign investment if implemented a decade ago may have made a dramatic change to the economic picture in Japan today.