Passage of 2011 tax incentives for foreign companies progresses

February 22, 2011  |  Developments, News

News, information

On the 11th February the Asahi Newspaper reported on the progress of 2011 tax reform proposals introducing tax preferences for certain foreign groups establishing subsidiaries in Japan (below the ‘Asian Base Promotion’ proposals and in Japanese the ‘アジア拠点化推進法案’ or ‘ajia kyotenka suishin houan’).

Corporate tax preferences

The Asahi reported that the inner cabinet of the Kan government had approved the Asian Base Promotion proposals on 10th February for presentation to the Diet on 14th February. The measures would reduce the Japanese rate of corporation tax on the profits of certain Japanese companies owned by foreign multinational groups that met qualifying criteria.

The rate of corporation tax for companies qualifying under the scheme would be reduced by 5 per cent for a five year period. Together with the proposed reduction in 2011 of the Japanese national corporate tax rate by 5 per cent, the proposals would reduce the effective rate of Japanese corporation tax for qualifying companies to around 29 per cent including local taxes. This compares to a proposed 2011 effective Japanese corporate tax rate of 35.64 per cent for other companies not qualifying for the scheme.

In order for a Japanese subsidiary to benefit from the incentives more than half of its capital must come from investment by specified foreign multinationals and the company’ basic business plan must be approved by the relevant Japanese Ministerial Office. The company should also employ at least ten individuals in its first year of operation.

Individual benefits

The measures include an income tax preference for directors and employees of the foreign parent company. Stock options allocated to such individuals will be free of tax on the economic profit ultimately earned from their exercise.

Furthermore, in order to encourage foreign experts to move to Japan the time required to examine their qualifications for immigration purposes will be reduced from the current approximate one month period to a period of ten days.

Context

The Japanese Ministry of Economics and Industry estimates that in 2011 approximately 30 foreign companies will be established in Japan, employing around 2,000 people and increasing overall tax revenues.

According to a survey by the Ministry in 2008 125 foreign companies withdrew from Japan and since then the tendency has been for the rate of withdraw to increase. Companies withdrawing from Japan often established a presence in China.

The Asahi Newspaper however noted that the difference in tax rates between Japan and other Asian countries even after the adoption of the Asia Base Promotion proposals and 2011 tax rate reduction would still be large.

The corporate tax rate in Singapore is 17%, but this rate can be reduced to between zero and 10 per cent for many high tech businesses or other businesses granted tax incentives by the Singaporean government.

In Korea tax incentives allow certain companies to pay zero corporation tax in the first five years of their operation and then pay tax at half the rate for two years.

Comment

While they are certainly a step in the right direction it remains to be seen how effective the above proposals will be in their aim of attracting foreign investment into Japan. The proposals certainly do not seem to compare well with the zero corporate tax rate incentives offered by Singapore or Korea and low corporate and individual tax rates offered by Hong Kong.

Ironically the Japanese often assume that foreign investors find it difficult to work in their country, but this is often not the case and Japan is a preferred destination for many expatriates who often regret having to work elsewhere in Asia.

Particular given Japan’s advanced public infrastructure and existing domestic high tech business, if Japan could find (or was ultimately forced to find) the political will to offer incentives comparable to those of their neighbors they would be a very strong competitor for foreign investment.


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