Japan, which has just revised its bilateral tax treaty with the United States, is now looking to sign pacts with other Asian economies that would cut taxes levied on international business activities.
Tokyo hopes to renegotiate treaties with its Asian neighbors in a way that would lower companies’ tax burdens on royalty, interest and dividend income.
The aim is to bolster investment and ultimately revitalize the economy.
“There are strong calls among Japanese businesses to move ahead with tax treaties with countries in Asia, which is not surprising given their huge investments in the region,” a Finance Ministry official said.
The government hopes to model these pacts after the Japan-U.S. treaty, which was ratified in Tokyo on Tuesday and replaces a tax agreement signed 30 years ago.
But that may not be as easy as it sounds.
While the new Japan-U.S. treaty features advantages and disadvantages for both sides, tax-cutting moves between Japan and other parts of Asia will, at least over the short-term, mainly benefit Japanese companies, a point that could make Japan’s neighbors less than enthusiastic.
For example, under the new Japan-U.S. treaty, the 10 percent source-country tax currently applied on income from trademarks and patents will be abolished.
The pact also says dividend payments by a subsidiary in one country to a parent company in another will be exempt from the current 10 percent taxation in the subsidiary’s place of business, if the parent has a controlling stake in the subsidiary.
This is good news for a huge number of Japanese companies that have production facilities and sales outlets in the U.S., including automakers.
In the case of other Asian economies, Japanese companies have far more subsidiaries in the region than the other way around.
Japan is also encouraging investment in the region by companies with value-added brands and intellectual property. If successful, the move would eventually lead to a flow of royalties from the area back to the country.
This means that if the arrangement with the U.S. is replicated, the Asian economies could lose tax income currently paid by Japanese companies.
To overcome potential reluctance from other Asian economies with regard to tax-treaty negotiations, Japan is planning to link work on tax deals to talks on free-trade agreements.
If the issues are linked, these countries may be able to win concessions in other areas even if they have to compromise on the tax arrangements.
Meanwhile, if Japan is forced to make FTA concessions on agricultural products, it may be able to win concessions on tax proposals.
“In the case of tax treaties between Japan and other Asian nations, Asian nations face the threat of a drop in tax revenue, at least over a short period,” the ministry official said.
“Of course we plan to explain that there are long-term merits. But even then, they may be reluctant, so we want to connect this with the FTA negotiations.”
Some of the first countries on Japan’s negotiating list are the Philippines and Thailand. Japanese officials are set to hold FTA talks with their counterparts in April.
In the case of the Philippines, source-country taxation for royalties stands at 25 percent.