Ruling bloc approves tax reforms to boost tech investment in Japan

The government unveiled tax measures Thursday aimed at encouraging companies to spend their cash piles on startups and other investments, and stimulate a slowing economy, while also helping firms to compete with China’s advances in 5G technology.

The annual tax revision for fiscal 2020, formally decided by the ruling Liberal Democratic Party and its coalition ally Komeito, focused on steps to encourage firms to spend their internal reserves of over ¥460 trillion ($4.23 trillion), lawmakers said.

For years companies have been sitting on a record cash pile as they remain wary about boosting wages and investment.

The economy grew at an annualized rate of 1.8 percent in July-September, backed by capital spending and domestic demand, but analysts expect growth to slow in the current quarter with the Sino-U.S. trade war and the national sales tax hike likely to weigh on the world’s third-largest economy.

Weak business spending would be another blow to Prime Minister Shinzo Abe’s stimulus policy, known as Abenomics, which is aimed at stoking a cycle of higher wages, household and corporate incomes and spending.

The new tax measures will offer a 15 percent tax break to mobile phone carriers and other businesses investing in 5G infrastructure to help domestic firms compete with China’s strides with the next-generation communications network.

The roll-out of 5G networks, with speeds fast enough to download a movie to a smartphone in seconds, has raised security concerns in the United States over equipment for the upgrade supplied by Chinese telecommunication firm Huawei.

“5G taxation marks the beginning of a new era,” LDP tax panel chief Akira Amari told reporters after a meeting with ruling bloc lawmakers to approve the tax revision.

“With this tax revision, I believe we managed to raise a flag so that Japan can lead America and EU on 5G development,” Amari said. He made no mention of China.

Companies eligible for the tax incentive will include mobile phone operators and those preparing 5G networks for smart factories and smart agriculture using artificial intelligence in rural areas.

The overall tax revision is expected to have no big impact on annual tax revenue, Amari added.

The revision follows Abe’s announcement last week that the government will roll out fiscal stimulus worth ¥13.2 trillion in spending.

The tax revision for the next fiscal year also includes preferential treatment for companies investing in businesses focusing on innovative technologies.

The new measures will also allow businesses that invest ¥100 million or more in startups established less than a decade earlier to deduct 25 percent of that investment from taxable income.

Also, as part of the government’s push to encourage individuals to invest more and help increase their retirement savings, the ruling bloc has decided to review a small-lot, tax-advantaged investment program called the Nippon Individual Savings Account, or NISA.

The ruling coalition plans to extend the installment-type NISA program by five years beyond 2037, when it was initially slated to end.

Under the reform package, single parents who have never been married with an annual income below ¥5 million will also be given special tax deductions.

Currently, parents who divorce or who have had a spouse die qualify for the preferential tax treatment.

Conservative lawmakers, particularly those belonging to the LDP, have long been opposed to such a reform, claiming it would encourage people to have children outside of wedlock and destroy traditional family values.

With the number of foreign visitors to the country increasing, the ruling parties aim to withhold taxes on winnings by nonresident foreign nationals at casino resorts set to be introduced under the nation’s recently liberalized gambling laws.

The reform package also includes steps to allow the selling of duty-free products such as cosmetics and watches via vending machines.