In the 1960s, the vision of a global marketplace was still in blueprint form. We were decades away from a telecommunications revolution that would link the world’s businesses. We were years away from plausibly imagining a world with a personal computer in every home. And the World Wide Web? Try using that phrase in the 1960s, and someone would think you were discussing Cold War espionage.
Japan was no economic giant then, but a nation in the midst of transforming itself — from a military power crippled by war into an economic power fueled by technology. It would be years before most Japanese brand names would become household words in America — and years before Japanese electronics would find a place in every retail showroom from Wall Street to Main Street.
As it entered the 1970s, Japan still considered itself a developing nation and sought to protect its trade. And so the U.S.-Japan Income Tax Treaty was negotiated, providing Japan with a necessary tax buffer to help its own manufactured products gain ground with its Japanese consumers.
Such protectionist tax policy made sense back then. But now, more than 30 years later, it makes little sense.
The U.S.-Japan Income Tax Treaty has been in force without amendment since 1971. That’s right: This treaty, instituting a high withholding tax rate for U.S. companies doing business in Japan, has been in effect for six presidential administrations without a single change or even a single formal negotiating session. In a global marketplace where paradigms shift and economies transform in the blink of an eye, a 30-year-old tax policy is more than antiquated — it’s inexplicable.
And in this case, an arcane tax policy is an impractical tax policy for both the American and Japanese business communities. Under the current treaty, the rates of withholding on interest, dividends and royalties are each 10 percent. Compare that to the U.S. Model Treaty, where in trade policies with international partners, U.S. objectives for withholding rates on dividends are 5 percent, on interest zero percent and on royalties zero percent. That’s a canyon of difference.
The problems with the current treaty don’t end there. Key provisions fail to deal adequately with the new business environment — or even faintly recognize it. And the aged dispute-resolution mechanism under the current treaty has resulted in the increased inability of the two governments to administer transfer-pricing disputes in accordance with required international guidelines.
This obviously creates a disadvantage for U.S. companies seeking to do business in Japan. But the antiquated tax treaty has negative implications for Japanese businesses, too. In a global marketplace, where relationships between companies extend beyond national boundaries, Japanese businesses are restricted by a climate where their government effectively discourages American companies from doing business with Japanese firms. It’s no wonder that the U.S.-Japan Business Council has strongly recommended that the U.S. and Japanese governments begin formal negotiations to update the U.S.-Japan Income Tax Treaty as soon as possible.
The United States has negotiated or updated more than 28 tax treaties and protocols with trading partners in the past eight years, including France, Germany, Canada, Britain and Italy. None of those countries does as much trade with the U.S. as Japan does. The need to change this treaty has never been greater, and the opportunity to commence negotiations has never been more apparent. The timing is right, and the time is now. During its annual meeting on July 11 in Tokyo, the U.S.-Japan Business Council wholeheartedly endorsed a commitment to renegotiate a new treaty no later than the new Japanese fiscal year, which begins April 1, 2001.
The capstone to this meeting and to the meetings between the two countries’ finance and foreign ministers will be U.S. President Bill Clinton’s bilateral meeting with Prime Minister Yoshiro Mori on July 19, followed by the G8 Summit in Okinawa. There has not been a time in recent years when economic relations between the U.S. and Japan have been given such a prominent position on the world stage.
We live in a new and promising era for U.S.-Japan financial relations. In a time of moving forward, we cannot let an old tax treaty hold us back. Mori and his administration have been encouraging in their informal talks with government officials about the possibilities of renegotiation.
But changes involving the tax treaty won’t happen until both nations make a formal commitment to update it. Though there have been some informal talks going back as far the 1980s, there has never been any formalized, even preliminary, negotiation designed to redefine or amend this tax treaty. In fact, despite Treasury Secretary Lawrence Summers’ efforts, Japan has not yet committed to even putting tax policy on the agenda for the coming months. We can’t start discussing details if we haven’t set aside the time for the discussion.
The world economy is in the midst of profound change. Traditional cross-border investment and trade continue to boom. Globalization links economies ever closer. And electronic commerce is expanding at breakneck speed. It’s a time of growth, innovation and reaching out beyond traditional borders — and traditional policy.
It is also time now to set a date to open formal negotiations for a new tax treaty that will increase commerce, trade and prosperity on both sides of the Pacific.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.