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Thomas Donohue’s article “Time to update the U.S.-Japan tax treaty” (The Japan Times, July 19) misleads readers about the issues in the Japan-U.S. tax treaty. The issues are more complex than he indicates.

Informal discussions between Japanese and U.S. tax authorities are currently in progress regarding various issues relating to the Japan-U.S. tax treaty. There remain, however, substantial gaps between the positions taken by the two governments, making it too difficult to set a timetable for formal negotiations.

Tax treaties have several general functions, including clarification of applicable rules relating to international tax affairs, avoidance of international double taxation, and facilitating the exchange of goods and services and the movement of capital, technology and persons. Tax treaties also provide for the reasonable allocation of the tax base between two sovereign states. In tax treaty negotiations, all these considerations — and the often conflicting interests of both parties — must be taken into account, thereby ensuring a well-balanced coordination of the taxation rights of the two sovereign nations. Certainly, what matters most is the treaty’s achievements, not its age.

Japanese withholding tax is designed to ensure the taxation rights on income earned in Japan, not to protect domestic industries. Donohue’s article confuses the issue of the tax burden on U.S. enterprises with the issue of protectionism. The United States, like Japan, has its own foreign tax credit system designed to eliminate international double taxation. Since the U.S. foreign tax credit system in principle prevents international double taxation, the total tax burden of a U.S. enterprise doing business in Japan should be the same, whether it pays Japanese withholding tax or not. The tax burden would not be lightened by the revision of the Japan-U.S. tax treaty. The foreign tax credit rules in the U.S. tax code, however, are considered some of the toughest of those of industrialized nations because the amount of tax credit is calculated for each type of income. The U.S. foreign tax credit rules are laudable from our point of view in that they ensure taxation rights. However, these rules make it difficult for U.S. enterprises to utilize the foreign tax credit and may put those enterprises in danger of double taxation. The point is, therefore, that it is U.S. tax policy that causes double taxation of U.S. enterprises and raises the tax burden on their foreign investments. It is unfair to blame Japan for the consequences of the U.S. tax policy.

Donohue claims that the current treaty discourages U.S. companies from doing business with Japanese firms and has negative implications for Japanese businesses. However, no major Japanese business association has requested the revision of the treaty.

It is clear that all businesses in Japan, whether domestic or foreign, are greatly benefiting from the tax reforms implemented in the past few years. The corporate tax rate, national and local combined, has been reduced to around 40 percent, which is lower than that in New York City. The maximum personal income tax rate has been significantly reduced as well.

The Japan-U.S. tax treaty should be discussed from a broad perspective, including the taxation problems facing Japanese enterprises conducting business in the U.S., domestic tax laws and taxation practices, with a view to further strengthening economic ties between our two countries. I often hear strong complaints about the excessive amount of tax levied as a result of the application of transfer pricing rules in the U.S. without a statute of limitations.

In a new era in which equal footing is a fundamental principle, it will also be necessary to review the nonpermanent resident rules in Japan, which have been left unaltered for more than 40 years. The U.S. business community is opposed to Japan’s abolishing its nonpermanent resident rules, under which an expatriate businessperson’s foreign-source income is virtually excluded from tax in Japan. In the U.S. tax code, however, expatriate U.S. citizens engaging in business overseas are subject to a heavier tax burden based on their U.S citizenship than citizens of any other country under the same circumstances. Since the issues in the nonpermanent resident rules cannot be resolved by revision of the Japan-U.S. tax treaty, each country must respect the other’s efforts to rationalize its tax system.

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