Tax

Notwithstanding the economic shocks due to external factors, the pace of technological change and digital transformation continues to accelerate. The EBC congratulates the establishment of the Digital Agency in September 2021 which is tasked with formulating a digital strategy and making policy recommendations to other ministries and agencies. Key initiatives are designed to stimulate research and development (R&D), bolster domestic production in strategic sectors, and enhance the competitiveness of Japanese enterprises. A notable feature of the reform is the introduction of an “Innovation Box” regime. This allows companies to deduct 30% of qualifying income derived from domestic transfers or licensing of certain intellectual property (IP), such as patents and copyrights related to artificial intelligence (AI) software developed through in-house R&D in Japan. The EBC welcomes these efforts and calls for further focus in these areas to ensure that Japan maintains its global competitiveness.

The Japanese Government has made ambitious pledges regarding climate change and creating a sustainable society, which are supported by tax reform proposals encouraging companies to reduce carbon emissions. The EBC considers that many opportunities remain to expand the scope and scale of tax incentives in this area which should have further positive impact on Japan’s attractiveness to foreign investors and individuals.

Japan is an active member of the OCED and should be proud of its role in the continuing global debate on tax avoidance and changes to the international tax system, particularly its restraint on unilateral taxing of the digital economy. Following years of intensive negotiations to update and fundamentally reform international tax rules, the OECD has released Pillar Two model rules for the domestic implementation of 15% global minimum tax which are shortly expected to be introduced into Japan’s tax laws. The EBC urges the Japanese Government to keep the rules as simple and practical as possible and consider the introduction of safe harbours. To date, bilateral trade and investment between Europe and Japan benefit significantly from tax certainty, the minimisation of administrative burdens for taxpayers and the mutual elimination of double taxation. The EBC encourages the Japanese Government to continue its efforts in this area. However, Japan’s tax treaties with many Member States (i.e. Bulgaria, Czech Republic, Finland, Hungary, Ireland, Italy, Luxembourg, Poland, Portugal, Romania and Slovakia) still lack exemptions in respect of areas beyond the scope of the multilateral instrument, such as elimination of withholding tax on dividends, royalties and interest. Further, no tax treaties have yet been agreed with Greece (under negotiation), Cyprus or Malta.

In summary, while the EBC appreciates the tax reforms undertaken so far by the Japanese Government, more work is needed to encourage and support inward investment if Japan is to become a competitive hub location for international business.