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Monday, March 8, 2004

JAPANESE PERSPECTIVES

Speed key to making most of new tax pact


On Feb. 27, a new Japanese-U.S. treaty on taxation was finally submitted to the Diet for ratification by the legislature. The treaty, if approved, will make dividends and royalties earned by U.S. subsidiaries in which the Japanese parent firm has a stake of more than 50 percent tax-free, doing away with the current 10-percent tax imposed on such payments.

More than 30 years have passed since the current treaty underwent a full-scale revision in 1971, and the business community has been calling for a new overhaul for quite some time.

In November 1999, Minoru Makihara, chairman of the Japan-U.S. Business Council, and his U.S. counterpart Michael Armstrong submitted a joint petition to Tokyo and Washington calling for its revision. Such efforts prompted the two governments to start negotiating a new treaty in October 2001. After a basic agreement was reached in June 2003, the new treaty was officially signed by the two governments in November and is now awaiting ratification by the legislatures of both countries.

The new treaty will have a significant impact. For example, Japan's direct investment in the United States far exceeds any such investment that has been made in the opposite direction, and Japan now has a large surplus in its net balance of dividend receipts, which reached 480.4 billion yen in 2002.

The pending revision will render a large portion of those dividends tax-free, since more than 80 percent of Japanese companies' roughly 3,600 American subsidiaries are held by stakes of 50 percent or more by the parent firms.

Unlike the dividends, however, Japan has a deficit in terms of royalty receipts.

For example, Japan had a deficit of 253.2 billion yen vis-a-vis the United States and only 73.2 billion yen with the rest of the world in 2000. But these figures represent a sharp reduction from the deficits of 485.4 billion yen and 279.5 billion yen, respectively, in 1997. If, in the future, Japan starts to run a surplus in royalty receipts, the new treaty will have a beneficial impact on Japanese firms.

One problem is that the date at which the new treaty can take effect will depend on when it is ratified.

The new treaty will take effect on July 1 this year if it is ratified by the end of the current fiscal year (March 31), but if ratification is delayed until next fiscal year the earliest date at which the treaty can take effect will be Jan. 1, 2005.

Congress is preparing to enter the treaty into force on July 1, and we would strongly like to see it ratified by the Diet during the current fiscal year.

Yoshio Nakamura is a senior managing director of the Japan Business Federation (Nippon Keidanren).


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