Japan Disproves Fear of Territorial Taxation

November 20, 2012

The case study analysis of Japan disproves the fears echoed by critics of territorial taxation, says the Tax Foundation.

Prior to 2009, Japan's international tax systems were similar to that of the United States. It taxed on a worldwide basis, provided foreign tax credits, allowed deferral of tax on active income until repatriation, and claimed the highest corporate tax rate in the developed world.

Poor economic conditions since 2008 prompted Japan to adapt to a new tax system in the run-up to 2009. This new inspiration was reflected in the 2009 budget.

  • According to the Japanese Minister of Economy, Trade and Industry (METI), Japan would pivot to a policy of territorial taxation as part of a new growth strategy.
  • The system was designed to stimulate innovation in Japan through strengthening the competitiveness of Japanese firms in foreign markets and encouraging repatriation of overseas earnings.

Since the policy change in 2009, an examination of the data illustrates that none of the popular concerns have become a reality. Indeed, Japan has experienced numerous benefits:

  • The unemployment rate has trended downward.
  • Economy-wide wages have picked back up.
  • Corporate tax revenues have remained stable.
  • Outbound foreign direct investment is up from 2009. This foreign investment underscore new growth opportunities for Japan as its companies engage the world marketplace.
  • According to the Wall Street Journal, Japanese companies are in the midst of the biggest boom in overseas investment the country has ever witnessed.

What can the United States learn from Japan? The answer is best stated by Mieko Nakabayashi, a member of the Japanese House of Representatives. She says: "With most of the world -- Japan included -- cutting corporate tax rates and employing territorial tax systems to remain competitive, the United States must surely know that its hesitancy to do these things is handing the advantage to its international competitors. They will suffer from that hesitancy while we and others outside the United States will benefit."

Source: "Japan Disproves Fear of Territorial Taxation," Tax Foundation, November 13, 2012.

 

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