In recent years, Japan has been losing losing its competitive advantage as foreign companies choose to locate their headquarters in other more business and tax-friendly Asian cities such as Singapore and Hong Kong.

As a way to increase the nation’s international competitiveness the Japanese government recently announced plans to create special international business zones in seven areas across Japan. Locating your business within one of these zones will qualify you for certain tax breaks.

There are five proposed areas in Tokyo which are classified as the “Asia Headquarter Special Zone.” The zone includes the Rinkai area, part of Shinjuku, Shibuya, Shinagawa, Tamachi and Haneda Airport. In an ambitious bid, they hope to lure over 50 foreign R&D companies and over 500 foreign capital corporations to these zones in Tokyo.

The government believes that the total economic benefit from the all of the zones across Japan will reach 9.1 trillion Yen in 2015, and 365,000 new jobs will be created.

So what are the benefits?

Foreign corporations who locate in these zones will be exempt from paying real estate acquisition tax, fixed asset and city taxes for the first 5 years (this only applies to corporations who hold real estate).

For corporations who are establishing new Asian operations and research facilities, the corporate tax will be reduced from the current level of 40.7% down to 28.9%.

What are the problems?

The problem with this plan is that the proposed corporate tax reduction is still far higher than Singapore (17%) and Hong Kong (16.5%) and, still, foreign corporations in those countries are complaining about tax rates being too high.

It also appears that there will be some restrictions over who qualifies for these benefits. This does not appear to be a blanket tax break that will apply to all foreign companies that move into these zones.

What is realistically expected to come out of this is an increase in new office space in these ‘special zones’ which will further add to Tokyo’s over supply. If a foreign company is eligible for the tax breaks, then it makes sense that they would choose commercial space within the special zones rather than outside. But, getting these companies to choose Tokyo over Singapore or Hong Kong as a base is going to require much greater incentives.

The Zones:

The zone does not appear to include Sanno Park Tower or Prudential Tower which house the headquarters of many large multinational corporations.

Sources:
Jetro (http://www.jetro.go.jp/en/topics/topics_20111221_01.html)
Tokyo Metropolitan Government (http://www.metro.tokyo.jp/INET/OSHIRASE/2011/09/20l9r800.htm)
The Tokyo Shimbun, December 23, 2011.

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