Japan May Allow Tax Breaks on Repatriated Profits

By Keiko Ujikane and Kyoko Shimodoi

Dec. 5 (Bloomberg) -- Japan may introduce legislation that would waive taxes companies pay on profits returned from abroad, in an effort to help the economy emerge from a recession.

The ruling Liberal Democratic Party’s tax panel this month may approve a revision that would encourage companies to bring back profits earned overseas, panel adviser Takeshi Noda said in a Dec. 1 interview. The Trade Ministry advocates a similar move.

Japanese companies have an estimated 17 trillion yen ($180 billion) in earnings kept abroad, and a government advisory group last week said bringing some of that money home would encourage them to spend more on equipment, hiring and research. Requiring that businesses use the money for specific purposes such as capital investment or paying dividends to shareholders is pivotal for any tax waiver plan to work, said Naomi Fink.

“The plan will probably provide a positive effect to corporate activities, but the government should specify what they can do with the money,” said Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. “That may set off a virtuous circle” by increasing productivity and investor returns that in turn would spur consumer spending, profits and wages, she said.

The Trade Ministry’s plan would enable companies to use the proceeds they repatriate for any purpose and wouldn’t impose a time limit on the tax breaks, said Yasuhito Nii, director of the ministry’s trade and investment facilitation division.

Homeland Investment Act

That’s different from legislation implemented in the U.S. in 2005. The U.S. Homeland Investment Act gave companies only a year to return profits at a discounted tax rate and required them to use the money to promote job creation.

Nii said limits would be too costly to implement because they would require the government to check whether companies are using the money correctly. ”It is important to let money circulate” by making it easier for companies to repatriate the money whenever they need to, he said.

Japan’s corporate tax rate is a combined 40.7 percent for both national and local taxes, among the highest in the developed world. That’s prompting companies to retain their earnings abroad.

“The tax break could function as a sort of an alternative to cutting corporate taxes,” said Takashi Inoue, manager of tax and accounting at Keidanren, Japan’s largest business lobby. “It’s a significant move as repatriated profits may contribute to economic growth.”

Not All Income

Under the trade ministry’s plan, tax breaks would only apply to the dividends that Japanese companies receive from their overseas affiliates, and other income such as interest payments and royalties wouldn’t be exempted, Nii said.

Earnings retained by foreign affiliates of Japanese companies stood at about 17 trillion yen in the year ended March 2007, Trade Ministry data show. Implementing the tax breaks would spur companies to bring back as much as 2 trillion yen, according to Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo.

The U.S. plan prompted American businesses to return about $200 billion, one-third of the profits retained by their overseas units, Inadome said.

About 83 percent of small and midsized companies surveyed by the ministry in October said they would repatriate money if the tax break is implemented. More than two-thirds said they would spend the cash on equipment or research and development.

Shareholder Dividends

Some companies are already bringing back earnings to buy their own stock or pay dividends to shareholders, so waiving the tax is sure to increase the trend, Keidanren’s Inoue said. The Nikkei 225 Stock Average plunged 48 percent this year. The gauge rose 0.2 percent to 7,942.92 as of 10:24 a.m. in Tokyo.

Using the repatriated money to provide dividends to shareholders may encourage households to shift cash from their savings to stocks, said Fink at Bank of Tokyo-Mitsubishi UFJ.

Japan’s households had 741 trillion yen ($7.4 trillion) in cash deposits as of June 30, according to the Bank of Japan. The dividend yield on Nikkei stocks is lower than benchmark indexes in the U.S. and Europe, Bloomberg data show.

“Using the funds to pay out dividends to shareholders is a good choice,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “That money will eventually go to households.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net.