Trade policy review report by the secretariat

3.4  Investment Regime

1.1.  As noted in Chapter 1, Japan's inward FDI remains significantly lower than outward FDI and low compared with other developed economies (section 1.2.2). Japan is ranked 27^th out of 189 economies in the World Bank's Doing Business report for 2014 and its ranking varies considerably from one heading to another: while Japan is ranked first for resolving insolvency; it is ranked 140^th for paying taxes; and 120^th for starting a business.³¹

1.2.  According to the authorities the only provisions that affect FDI directly are in the Act for Promotion of Japan as an Asian Business Center of 2012 which provides incentives to encourage investment in establishing Research and Development and Regional Headquarters, primarily through tax breaks, including corporate and income tax breaks. However, many other laws affect investment, including the Foreign Exchange and Foreign Trade Act, the Order on Inward Foreign Direct Investment, and the Foreign Exchange Order.³²

1.3.  The Act on National Strategic Special Zones of 2013 allows for the designation of zones where regulatory reform is expected to lead to increased investment. According to the authorities, precise details for each zone are to be decided by consensus between the national government, local authorities, and the private sector.

1.4.  In March 2014, six National Strategic Special Zones were identified with three objectives:

• 
  the Tokyo zone and the Kansai zone for comprehensive regulatory reform with the aim of establishing them as bases for international business and innovation;
  
• 
  the Niigata City zone, the Yabu City zone, and the Fukuoka City zone with the aim of regulatory reform for agriculture and employment; and
  
• 
  the Okinawa Prefecture zone for tourism-focused business.³³
  

1.5.  Under the revised Japan Revitalization Strategy of 2014, the objective of strengthening the competitiveness of Japan and promoting investment requires "accelerating the TPP and other economic partnership negotiations to remove obstacles to the cross-border movement of goods, services and investment; fundamentally reforming energy policy to prevent energy costs, including electricity rates, from rising; carrying out a pro-growth corporate tax reform and "so on" and sets a target of doubling investment by foreign companies in Japan to ¥35 trillion by end-FY2020. These objectives are to be achieved through several initiatives including: regulatory reform to improve the business climate; support measures for investment; enhancing National Strategic Special Economic Zones; and improving the system for the resolution of labour disputes.³⁴

1.6.  The Council for Promotion of Foreign Direct Investment was established by the government in April 2014 following a recommendation by the Expert Group Meeting on Foreign Direct Investment in Japan. The Expert Group noted the low level of FDI in Japan and identified several contributory factors:

• 
  an inflexible labour market and low participation by women in the labour force as well as language skills;
  
• 
  corporate governance, particularly the low focus on improving shareholders' returns;
  

• 
  relatively high energy and distribution costs, the costs of meeting Japan's quality and safety standards and, particularly for agricultural raw materials, high costs of inputs;
  
• 
  high nominal and effective rates of corporation tax and costs of complying with the tax system as well as other administration costs such as setting up businesses.
  

1.7.  The Expert Group made a number of recommendations including reducing the tax and administrative costs, improving human resources, harmonization and simplification of licensing and approval systems, and promotion of EPAs, tax agreements, and other bilateral investment-related treaties.³⁵

1.8.  The FY2014 Subsidy Program for Projects Promoting Foreign Direct Investment, Site Location and Regional Development in Japan (Project of site location for global companies) provides subsidies of up to ¥500 million for the costs of survey design, purchasing or leasing facilities and equipment for global companies establishing regional headquarters or research and development sites in Japan. Seven projects were selected in FY2014. Four projects were selected in each year under the equivalent FY2012 and 2013 programmes.³⁶

1.9.  Japan has bilateral investment treaties with 32 countries/territories, including ten bilateral trade agreements which include investment provisions (Table 2.3).

Table 2.6 Bilateral investment treaties in force

(country and year they were signed)

Investment treaties
Egypt (1977) Sri Lanka (1982) China (1988) Turkey (1992) Hong Kong, China (1997) Bangladesh (1998) Pakistan (1998) Russia (1998)	Mongolia (2001) Korea, Republic of (2002) Viet Nam (2003) Cambodia (2007) Lao People's Democratic Republic (2008) Peru (2008) Uzbekistan (2008) Colombia (2011)	Papua New Guinea (2011) Iraq (2012) Kuwait, the State of (2012) Japan; China; and Korea, Republic of (2012) Mozambique (2013) Myanmar (2013)
Regional trade agreements with investment provisions
Singapore Chile Brunei India	Mexico Thailand Philippines Malaysia	Indonesia Switzerland

Source: Japanese authorities.

1.10.  In addition, Japan has, or is a party to, 62 tax conventions applicable to 85 jurisdictions, including other signatories to the Convention on Mutual Administrative Assistance in Tax Matters (Table 2.4).

Table 2.7 Tax conventions

Country/ territory	Avoidance of double taxation and prevention of fiscal evasion	Tax information exchange	Convention on mutual administrative assistance in tax matters	Country/ Territory	Avoidance of double taxation and prevention of fiscal evasion	Tax information exchange	Convention on mutual administrative assistance in tax matters
Albania			*	Korea, Republic of	*		*
Argentina			*	Kuwait, the State of	*
Armenia	*			Kyrgyz Republic	*
Australia	*		*	Liechtenstein		*
Austria	*			Lithuania			*
Azerbaijan	*		*	Luxembourg	*		*
Bahamas		*		Macao, China		*
Bangladesh	*			Malaysia	*
Belarus	*			Malta			*
Belgium	*		*	Mexico	*		*
Belize			*	Moldova, Republic of	*		*
Bermuda		*		Netherlands	*		*
Brazil	*			New Zealand	*		*
Brunei Darussalam	*			Norway	*		*
Bulgaria	*			Oman	*
Canada	*		*	Pakistan	*
Cayman Islands		*		Philippines	*
China	*			Poland	*		*
Colombia			*	Portugal	*
Costa Rica			*	Romania	*
Croatia			*	Russian Federation	*
Czech Republic	*		*	Samoa		*
Denmark	*		*	Saudi Arabia, Kingdom of	*
Egypt	*			Singapore	*
Fiji	*			Slovakia	*		*
Finland	*		*	Slovenia			*
France	*		*	South Africa	*		*
Georgia	*		*	Spain	*		*
Germany	*			Sri Lanka	*
Ghana			*	Sweden	*		*
Greece			*	Switzerland	*
Guernsey		*	*	Tajikistan	*
Hong Kong, China	*			Thailand	*
Hungary	*			Tunisia			*
Iceland			*	Turkey	*
India	*		*	Turkmenistan	*
Indonesia	*			Ukraine	*		*
Ireland	*		*	United Kingdom	*		*
Isle of Man		*		United States	*		*
Israel	*			Uzbekistan	*
Italy	*		*	Vietnam	*
Jersey		*		Zambia	*
Kazakhstan	*

Source: MOF online information. Viewed at: http://www.mof.go.jp/english/tax_policy/tax_conventions/international_182.htm [October 2014].