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1 Japan Disproves Fears of Territorial Taxation 1 (2012)

handle is hein.taxfoundation/ffddfxz0001 and id is 1 raw text is: TAX(;. %
November 13, 2012
No. 335
Japan Disproves Fears of Territorial Taxation
By
Tax Foundation Staff
This is the second case study in a series on territorial tax systems in other countries. The intent of the study
is to see what lessons the U.S. can learn from other countries' experiences and to evaluate the validity of
some of the fears critics express when discussing what would result if the U.S. were to move to a territorial
system.
Through the introduction of this system, the profits repatriated into this country are anticipated to be put to use
for vitalization of the Japanese economy in the wide-ranging and various fields, such as capital investment,
research and development, employment, etc. -Japan Tax System Council, 20081
Prior to 2009, Japan's international tax system bore a remarkable resemblance to that of the United
States.'2 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. In introducing the
2009 budget, however, the Japanese Minister of Economy, Trade, and Industry (METI) announced that his
country would pivot to a policy of territorial taxation as part of a new growth strategy designed to
stimulate innovation in Japan through strengthening the competitiveness of Japanese firms in foreign
markets and encouraging repatriation of overseas earnings.
In the run-up to 2009, Japan's leaders became very concerned with the accumulation of foreign earnings
held overseas, which increased from Y138 billion ($1.1 billion) in 2001 to Y3.2 trillion ($28 billion) by
2006. Officials believed that this pool of earnings represented foregone investment in Japan, and that the
barrier to repatriation increased the risk that R&D operations would be moved abroad.4 Before the policy
1 Toshio Miyatake, Japan  Foreign Subsidiary Dividends Exclusion (paper presented at University of California at Berkeley School
of Law, Institute for Legal Research & Robbins Religious and Civil Law Collection, Sho Sato Conference, Mar. 9-10, 2009), at 5,
http:/i-wwv.iaw.berkelev.edu./files/isho sato tax conf web  afc c -.iyaakc.f
2 How Other Countries Have Used Tax Reform to Help Their Companies Compete in the Global Market: Hearing Before the H.
Comm. on Ways and Means, 112th Cong. (May 24, 2011) (statement of Gary M. Thomas, Partner, White & Case LLP),
hy;_ :/_-----g-o_,.-go/_td---s-y-s-/p--kg/CIJRG-i 12hhrgT25! ,/pdf/CIRG- 11 2lhhrgT_25]__._p__,_0_f [hereinafter Thomas Statement].
Joint Committee on Taxation, Economic Efficiency and StructuralAnalyses ofAlternative U.S. Tax Policiesfor Foreign Direct
Investment (June 25, 2008), at 49, htrI,)://, ww.ic.gv/x--55-.O8.p(f [hereinafter JCT, Economic Efficiency].
4 See Miyatake, supra note 1, at 3.

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