The Japan Business Federation, otherwise known as Keidanren, plays an essential role in shaping the Japanese tax landscape. However, Keidanren has expanded its influence into the international debate in 2019.
Traditionally the voice of manufacturing in the export-led economy, the federation has transformed in recent years to include more digitalised businesses and has had to strike a balance between differing views from its members.
Japan has felt the squeeze of the global economic downturn and 2019 has been a difficult year. Prime Minister Shinzo Abe decided to increase consumption tax from 8% to 10% to finance the country's growing social welfare costs – inflated by Japan's ageing population.
The Abe government has imposed measures to mitigate demand fluctuations and the negative impact of the consumption tax hike, such as a series of tax breaks for housing and cars. There will a cut in the annual automobile tax while people buying apartments will be able to deduct mortgage interest from their income tax bill.
"These measures are working at the moment but we are concerned going forward that by the end of the year we will a downturn in the economy towards the end of the year," says Hiroshi Makuuchi, manager of tax policy at Keidanren.
"If these risks materialise, the Japanese government should come up with additional measures to boost the economy" he tells ITR, stressing that this must include tax.
Going international
In the past year, Keidanren has had several highlights but one of the key events was the G20 summit – an event where businesses from G20 countries got together and compiled a policy proposal, which was submitted to Prime Minister Abe.
Keidanren was also active in compiling a policy plan for the G20, its year-long presidency held by Japan, which included a proposal to the taxation of the digital economy. Although this has been a highpoint for Keidanren, it has also been a challenging pursuit and efforts on the digital economy will continue into next year.
Keidanren has grappled with the main issue concerning the wider tax landscape: digital tax. The group expressed strong support for globally consistent international tax rules and seemed wary over a tax on turnover and advocated for proportionality in terms of digital tax.
The main proposal noted that the scope of the new taxing right under pillar one of the OECD's unified approach should be narrowed so not all consumer-facing businesses are overly affected.
"We understand that we cannot ring-fence the digital economy, but we have other traditional manufacturing companies. These globally operating companies are very concerned by the new tax right because they might be affected by the new rules," Makuuchi tells ITR.
Some Japanese digital platforms are members of Keidanren and they want to see a level playing field between domestic platforms based in Japan and the US tech companies. Some of these platforms want to see unilateral measure by the Japanese government to tax turnover. Meanwhile, Japanese subsidiaries of US technology companies are also members of Keidanren, so the organisation has an arduous task in finding consensus among its members.
"We think that a strong dispute resolution mechanism should be introduced in tandem with the new taxing rights. We hope to see more arbitration clauses in tax treaties and a more robust mechanism for dispute resolution," says Makuuchi.
Another point that Keidanren will focus on in 2020 will be tax transparency. The OECD is due to review the common reporting standard (CRS) and country-by-country reporting (CbCR). This will be a key issue for Japanese companies.
Some countries could push for an expansion of the content of CbCR to include some other elements such as royalties, dividends and service fees. Keidanren does not support that idea because it would increase the compliance burden for Japanese companies. Furthermore, the federation is firmly against data based on an entity-by-entity basis and the public disclosure of CbCR.
Staying power
The G20 presidency will shift from Japan to Saudi Arabia in 2020 and Keidanren is concerned that global attention to Japan will decrease as a result. "We need to make a greater effort to make sure our voice is heard at the OECD and the G20," says Makuuchi.
Every year, Keidanren compiles a policy proposal on annual tax reform to effectively convey the voice of member companies to the government, often spurring action from lawmakers. Keidanren noted that in 2020 there will be some tax breaks on capital investment for venture companies, but the effect of annual tax breaks remain to be seen.
"I think the government and Japanese politicians are very eager to introduce new tax breaks to facilitate investment from venture companies from large businesses. If these measures are introduced, companies may invest much more in their venture system," says Makuuchi.
Historically, Keidanren members have consisted of brick-and-mortar manufacturing companies but membership has become diversified and expanded into digitalised and smaller companies, including venture companies.
"We are now hearing various views from these companies so our policy proposal will change slightly in the years to come because of their special and new ideas. This is a great change for Keidanren," says Makuuchi.
From 2020 there will be a shift to a hard-to-value intangible (HTVI) approach, replacing the existing transfer pricing system and Japanese companies are concerned about the potential application of HTVI by the national tax agency in the coming years.
HTVI would be defined as intangibles meeting the following criteria: unique and having significant value. The arm's-length pricing is calculated based on the income projection but assumptions used in valuing the arm's-length price are uncertain. It's not that Japanese companies often transfer their valuable intangibles from Japan to other countries, but their potential application is a concern for them.
The National Tax Agency released guidance of the application and mechanism of the HTVI approach but companies say that these efforts are not enough to mitigate their concerns and they want to see more detailed guidance.
Although uncertainty and difficulty will continue for Japan, Keidanren does not expect any major tax changes in 2020. Unlike so many other jurisdictions, Japan has a strong fiscal strategy and – despite economic woes – steers a stable course.
