Will Japan PM Suga’s latest moves help Tokyo take Hong Kong’s finance crown?
- Prime Minister Yoshihide Suga says Japan plans to offer tax and other perks to lure foreign firms and talent to Tokyo but will these proposals become reality?
- Recruitment firms say uncertainties in Hong Kong and financial inducements by Japan could help some companies make the jump
One of the Asia-Pacific’s leading recruitment agencies began to receive the first, tentative inquiries about opportunities in Tokyo in the early months of the year, as international corporations with their regional headquarters in Hong Kong felt out the alternatives.
The coronavirus pandemic abruptly shut down the initial inquiries about Japan, said Vijay Deol, the Tokyo-based managing director of En World, as companies prioritised staying solvent ahead of relocating their operations. But Deol expects the approaches to start again as soon as the health crisis has been brought under control and restrictions on travel are lifted.
“We heard the rumblings out of Hong Kong back at the start of the year, with companies and executives worried about the changes there and the restrictions being imposed on freedoms,” Deol told This Week in Asia.
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The government has identified a number of areas that require attention and legal revisions if the plan is to come to fruition, and the authorities will be aware that two previous efforts to appeal to foreign executives fell short because not all the changes could be implemented.
The biggest challenge is related to corporate and personal taxes, with performance-based executive compensation paid by asset management companies not treated as deductible in Japan, for example. That has discouraged the highest echelon of executives from basing themselves in Tokyo, while companies are also dissuaded because they are unable to reduce their taxable income and therefore face a higher corporate tax burden.
The government panel intends to look at ways to solve this issue, with one possibility an “offshore” status that would be separate from Japan’s existing taxation system.
Foreign professionals are also very wary of Japan’s inheritance tax, which is up to 55 per cent of their assets — and also covers a person’s overseas assets if they have lived in Japan for 10 of the previous 15 years.
The joke among many long-term expatriates is that while Japan may be a great place to live, it’s a terribly expensive place to die. As a consequence, the government is now considering making overseas assets that were held before a person arrived in Japan exempt of inheritance taxes.
The government is calling for changes to both the corporate and personal taxes to be incorporated into law for fiscal 2021, which starts in April next year.
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On Monday, Suga confirmed that the government was planning such a move and would promote diversity in boardrooms to draw foreign talent. It would also address issues relating to “residency requirements and administrative support in English” to attract top financial and other foreign talent, The Nikkei newspaper reported.
In the 2019 Upper House election, the governing Liberal Democratic Party made a point of calling for Tokyo to evolve into an international financial hub. At the time, the party set up an economic growth strategy group and drew up a list of recommendations, which included relaxing existing banking regulations, improving governance and putting a greater focus on environmental and social issues.
Procedures to licence asset management companies and other businesses are presently carried out in Japanese, so the proposals include additional funding for bilingual legal experts, while the supervision and inspection of foreign financial institutions could switch to being conducted in English before the end of this financial year.
The proposals also include the introduction of new working styles, such as telecommuting, as a result of the coronavirus pandemic, as well as a fast-track and simplified system for permanent residency, tax breaks, reduced corporate rents and the adoption of fifth-generation wireless technology.
To appeal to families, more international schools will be given opportunities to set up campuses in Tokyo, while additional support will be drawn up for visas for assistant staff.
The combination of a push caused by uncertainties in Hong Kong and the pull of incentives on offer in Tokyo may be sufficient to convince some firms to make the jump.
“There is serious concern over the possible unknowns right now, for sure,” said one senior executive of a global financial company that has its regional headquarters in Hong Kong.
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Doug Tucker, the Hong Kong-based regional manager for financial advisers DeVere Group, believes it is “too early to say” what the impact of recent developments in the city will mean for international companies, but if his head office does decide the time has come to relocate its Asia-Pacific headquarters, then he hopes Tokyo will be his next destination.
Yet questions still remain over whether Japan will this time be able to progress beyond proposals to concrete changes in its system.
“This is Japan’s third shot at this after they fell short in the ‘bubble era’ of the 1990s and then again around 2000,” said Martin Schulz, chief policy economist for Fujitsu Ltd’s Global Market Intelligence Unit. “But to do it, they have to internationalise and digitise at lighting speed,” he said.
“They have to be absolutely laser-focused if they want to get international finance into Tokyo,” he added. “And Japan in general needs to be more flexible and open to foreigners.”