The tax bills of US companies in Japan and Japanese companies operating in the United States are expected to fall from July when a revised tax treaty designed to spur cross-border investment comes into force.
The treaty, ratified on Tuesday, will end double taxation on dividends, royalties and interest payments and includes other measures that officials said could cut tax bills in some cases by as much as 10 percent.
"There have been strong calls from the business community for this treaty," a Japanese government official told reporters.
"It will spur investment in Japan, that is our hope."
US Treasury Secretary John Snow said in a statement released in Washington that the treaty would significantly reduce tax barriers to investment and trade in both directions.
"This enhanced tax treaty relationship will foster still closer economic ties between the world's two largest economies, enhancing the global competitiveness of our businesses and creating new opportunities for international trade and investment, which will mean more growth and jobs," he said.
"Because of the swift action taken by both governments, key benefits of the new tax treaty will be available to our businesses right away this summer," he said.
Japan, with one eye on the rise of neighbouring China as a magnet for foreign investment, has set a goal of doubling the amount of foreign investment it receives by 2008.
As a first step, Tokyo agreed with Washington in June 2003 to revise their tax treaty, which was signed in 1971.
In the case of dividends, the revisions mean a US company receiving dividends from a Japan-based subsidiary in which it holds more than 50 percent will no longer have to pay Japanese tax as well on the receipts, though it must pay US tax.
Similarly, a US company would be exempt from Japanese tax payments on any royalties it receives from subsidiaries in Japan that pay to use the parent's trademarks.
Japanese companies in the US would similarly be exempt from US tax payments in the same circumstances.
The revisions would knock some 10 percent off the amount of tax paid on royalties, amounting to some 63 billion yen ($600 million) less tax in a year for US companies and about 88 billion yen ($835 million) for Japanese companies.
Lowering the required holding in a subsidiary to 50 percent from 80 percent also means more companies are likely to benefit from the changes, the Japanese government official said.
The official added that the revisions were broadly neutral in terms of their effect on Japanese government tax revenues - a key issue for Japan as its slow economic recovery has yet to feed through to higher income from taxes, while its debt burden mounts.
Japan will gain from the changes to the way dividends are taxed because US companies pay far more in dividends to Japanese subsidiaries than vice versa, but will lose out on income from royalties, the official said.
He could not say what effect the changes would have on Japan's huge current account surplus, and declined to say how much new investment could be expected from the changes.
In the year to March 2003, Japan attracted about $21 billion of foreign direct investment. China drew about $53 billion of investment in calendar 2003.
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