Global corporate tax revenue is vanishing due to the shifting of profits to tax havens. Under the current principles of international taxation, taxable income of each member of multinational enterprises (MNEs) is calculated on the assumption that individual companies are engaged in business transactions as a separate company dealing at an arm’s length (principle of separate accounting). However, MNEs can easily reduce their group tax burden by booking intangible assets that generate a significant amount of profits (assumed to be excess profits) on the books of group companies in tax haven countries granting low tax rates. This paper pays attention to the fact that a package of solutions worked out by the international community in January 2020 has boldly adopted the taxation of consolidated group income and a global minimum tax for income taxation of MNEs, and explores the meaning of the package under international taxation law. Will the package be effective in restraining “a race to the bottom” (Tax competition and corporate tax rates reduction)?
Under the World Trade Organization (WTO) framework, international rules on anti- dumping (AD) measures, on the one hand, and those on rules of origin (ROO) - including the provisions aiming at developing a harmonized rule of origin (HRO) - on the other, have been considered as related but distinct areas. Sensitive issues such as how to set and apply ROOs in the course of the AD investigations, and whether or not to apply the HRO to the AD measures, have also been addressed individually within each field, respectively. However, in everyday trade administration practices, the two sets of rules, i.e., AD and ROO, are becoming increasingly cross-cutting and interdependent of each other, especially when discussing the legitimacy of “anti-circumvention” measures which counteract “circumvention” of the AD measures. Failing to address the issue of interrelationship between the two sets of rules may hinder effectiveness of international disciplines in both AD and ROO. Until now, however, little inclusive and extensive research examining this issue has been conducted. Thus, this paper clarifies the major causes of the problem, with special focus on regulatory and judicial trends in the US. It illustrates the US approach of using ROOs more aggressively and in an extended manner, to secure effectiveness of the AD measures. As a reflection, this paper sheds light on systemic problems that this US practice creates in contrast to the longstanding pursuit of international regulation of AD measures, and the importance of multifaceted and coordinated regulatory design across both fields of AD and ROO.
While the examination process on a new tax allocation rule has been developed in the OECD and its final discussion is still on-going, this paper explores what kind of efforts and contributions have been made by businesses who are important stakeholders on this issue and identifies whether those responses have been well addressed or not. During the drafting stage managed by the Inclusive Framework (IF), supported by the OECD secretariat, the main issue has been to what extent any residual profits of digital transformation enterprises (digital MNEs) should be allocated between the home country of the digital MNEs and market countries. The features of the digital economy, especially “Scale without mass” have served as a mechanism to allocate their residual profits to their home countries. The private sector generally believes that such outcome seems reasonable, mainly because the digital economy heavily depends on intangibles developed by the headquarters company, that bears the huge RD. To structure a new tax base and designate allocation keys to it, if necessary, the governments should respect business accounting practice as much as possible, and the additional allocation of profits to market countries should be minimized, because the private sector heavily depends on the intangibles that are developed by its parent company as well as on the global network that is managed by its parent company. Thus, even if a new additional allocation rule would be agreed, the compliance cost for the new rule should be minimized. During the final stage of drafting the two pillar approaches, input from the private sector is important and indispensable, especially for the technical issues, such as the use of consolidated accounting reports, documentation requirements on taxpayers and dispute prevention and resolution program. So far, it is observed that public consultations have been organized in a timely manner and working effectively, however, before final political negotiations among the IF countries, consultations with businesses could produce practical and administrable adjustments to the OECD frameworks.
The consideration of a tax system on the digital economy involves challenges related to implementation, such as how to calculate and allocate profits attributable to market countries, and challenges related to enforcement, such as ensuring appropriate tax declaration and payment, avoiding excessive compliance cost, and preventing and eliminating double taxation. New rules should adequately take into consideration the following issues concerning implementation and enforcement. The first issue is the clarity of the requirements regarding the methods of calculating and allocating attributable profits. The second issue is the need for effective systems to require registration in market countries and for information sharing among the tax authorities to ensure appropriate tax declaration and payment, and avoid excessive compliance cost. The third issue is the need to foster an international consensus to allocate profits and develop an effective multilateral framework of dispute settlement. It is required to hold sufficient discussions on how to tax the ever-growing digital economy, which is the issue that significantly affects the future direction of the international tax system.
A discussion, focusing on the present-day OECD, is being carried out with regard to taxation that is compatible with the digitalization of the economy. Despite the efforts of the OECD, each country has been working on the introduction of a digital service tax through unilateral or interim measures. Such a tax has been criticized as an ambush, as not allowing coordination under treaty agreements, and as a system that targets specific companies. However, Professor Wei Cui has observed in relation to a digital service tax that digital platforms would earn Location-Specific Rents in conditions not unlike those that arise when mining natural resources, and contends that this has a rationale in the user’s country’s right to tax digital platform corporations. The present paper explores the rationale behind a digital service tax through Cui’s opinion and expert analyses responding to it. The important factors in this discussion include the fact that businesses that run digital platforms with controlling power in the market have a dual nature and indirectly network effects; the fact that marginal costs are currently low and that the revenue of takings has been shown to be very close to profits; and the fact that there is scope for the view that coordination under treaty agreements is not necessary.
The most important choice in the era of the League of Nations is the adoption of separate accounting, which considers a domestic physical presence (which corresponds to the present concept of a “permanent establishment” (PE)) of a foreign enterprise to be an independent enterprise. The idea of separate accounting, in which a person (individual or corporation) or a part (PE) that physically contributes to the business income is entitled to a share of the income according to its contribution, is associated with the idea of the labor value theory. In reality, entities sometimes do receive income without contribution, such as in compensation for covenants not to compete. When we allocate income among affiliated enterprises in accordance with the contributions made, there are two types of independent business transactions, or arm’s length transactions, of note: reliable arm’s length transactions, and unreliable arm’s length transactions. We can find examples of both mild derogation from the arm’s length principle and severe derogation from the arm’s length principle. In one case, Amount B, in which profit is attributable to a place of activities according to fictious rate of return, can be considered as mild derogation from the arm’s length principle, in which transactions like unreliable arm’s length transactions are denied. In another case, Amount A, in which taxing rights are allocated to places of demand, can in no way be justified as mild derogation from the arm’s length principle, and must be considered as severe derogation from the arm’s length principle.
In Japan, where the aging of society with a low birth rate is ongoing, it is important to increase the return on net external assets as a way to offset a decline in the amount of such assets. As a result of an increase in the share of foreign direct investment in recent years, the return on net external assets is expected to rise. However, the return on foreign direct investment by Japan has continued to be lower than the return on foreign direct investment by the United States. Some reports indicate that the return on foreign direct investment by the United States is being inflated as a result of tax avoidance practices. However, it is essential to improve the return through appropriate risk-taking without relying on tax avoidance practices amid growing international criticism of such practices. This research examines the deciding factors in the return on foreign direct investment by both Japan and the United States and compares the characteristics unique to the two countries. The research results suggest that US companies have a stronger tendency to choose investment destination countries in consideration of tax factors and that this tendency is likely to be reflected in the return on foreign direct investment. On the other hand, the results also suggest that although multinational companies face various risk factors in investment destination countries, US companies are securing higher excess returns in exchange for risk-taking.
How to engage China is more important than ever as global society is forging international rules. However, it is not straightforward to understand the characteristics of China’s market economy, given the wide diversity across industries, regions and firms. In order to present a practical view on Chinese economies, this paper first categorizes the types of market economies in China. Then, it examines cases that present challenges on trade rules. Specifically, in a mixed market such as the steel industry, the existence of state-owned enterprises distorts competitive neutrality through subsidies: The use of such subsidies should be disciplined.
In the Chinese economy, whose growth is gradually slowing down, it is necessary to promote structural reform, which is an important policy challenge, and implement measures to stimulate the economy for the immediate moment at the same time. The contents and direction of fiscal policy are of great concern. As for the fiscal position, it cannot be said at the moment that fiscal risk is extremely high when we take a comprehensive look at the budget balance situation and debt problems. However, pressure on the fiscal position is gradually growing. As China is currently shifting its fiscal policy emphasis to economic stimulus measures, such as large-scale tax reduction and expansion of public investments, there are concerns that the structural reform may stall. Although the fiscal relationship between the central and local governments has undergone several adjustments since the introduction of the tax-sharing system, there are still some unresolved issues. In particular, the mutual dependence between governments, financial institutions and companies at the local level are aggravating regional debt problems. When we consider China’s fiscal policy, the lack of transparency over the fiscal position is also posing a significant risk. In this respect, the results of a survey conducted by a research group at Shanghai University of Finance and Economics are very interesting. The group pointed out that although disclosure of fiscal data is gradually improving, many problems remain. It is necessary to reform the government-market relationship, which has been a pending challenge. Getting over the situation of guo jin min tui (the state advances as the private sector retreats) by promoting the reform of state-owned enterprises is also important for maintaining fiscal sustainability. At the same time, it is essential to clarify the division of administrative work and roles, authorities, responsibilities, and resource allocations between the central and local governments and between local governments. There is no doubt that social security expenditure will increase steeply as the aging of society with a low birthrate advances rapidly in the future. In addition, as China is implementing new urbanization measures intended to achieve a balanced national development and resolve inequality, it is inevitable that the pressure on the fiscal position will grow further in the near future. It is very important to minimize future fiscal risks by promoting the structural reform while China has sufficient fiscal capacity and before the aging advances further.
While the impact of the growing diversity and complexity of preferential rules of origin (RoO) due to the development of free trade agreements (FTAs) and economic partnership agreements (EPAs) is attracting attention, there are moves to achieve the convergence of complex preferential RoO in light of the experiences gained by individual countries through the enforcement of RoO under FTAs/EPAs, and the geographical expansion of FTAs/EPAs and the development of mega-FTAs/EPAs. This paper examines the current state of diversity and complexity of RoO and the moves toward convergence by conducting a comparative analysis of RoO under EPAs concluded by Japan and FTAs concluded by major countries with respect to a selection of typical products in major sectors and considers whether it is possible to simplify RoO in order to reduce the diversity and complexity. It also considers what role multilateral frameworks, such as the World Trade Organization (WTO), can play in the simplification of RoO.
Southeast Asian countries are active in infrastructure development and the introduction of preferential tax measures for trade and investment. Such policy measures have been implemented in anticipation of the development of new industries and industrial sophistication as well as the growth of local companies through the introduction of foreign technologies. Consequently, Southeast Asian countries have achieved high economic growth, even though the development of local companies has not necessarily been sufficient. There is a gap between the macroeconomic and microeconomic situations in terms of policy achievement, presumably because technologies transferred through trade and investment go mainly to multinational companies’ subsidiaries, rather than to local companies, in Southeast Asia. If local companies cannot be expected to improve their capabilities for lack of learning ability, multinational companies will not make efforts to transfer technologies to them. In consideration of this problem, this paper first analyzes the correlation between inter-company technology transfer and innovation. As a result, it is confirmed that technical assistance brings beneficial effects mainly to process innovation, while developing cooperative inter-company relationships is essential for promoting product innovation. Next, the paper analyzes the correlation between continuous improvement (i.e., Kaizen) activities and technology transfer and makes clear the effectiveness of continuous improvement activities in the development of companies’ basic learning ability and cooperation ability. These findings suggest the importance of international cooperation for local companies in introducing continuous improvement activities and developing inter-company cooperation capacity to promote innovations.
This paper first explains the extremely low level of fintech-related investments in Japan compared with the levels in other countries and the possibility of expansion of investments in new, uniquely Japanese businesses, such as the Furusato (hometown) Investment Fund. Next, the paper makes clear distinctions by prefecture in terms of the necessity of financial and economic education and the current status of such education based on the results of a questionnaire survey conducted by the Central Council for Financial Services Information. Finally, by conducting a theoretical analysis of the impact of fintech on various economic agents, the paper shows that fintech has both positive and negative macroeconomic effects and explains the channels whereby the effects spread.
The modern financial technology (“FinTech”) revolution has two features that distinguish it from previous eras of innovation: (1) Consumers have greater access to financial information and applications using smartphones on high-speed networks; and (2) businesses benefit from dramatically lower costs, improved performance, and enhanced options in data storage, computation, and application development. The once monolithic and proprietary financial services industry is being challenged under the zeitgeist of decentralization, disintermediation, and open protocols. Consequently, households in the United States are witnessing the emergence of new options for investment, credit, insurance, and payments. We illustrate how several influential FinTech trends may help address biases and constraints that hamper households in smoothing intertemporal consumption.
Japanese companies have been active in expanding business operations abroad. This paper focuses on the expansion of business operations of listed Japanese companies’ overseas bases to analyze how differences in the asset size of overseas bases (share of overseas bases’ assets) affect changes in the corporate value (PBR: price-to-book value ratio) due to changes in exchange rate. In addition, it analyzes the impact of changes in overseas bases’ balance sheets and profits/losses due to changes in exchange rate on related performance indicators (equity capital, equity capital to total assets, and return on equity (ROE)). We use panel data to obtain the following estimation results. We find that the larger the asset size of company’s overseas bases, the larger the company’s export volumes, and, prior to the Lehman Shock, the higher the company’s corporate value rises when the Japanese Yen depreciates. We also find that the impact on the corporate value increases somewhat although the increase is smaller compared with the situation where the Japanese Yen depreciates after the Lehman Shock. On the other hand, it becomes clear that the larger the asset size of company’s overseas bases, the larger the impact of changes in exchange rate on the company’s equity capital and the equity capital to total assets ratio through changes in the foreign currency translation adjustment. An analysis of the impact of changes in exchange rate on the ROE shows that depreciation of the Japanese Yen tends to increase the ROE because net profits have a larger positive effect on ROE. However, as the equity capital increases, the positive effect is partially offset. These results suggest that it is necessary to conduct the study by taking into account not only the impacts on export and other trade activities but also the impacts on companies’ overseas assets when we study the impact of changes in exchange rate on corporate value.
In asset management business, AI and Fintech are now widely used. This article introduces a wide range of examples where AI and Fintech are applied to the development of asset management methods. One of the cores of their applied technology is text mining that converts text information into numerical data, which has evolved through deep learning. Big data has dramatically expanded the amount of input data to asset management models, and advanced prediction models have been developed by analyzing these data using deep learning. On the other hand, AI has brought about the harmful effect of making the model a black box. A lot of attempts are also being made to contribute to the investment theory by estimating risk factors with AI optimization technology and big data. Fintech, on the other hand, provides with automated wealth management, which has contributed to the expansion of asset management business for small-sized and inexperienced investors with robot advisors. In addition, the application of big data is progressing even in ESG investment, which has recently attracted a lot of attention.
The history and reality of international dispute settlement required the international community to develop two independent mechanisms for trade and investment. However, in recent years, there is an increasing number of cases in which the same dispute is simultaneously dealt by the WTO and by the investor-state dispute settlement (ISDS), namely, investor- state arbitration under international investment agreements (IIAs). As a result, more and more normative overlaps and practical interactions are observed between the two legal systems. Against this backdrop, the present paper considers how the international mechanisms of trade and investment legally compete, co-exist and interact each other in the procedure and reality of dispute settlement. First, it examines procedural and technical duplication between the WTO’s dispute settlement and ISDS. Then, with a special focus on the national treatment principle, a fundamental rule common to both of the systems, it makes clear how the WTO and ISDS concur for the protection of substantial rights of foreigners in actual dispute settlements.
In empirical analyses in economics over recent years, some studies have been using data collated by administrative departments as part of their work. Administrative data is full data of the target constituents of a government policy that is gathered periodically. Because it is collated for the purpose of performing tasks, it is superior to conventional sample surveys in terms of the accuracy of its figures, its lack of dropouts and nonresponses, and its large number of observations. However, the academic use of administrative data is not a simple matter due to legal restrictions instituted to deal with problems of confidentiality and complicated administrative procedures. This paper will consider the advantages and disadvantages of the academic use of administrative data and will then introduce case studies from within and outside Japan. As an example of administrative database building, the paper will explain the building process and structure of a student database created in Adachi ward, Tokyo, which is used in papers within this special issue. We contributed significantly to the development of the student database for Adachi ward. Given that there are not thought to be many such case studies in Japan, the significance of this paper is that it describes this process in detail.
The aim of this paper is to perform quantitative analysis about the relationships between receipt status of school financial support and student’s characteristics such as academic performance, obesity, home-learning conditions, everyday attitudes towards learning, and academic performance and physical capabilities. Focusing on all pupils and students attending Adachi ward (Tokyo) public elementary schools and junior high schools, we construct panel data by linking two surveys (“The Survey on the Physical Capabilities of Pupils and Students, and the “Adachi Comprehensive Survey of Acquisition of Basic Academic Skills (conducted from second year of elementary school until third year of middle school), which was independently conducted by Adachi ward in 2009–2017) to pupil/student name registers (list of school-age children) with information about application for and receipt of school attendance support. Even having controlled for pupils’ and students’ fixed-effects, the results of this analysis reveal the possibility that pupils and students who are continuous beneficiaries of public assistance may be put in circumstances with difficulties to learning. We find that, pupils and students who are not eligible for national public assistance but receive municipal school attendance support are in better conditions in terms of overall academic performance and home-learning compared to pupils and students that are continuous beneficiaries of public assistance. Regarding the relationship between academic performance and physical capabilities, it was revealed that, having controlled for pupils’ and students fixed-effects, there is a high probability that there is a positive correlation between physical capabilities and academic performance, and a negative correlation with obesity.
Since the birth of the word “Fintech,” the financial business has changed from a closed market limited to certain institutions to a highly competitive market in which venture companies and communications companies have taken place to the forefront by taking advantage of technology. Existing financial institutions can no longer survive without the use of technology. Fintech service began in the area close to the consumer, such as the payments and remittances of small amounts, but is now beginning to enter areas that were considered a source of earnings for financial institutions, such as asset management and financing. This paper examines various cases that show the uses of Fintech domestically while comparing them to those overseas use-cases, looking into the background behind companies including non-financial institutions, that have applied Fintech. Consequently, we have begun to see companies with business strategies that use the data gathered to understand customer trends and recommend services that are aligned with customer preferences. Non-financial institutions that have many members use Fintech to solidify their engagements with their customers, while financial companies have been drastically reforming their customer point of contact and user interface to address customers directly with new technology and business models so as to survive.
