As the globalization of corporate activities progresses, the importance of cross-border investments is increasing for Japan's economy. Japan's direct foreign investments reached an all-time high of ¥53.4 trillion in 2006 (at year-end), #1 and the income balance surpassed the trade balance. #2 Moreover, the number of Japanese companies based overseas (worldwide) grew from 18,223 in 1996 to 21,226 in 2006. #3
Given such circumstances, not only the reduction and elimination of tariffs and other trade barriers but also the reduction and elimination of barriers to cross-border investments, such as restrictions on investments by foreign capital or the business regulations and procedures of investee countries, are becoming more important for Japanese companies expanding their businesses abroad.
Nippon Keidanren has strongly called for the further liberalization and facilitation of cross-border investments, such as through the establishment of international investment rules and the conclusion of bilateral and regional Economic Partnership Agreements (EPAs) and investment agreements. #4
In October 2007, Nippon Keidanren published "A Call for the Development and Promotion of Proactive External Economic Strategies," a policy proposal offering broad principles for global external economic strategies for Japan. In this proposal, Nippon Keidanren called for the examination of the creation of an East Asian (Economic) Community and the promotion of EPAs or such sectoral agreements as investment agreements, tax treaties, and social security agreements in line with the nature of economic relations with countries and regions as part of the process of building Japan's global business environment.
As a follow-up to these proposals, this policy proposal explains the thinking of Nippon Keidanren on concrete ways to promote the creation of a legal framework for Japan's foreign investments.
Japanese companies are facing a range of challenges in relation to cross-border investments. #5 For example, in investing in a foreign country, there may be restrictions on the investments of foreign capital to enter such business segments as finance and securities, retailing and wholesaling, or logistics services, or there may be demands to establish joint ventures with local companies. Many problems have also been cited after investments have been made, such as restrictions on the range of business activities foreign capital is permitted to engage in, restrictions on the free and smooth transfer of payments, arbitrary application or delays in approval or other administrative procedures, and arbitrary or sudden changes or abrogation of laws and regulations or administrative policies. Other issues that can be mentioned include counterfeit or pirated goods, and other infringements of intellectual property; double taxation; the double payment of social insurance premiums; delays in visa issuance; and country-specific standards and specifications.
To solve the issues described above, the Japanese government has worked to establish multilateral investment rules such as through WTO and has sought to negotiate and conclude regional and bilateral investment treaties or EPAs with investment chapters with a view to creating a legal framework for foreign investment that would liberalize the entry of foreign capital in foreign nations, facilitate investment activities, and protect investment assets.
As a result of these efforts, Japan has concluded Bilateral Investment Treaties (BITs) with the main objective of protecting investments with nine countries. #6 In such agreements, besides the general protection of investors of contracting parties as specified in treaties of commerce and navigation, many also include articles on obligations of the investee country when expropriating or nationalizing investments of other contracting party or the need to pay compensation as well as the arbitration clause for disputes between investors and host countries. Such articles are meaningful for companies since they can expect that arbitrary expropriations by contracting parties will be deterred and that they can be compensated for damages. In recent years, besides such agreements with the main objective of protecting investments, the conclusion of investment agreements liberalizing the entry of foreign capital and the conclusion of EPAs with investment chapters are contributing to the liberalization and facilitation of investments. Japan has currently signed such agreements with 12 nations. #7
In addition to the above, Japan is negotiating a Japan-China-ROK investment treaty, BITs with Saudi Arabia and Uzbekistan, and EPAs with investment chapters with India, Australia, and Switzerland.
Regarding the development of multilateral investment rules, no new efforts have taken place since the failure to include investments in the WTO Doha Round of negotiations in the "July Package" adopted in August 2004. #8
As described above, Japan is working to conclude BITs and EPAs with investment chapters. At the present moment, Japan has concluded 21 such agreements, which is far less than the situation for European nations and the United States. #9 As of the end of 2006, 2,573 investment treaties have been concluded worldwide. #10
Many investee countries remain with whom Japan has not concluded agreements with the main objective of protecting investments or even treaties of friendship and commerce. As Japanese investments expand globally, prompt action is required.
In East Asia where Japanese companies are extending their production and distribution networks, the conclusion of bilateral EPAs is bringing legal protection and advancing liberalization with regard to Japanese investments. In many instances, however, liberalization is limited to binding the status quo.
Also, little progress has been made in creating a multilateral legal framework. The ASEAN-Japan Comprehensive Economic Partnership (AJCEP) agreement completed of the signing on April 14, 2008 contains no commitments exceeding existing bilateral EPAs. This partnership agreement is limited to the creation of a framework for liberalization at the ASEAN-Japan regional level and to a commitment to negotiate investment protection and liberalization, and these matters remain issues to address in the future. #11 The Japan-China-ROK investment treaty has still not been concluded, and negotiations should be hastened.
Furthermore, even in countries providing legal protection and liberalization of investments through investment agreements or EPAs with investment chapters, some recently concluded EPAs do not include investment arbitration clauses, place limits on the scope of investment, or limit the prohibition of performance requirements to TRIMs (WTO Agreement on Trade-Related Investment Measures). Thus, depending on the country, we cannot regard the level of investment protection and liberalization to be adequate compared to the Japan-ROK investment agreement or the Japan-Vietnam investment agreement. As foreign investment expands, demands are increasing for the liberalization and facilitation of investments, and it will be necessary to augment the content of investment agreements. #12
Japanese companies face multifold challenges in making foreign investments, and these challenges will not be fully resolved merely by concluding investment agreements or EPAs with investment chapters. Hence, as part of the process of creating a legal framework for investment, it will also be necessary to promote the conclusion of tax treaties and social security agreements.
The Japanese government should work to address the issues discussed above based on the following concepts.
In creating a legal framework for investment, efforts to establish multilateral investment rules should be maintained and strengthened. In particular, the WTO, with established procedures for resolving disputes, functions as a systemic framework supporting free and smooth economic activities on a global scale. WTO rules cover not only trade in goods but investment measures related to trade as well as trade in services closely related to investments since they also encompass services offered through business operations located in host countries. These rules also include the protection of intellectual property, an issue frequently mentioned by Japanese companies. Thus, Japan should continue to work for the inclusion of investments in the negotiations of the next WTO round. For this reason, the earliest possible conclusion of the WTO Doha Round is desired.
Bearing the above in mind, the following matters should be addressed for the time being. First, efforts should be accelerated to establish between Japan and host countries and regions important to Japan a high-level legal framework for Japanese investments. Specifically, to promote investment protection and liberalization, (i) an extremely important and urgent issue is to work forcefully toward the early conclusion and entry into force of EPAs or investment agreements currently under negotiation. Also, (ii) negotiations should begin promptly with other important countries and regions currently without a legal framework (EPAs with investment chapters or investment agreements) for Japanese investments. Moreover, (iii) existing agreements should be reviewed on an ongoing basis to strengthen the level of investment protection and liberalization.
It will also be necessary to promote the conclusion of tax treaties and social security agreements as a legal framework parallel to investment agreements and EPAs in order to prevent double taxation and the double payment of social insurance premiums, which are not covered by investment agreements or EPAs. #13
Second, to efficiently and continuously resolve the issues faced by Japanese companies as they smoothly promote investment on a global scale, it would be worthwhile to build and strengthen a framework for government and private-sector consultation and dialogue with host countries with the aim of creating a suitable business environment in foreign countries.
Countries where the matters discussed above should be addressed are listed below.
[ Japan-China-ROK investment agreement, Japan-Australia EPA, Japan-India EPA, and Japan-Saudi Arabia investment agreement ]
Agreements being negotiated should be concluded at an early date, particularly for East Asia where international specialization and related networks are expanding and for countries with close investment relationships with Japan. The agreements listed above are examples of countries where progress in negotiations is required.
In engaging in negotiations, it will be necessary to aim for high-level agreements. In particular, it will be important to include an arbitration article on disputes between investors and host countries, the obligation for fair and equitable treatment, the liberalization of investments or the regulation of controls on the entry of foreign capital (such as national treatment and most-favored-nation treatment for pre-establishment investment and the prohibition of performance requirements), the facilitation of investment activities (ensuring transparency through such measures as the publication of laws and regulations and the solicitation of public comments), and an umbrella clause. #14, #15
The Japanese government has positioned the conclusion of EPAs with the United States and the EU as issues to address in the future. #16 As Nippon Keidanren previously proposed, #17 it will be necessary to begin at an early date joint study by industry, government, and academia of EPAs with the U.S. and the EU and to create a high-level legal framework for investment.
In negotiating agreements with countries listed in A) and B) below without legal frameworks for Japanese investments (EPAs with investment chapters or investment agreements), as with (i) above, it will be necessary to conclude high-level agreements at an early date. In particular, it will be important to aim for agreements that include an arbitration clause for disputes between investors and host countries, the obligation for fair and equitable treatment, the liberalization of investment or the regulation of controls on the entry of foreign capital (such as national treatment and most-favored-nation treatment for pre-establishment investment and the prohibition of performance requirements), the facilitation of investment activities (ensuring transparency through such measures as the publication of laws and regulations and the solicitation of public comments), and an umbrella clause.
In this process, it will be indispensable to explore the possibility of concluding EPAs that contribute to the general improvement of trade and investment relations with countries of strategic importance to Japan, that is to say, countries with close trade and investment relations with Japan or countries that have concluded FTAs with third countries with whom Japan's competitive terms are inferior to such third countries. When there is an urgent need for legal security regarding investment protection and liberalization, it may be possible to negotiate BITs as precursors to EPAs. #18 Also, when achieving a high-level agreement is difficult in the short term, it will be important to include provisions that will provide the basis for revising the agreement in the future to a more high-level one.
[ Brazil, South Africa, United Arab Emirates, Argentina, Venezuela, Colombia, Poland, the Czech Republic, Hungary, Slovakia, and Rumania ]
The countries listed above are examples of those receiving relatively sizable investments from Japan but that have not established with Japan legal frameworks for investment or have only established treaties of commerce and navigation.
With regard to EU member nations, liberalization should be secured through a Japan-EU economic partnership agreement (Japan-EU EPA) #19 proposed by Nippon Keidanren, since the EU is scheduled to assume authority over liberalization. As for investment protection that is under national authority, such protection should be secured through agreements with the main objective of protecting investments concluded with each nation. #20
[ Algeria, Nigeria, Iran, Kuwait, Oman, Bahrain, Qatar, Peru, Panama, Bolivia, Ukraine, Kazakhstan, Israel, and Angola ]
The countries listed above are those with whom it would be beneficial to promote investments by creating legal frameworks for investment taking into consideration the national interest such as to secure a stable supply of resources and energy or to strengthen the overall relationship with the host country.
[ China, Russia, Malaysia, the Philippines, Thailand, Brunei, Turkey, Hong Kong, Pakistan, Sri Lanka, Egypt, and Mongolia ]
The countries and region listed above are examples of those with whom existing agreements need to be revised to achieve high-level legal frameworks for investment. In particular, the entry of foreign capital should be liberalized, investment activities should be facilitated, and arbitration clauses for disputes between investors and host countries should be secured.
Whether or not EPAs should be concluded (EPAs have already been concluded with Malaysia, the Philippines, Thailand, and Brunei) or the timing for revising agreements should be decided on a case-by-case basis by taking into account such factors as the trade and investment relationship with the host country, changes in the host country's business environment, and when the existing agreement was concluded.
As part of the process of creating a legal framework for investment, it will be essential to promote the conclusion of tax treaties and social security agreements to prevent international double taxation and to eliminate the double payment of social insurance premiums by employees working abroad.
Japan has concluded tax treaties with 56 countries, tax treaty negotiations are under way with four countries (Kazakhstan, Brunei, United Arab Emirates, and Kuwait), and a revised tax treaty is being negotiated with the Netherlands. Including the countries listed in II. 1 (1), negotiations toward the conclusion of new tax treaties or the revision of existing treaties should be accelerated with countries receiving sizable investments from Japan and with countries where investments are expected to increase.
To enable companies to freely develop their business undertakings, it will be particularly important to avoid the risk of double taxation through the application of transfer pricing taxation. To allow advance determination in line with the transaction situation of companies, such as regarding the allocation of the return on tangible and intangible fixed assets, efforts should be made to include high-level provisions, including articles on advance pricing agreements (APAs), in the conclusion and revision of tax treaties. In particular, tax treaties with Brazil and Indonesia need to be revised to include APAs.
Also, with regard to tax treaties, efforts should be made to create an environment that promotes investment and technology exchange by reducing or eliminating source-country taxation of investment income (dividends, interest, and royalties [copyrights and patents]). #21
Japan has concluded social security agreements with 10 countries and is negotiating such agreements or is in preparatory negotiations #22 with seven countries. Given that the United States has concluded social security agreements with more than 20 countries and that France and Canada have done so with more than 40 countries, Japan should begin or accelerate negotiations to conclude social security agreements with countries where double payments are comparatively large (such as Italy, Brazil, Spain, Hungary, Sweden, the Philippines, Mexico, Poland, and Greece) #23 and with the countries listed in II. 1 (1) where double payments are occurring or where there is a high risk of double payments.
To further facilitate the foreign investments of Japanese companies, including situations where investment and other agreements have already been concluded, there is a need to promote government and private-sector consultation and dialogue with host countries on the creation of a favorable business environment.
For Japanese companies to withstand international competition, regulations and rules need to be revised appropriately and in a timely manner in accordance with the changing business environment and the needs of companies. From such a perspective, a framework is needed where the private sector can propose improvements and make other requests in an ongoing manner regarding the entire business environment, including issues not covered by EPAs, investment agreements, tax treaties, and social security agreements. It would be beneficial to create such a framework as part of EPAs or investment agreements, but it would also be possible to establish this framework in advance of such negotiations.
When such a framework already exists, it should be revised as needed so that it is effective in resolving specific issues.
Host countries where these efforts are needed are countries where companies are facing many challenges #24 in pursuing business activities, such as East Asian countries and countries listed in II. 1.
To achieve the matters discussed above, the Japanese government should promptly set up required structures and strengthen its efforts. Companies should also express their views more actively to the governments of investee countries and work to improve the business environment, such as by utilizing provisions available through investment or other agreements and by utilizing frameworks for creating a suitable business environment.