[Index] [Introduction] [General Remarks] [Itemized Discussions] [Supplementary Discussion]

The Environment for International Investment and Japan

- Views on MAI Negotiations -

Itemized Discussions:

Important Items Involving Investment

This section addresses the ten items which are important from the viewpoint of the Japanese economy among the many issues involving international investment. For each item: 1) a Basic Opinion regarding the issue, based on the stance from the viewpoint of the Japanese economy will be indicated; 2) Specific problems which each country should solve will be expressed (although, items not necessarily expected to be satisfactorily solved through the MAI will be included); and 3) How these items should be treated in the MAI in order to solve the issues will be clarified. (Note that for Items 8, 9 and 10, only an opinion and recommended treatment by the MAI will be indicated.)

  1. Key Personnel (Transfer and Hire of Company Staff)
    1. Basic Stance
    2. The transfer of key personnel with foreign direct investment is essential to smooth business activities. The procedures involving the entry and residence of key personnel in foreign countries, such as the issuing of visas, should be conducted promptly. The simplification of visa acquisition procedures and shortening the visa waiting periods are necessary.

      In addition, the creation and transparent enforcement of the necessary international rules to prevent the double payment of public costs (social insurance costs, etc.) involved in transfer of company staff are also needed.

    3. Problems to Solve
    4. [ Visa ]
      Some countries limit the actual number of visas issued, which is a problem especially when companies try to increase the number of foreign personnel. There are some problems among the OECD member countries, described below, which should be alleviated in order to establish simpler visa issuing systems:

      1. There are cases in which local affiliates have to delay starting operations because of the issuing of visas for the president and other key personnel. In addition, current systems can not handle the many cases, for example, during start up, in which it is necessary to send more than the usual number of personnel in a short term. The simplification of short-term visa issuing procedures for such cases as start up should be considered.
      2. In many cases, key personnel are treated in the same way as immigrants in terms of procedures when they apply for visas. As a result, this takes time, and it is usually necessary for them to hire lawyers in order to facilitate the process.
      3. There are cases in which delays occur because changes in visa application procedures have not been adequately notified.
      4. In the area of family visas for key personnel, there have been calls for the alleviation of some regulations, for example, those which require special student visas for children of adult age. We request that the Japanese Government also make efforts to ameliorate its visa issuing process.

      [ Social Insurance Costs ]
      The double payment of social insurance costs such as public pension insurance fees is pushing up the cost of transfer of personnel overseas. Japan, under the bilateral negotiations, is now preparing for the conclusion of portable pension agreements with Germany and the United States. Japan should also move quickly to conclude agreements with other major countries in an effort to promote the prevention of the double payment of public pension insurance fees.

      The establishment of the general clause in the MAI should also be considered.

      [ Hiring Obligations of Local Affiliates/Appointment of Local Citizens to the Board of Directors]
      Although the hiring of local citizens suitably and fairly is essential to the sound operation of an overseas affiliate, it would be very difficult to ignore differing conditions in each country, including flexibility of labor market, etc., in order to promote harmonization of the domestic rules. However, at the very least, regulations such as nationality requirements for executives, including the board members, should be rectified.

    5. Requests for the MAI Negotiations
    6. The definition of key personnel should be clarified. Based on the viewpoint that countries should ensure the unrestricted entry and residence of personnel essential to better manage their investment, not only executives, managers and specialists, but also management trainees and technicians should be considered as key personnel.

  2. Performance Requirements
    1. Basic Stance
    2. Local contents requirement, export requirement, imports and trade balancing requirements are the performance requirements which violate the national treatment (GATT Article III) and the general elimination of quantitative restrictions (GATT Article XI), and regarded as the violations of the WTO's Agreement on Trade Related Investment Measures (TRIMs). The spirit of the TRIMs Agreement which prohibits trade-restrictive and distorting performance requirements should of course not be tolerated. In addition, performance requirements which actually distort free investment by foreign corporations over a wider range should also be rectified.

    3. Problems to Solve
    4. A brief look at some of OECD Member countries reveals the following difficulties:

      1. The formula for procurement ratios applied to automobile manufacturers in North America are not consistent across each system (the Labeling Act, the Corporate Averaging Fuel Economy (CAFE), etc.), and are a burden on investments and corporations. It should also be noted that sometimes these calculation methods are in fact favorable toward domestic businesses.
      2. The existence of voluntary regulations (the prioritized purchase of products made by domestic businesses) imposed by the procuring side for political reasons and other non-transparent performance requirements should also be noted, although these are not systemic problems.
      3. De facto regulations on direct investment are caused because the harmonization of environmental regulations and safety standards among countries are insufficient. The international harmonization of environmental regulations and safety standards is becoming an important issue. (However, these problems differ from the systematic performance requirements.)

    5. Requests for the MAI Negotiations
    6. Even in cases where performance requirements are distorting free investments, as long as they are applied not only to foreign-affiliated firms, but also domestic businesses, it is not necessarily appropriate to request their rectification under the MAI framework.

      In addition to confirming the spirit of the TRIMs Agreement, the prohibition of measures which have the effect of distorting investments and are not treated under the TRIMs Agreement, such as technology and manufacturing transfer requirements and local equity requirements, should be specified under the MAI. In addition, provisions of the actual measures for receiving favorable treatment (tax reductions, financial assistance, etc.) should be included.

  3. Investment Incentives
    1. Basic Stance
    2. The granting of investment incentives on a MFN basis is essential. In addition, these incentives should be granted to not only foreign affiliates, but also deserving domestic businesses. However, we believe that for periods of time, investment incentives for foreign-affiliated companies must also be considered.

    3. Problems to Solve
    4. Many investment incentives exist between the OECD Member countries. Included are the tax advantages, tax reductions, ability of infrastructure facilities, and so on. Among the OECD Member countries, these incentives are for the most part functioning properly. However, there are sometimes problems with the execution of incentives, such as the difficulty of acquiring the actual permission for incentives which were promised at the time decision to invest was made.

      Concerning investment incentives subject to only foreign-affiliated businesses, the purpose to contribute to the rectification of investment imbalances should be clarified. Also they should be introduced under acceptance in the host countries.

    5. Requests for the MAI Negotiations
    6. Incentives which contribute to economic growth are indispensable to non-OECD Member countries and should not be uniformly restricted. However, all incentives must be granted based on the principles of national treatment and MFN. Furthermore, performance requirements which are deemed as WTO violations under the TRIMs Agreement should not be linked to incentives.

  4. General Exceptions and Country Specific Reservations
    1. Basic Stance
    2. The bases for general exceptions - national security, international peace and security, public order - should be defined clearly and precisely. In addition, measures to prevent the misuse of these definitions are necessary.

      Country Specific Reservations are based on individual conditions in each country, and it will be desirable to shrink these areas gradually to achieve liberalization. Exceptions which violate the principle of MFN should be prohibited.

    3. Problems to Solve
    4. Investment regulation, sometimes causes problem. Policies of favorable treatment for nationals and regulations on foreign investment aimed at cultivating domestic production are being adopted in particular countries. Although in general, policies of favorable treatment for nationals are starting to be relaxed, unclear rules involving suspended judgment and sudden changes in them should be alleviated because they become barriers to business activities.

    5. Requests for the MAI Negotiations
    6. The clarification of the ideas of national security, international peace and security and public order in order to establish as concrete a basis for general exceptions as possible is an important issue. There is no need to regard international peace and security and public order in making exceptions to national treatment instruments. It is also necessary to adopt provisions for preventing the misuse of exceptions related to national security.

      Furthermore, in the future process of liberalization negotiations, a method should be adopted in which each country indicates its business areas for country specific reservations, in which standstill and rollback measures should be applied. At the same time, it will be necessary to establish a monitoring mechanism and a declaration to ensure the action of the signatories. Participation by non-OECD Member countries should be encouraged by setting more relaxed terms and step-wise procedure.

  5. The Treatment of Regional Economic Agreements (EU, NAFTA)
    1. Basic Stance
    2. Regional agreements such as the EU and NAFTA should not serve to enlarge trade and investment barriers to non-signatories. We should make efforts to close the gaps in national treatment and MFN between countries within and without regional agreements, thereby eliminating the barriers to non-signatories.

    3. Specific Examples
    4. A regional economic framework can also be advantageous for a non-signatories. For example, non-NAFTA businesses which set up local affiliates in a NAFTA nation can use it as a foothold to lead to smooth investments in other NAFTA nations. Some Japanese businesses have received special privileges for their efforts using the above method. Such contributions to the investment vitality of non-signatories are admirable. On the other hand, specific problems which must be solved also exist. For example, the raising of local contents for automobiles by NAFTA, and the difference in treatment in the business set up stage regarding the application of tariff exemptions on importation of auto parts in the Auto Pact of the U.S.-Canada, are in fact against the national treatment principle.

    5. Requests for the MAI Negotiations
    6. The MAI should include provisions for clarifying the treatment of regional integration, and in addition to making it clear to non-signatories their standstill obligation regarding restrictions, it should set provisions which ensure that measures for exceptions based on non-discriminatory principles are put in place so as not to disadvantage non-signatories.

  6. Application to State Governments
    1. Basic Opinion
    2. Among countries which have a federal system, such as the United States, Canada, Australia, etc., there are cases in which the actual execution of international treaties is delegated at the state level. While it is necessary to consider the level of autonomy of states and issues regarding national constitutions in each country, it is also necessary to ensure the enforcement these treaties.

    3. Problems to Solve
    4. In addition to the problem of ensuring enforcement of treaties, there are also situations in which rules and legislation differ among states. We must aim to rectify these situations toward liberalization.

    5. Requests for the MAI Negotiations
    6. We should formulate steps to take in order to ensure enforcement at the state level. For example, a reservation list for states could be submitted at the same time the lists for each country are submitted.

  7. Tax Systems
    1. Basic Opinion
    2. As mentioned earlier in the Itemized Discussions, there are over 1,400 bilateral tax treaties in existence. At the same time, ongoing efforts are being made by the OECD Committee on Fiscal Affairs. Under the current conditions, we need to ensure the transparency of execution while observing the existing rules.

    3. Problems to Solve
    4. [ Transfer Pricing Taxation ]
      The United States and Australia are moving away from the internationally agreed-upon methods, ones base on the arm's length principle. They have introduced methods based on profit, such as the Comparable Profits Method, and are moving to raise taxes, thereby creating obstructions to international investment.

      [ Management Guidance Fees, Brand Names Fees, Royalties, etc. ]
      Management guidance fees, brand fees, and royalties are in some cases taxable. The relaxing of government regulations and the increased transparency of enforcement are necessary in order to respect the contracts, such items as percentage and term.

    5. Requests for the MAI Negotiations
    6. The MAI would lose a great deal of its significance as a comprehensive multinational treaty on investment if it were to dismiss tax considerations completely. It is important to consider, for example, the utilization of procedures for dispute settlement, or the incorporation of the OECD Transfer Pricing Guidelines, in such a way that they are not inconsistent with the bilateral tax treaties already in place.

  8. Dispute Settlement
  9. The MAI should utilize existing frameworks and offer a list of possible solutions to disputes. For this purpose, the Calvo Clause (foreign contractor must obey a settlement dispute based on the local remedy of the contract nation) should be abolished. In addition, investors should have the right to choose either domestic judicial procedures or international dispute settlement procedures.

    The relationship between international dispute settlement mechanisms and local remedies should be readjusted so that the system can be used comfortably by investors. It is also necessary to discuss ways to improve the convenience of the utilization of existing international dispute settlement mechanisms.

  10. Transfers, Expropriation and Compensation
  11. In order to encourage investment, unrestrained and smooth transfers should be compensated. Sudden change of regulations on transfers should be undesirable. Limitation of transfer to foreign currency acquired through exportation should be abolished.

    Investors should be able to choose whether the compensation for expropriation is calculated according to market price or the initial cost of the investment. In addition, compensation should be paid in a stable and internationally convertible currency.

  12. Private Practice
  13. Issues regarding private business practices, which are based on the social backgrounds in each country, should not be included in a legal framework such as the MAI.

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