Japan's Tax Panel Recommends More Favourable Depreciation Rules

by Mary Swire, Tax-News.com, Hong Kong

23 November 2006

The Japanese government's tax advisory panel has proposed changes to the country's depreciation rules in an effort to encourage firms to invest more in capital equipment, thus helping to fuel an economic recovery.

According to a report by Japan's Nihon Keizai Shimbun newspaper, the Tax Commission has drafted reform proposals for the year to March 2008 that would allow companies to fully write off their capital investments.

Under Japan's current depreciation rules, which have remained largely unchanged since the 1960s, firms can write off 90% of the cost of equipment when it has reached the end of its useful life. If the equipment is retained beyond this time, Japanese companies cannot write off more than 95% of the cost.

The new proposals would also bring Japan closer into line with depreciation rules practiced in competitor countries such as South Korea.

The Commission's proposed changes to these rules would likely find support from within the government. Earlier in the month, Hideo Suzuki, director of the corporate affairs division of the Ministry of Economy, Trade and Industry told Bloomberg News that "such a change during an economic recovery will probably give further impetus to corporate plant and equipment investment."

Japan's new Prime Minister, Shinzo Abe, is also said to be in favour of raising the depreciation limit which companies can deduct from profits on the purchase of new equipment to 100%. He has also expressed support for corporate tax cuts and other tax incentives to encourage investment.

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