Let's create tax havens.
Hello. I'm Mike, a lawyer living in Hong Kong.
So, here we are. Here's how I'm thinking about turning Tokyo into a serious financial hub.
(1) Make Okinawa a special financial zone and eliminate corporate tax and income tax. (2) Establish a special financial bureau in the special zone to oversee the fund formation process and the funds formed there. The procedures will be simplified and of course all in English. In other words, the creation of a "Cayman" within Japanese jurisdiction.
2) Create another special financial zone near Tokyo. If a fund manager is based here and manages a fund that meets certain requirements (a fund established in Okinawa would obviously meet those requirements), the fund's income would be exempt from Japanese taxation. The fund manager's income tax on the fund business would be around 15%. Of course, all registration and other procedures will be in English in the special zone. Registration requirements will also be relaxed. In other words, this special zone will be called "Hong Kong".
(iii) Revise related laws such as the FIEA to the extent necessary for a financial hub.
No, it's impossible, I hear you say. But we are not at the stage where we can just change the law and taxation system and say, "Here you go. At the very least, we need to create a level playing field with funds managed in Hong Kong. In Hong Kong, funds are set up in tax havens such as Cayman (but they can be set up in Hong Kong in the future) and fund managers are in Hong Kong to manage the funds. The fund is tax free in Cayman and also in Hong Kong. At least it should be the same.
Let me explain in more detail. First of all, Hong Kong has already set up a system that allows fund formation in its own country, so Japan also needs a "Cayman" in the country. Tax havens have a strong negative image as a place where the wealthy evade taxes and where the underworld hides its money, but they are essential for asset management businesses such as funds. Institutional investors, the main players in the fund investment business, are themselves a fund and are therefore obliged to invest their money efficiently in assets around the world. This is why they use a variety of investment funds, which have a number of jurisdictions: the country of origin of the investor, the country of origin of the fund, the country of origin of the fund manager and the country of origin of the assets invested by the fund. The investor has to consider the legal and tax regimes of each of these countries, which can be quite complex. Firstly, it is natural to accept that the investor will be taxed in the country where the investment is located. We also accept the taxation in the country where the invested assets are located, as long as it is the same as if the investor had invested directly in those assets. However, we do not accept taxation in the country of the fund or the fund manager, or additional taxation in the country of the invested assets, as these would be unnecessary costs. This is why funds are set up in the tax haven of "Cayman" and fund managers manage funds in "Hong Kong" where the fund itself is not taxed as long as the "Cayman" fund is managed. These are the recommendations (1) and (2).
And the last point (3). If you read the recent Nikkei article ("Tokyo as a financial hub for Asia (10)") and other reports, you will find that the percentage of investment by "domestic investors" is increasing, and that the income tax and inheritance tax for foreigners coming to Japan are being revised. As usual, the idea of "domestic" and "foreign" has not changed. We are making a fatal mistake when we try to revise the legal system by dividing it into domestic and foreign investors, Japanese and foreigners. We will never be a financial hub for Asia.
But this is actually a deep-rooted story.
The Financial Instruments and Exchange Law clearly states in Article 1 that it is for the "sound development of the national economy and the protection of investors". In other words, it is the public (or perhaps "residents" is more accurate) that the law is intended to protect. The investors to be protected are also domestic investors. So the amendments that are being considered now would be divided into domestic and foreign investors, Japanese and foreigners. But this is contradictory to the idea of becoming an international financial city that also attracts foreign investors. For example, if a fund manager in Japan invests only in foreign assets in a fund consisting only of foreign investors, the FIEL would not apply. Would that make Japan a lawless zone? No, it is not.
The nationality of the investor is not an issue in the fund business. The same rules apply to all investors, and the same rules apply to all fund managers. The important thing is that the funds are legitimately raised and legitimately managed, not which country (although some countries regulate this). This is why the regulators in the country where the fund is set up monitor the flow of illegal and improper funds, and the country where the fund manager is located imposes the same regulations on the manager, regardless of which fund he or she manages, to weed out the bad actors. In fact, this is the case for fund management in Hong Kong.
In this way, in the end, if Tokyo is to become a truly international financial hub, the basic principles of the FIU will have to change. In other words, it needs to be amended in line with the basic principle of providing financial services in Japan to contribute to the development of the global economy and the protection of (domestic and foreign) investors, rather than the development of the national economy and the protection of (domestic) investors. Moreover, in the name of protecting domestic investors, there are quite a few financial products that are legally and effectively unavailable for investment from Japan. All of these must be brought together. We have to amend the law. This is a lot of work. But I believe that this is a reform that is really needed.
To be continued next time.
