The Japanese manufacturing industry is renowned worldwide for its exquisite craftsmanship, advanced technology, and high-quality products. According to data from the Ministry of Economy, Trade and Industry of Japan, in 2023, the added value of Japan’s manufacturing industry was about 115 trillion yen, accounting for approximately 21% of GDP. Major manufacturing sectors include automobiles, electronics, machinery, chemicals, and steel.

As the world’s third-largest economy, Japan’s manufacturing industry plays a crucial role in the global industrial chain. To maintain the international competitiveness of its manufacturing industry, the Japanese government uses tax policies to support and guide the development of the manufacturing sector. This guide aims to provide a detailed introduction to the tax policies for Japan’s manufacturing industry, with a particular focus on special tax policies and incentives for different sectors.

Overview of Japanese Manufacturing Industry Taxation

1.1 Main Types of Taxes

Japan’s tax system is relatively complex, and manufacturing enterprises face multiple types of taxes. The following are the main types of taxes involved:

(1) Corporate Tax: This is Japan’s primary corporate income tax, administered by the National Tax Agency. Corporate tax is based on the taxable income of enterprises.

(2) Local Corporate Tax: This is a national tax, but the revenue is distributed to local governments. It is an additional tax levied on the corporate tax amount at a certain percentage.

(3) Corporate Enterprise Tax: This is a local tax levied by prefectures, based on the enterprise’s income, added value, and capital amount.

(4) Corporate Inhabitant Tax: This is a local tax levied by prefectures and municipalities, including a per capita levy (fixed amount tax based on enterprise size) and corporate tax levy (levied at a certain percentage of the corporate tax amount).

(5) Consumption Tax: This is Japan’s value-added tax, currently with a standard rate of 10%.

(6) Fixed Asset Tax: This is a local tax levied on land, buildings, and depreciable assets.

1.2 Tax Rate System

Japan’s corporate income tax adopts a progressive tax rate system, as follows:

(1) Corporate Tax:

Large enterprises (capital exceeding 100 million yen): 23.2%

Small and medium-sized enterprises (capital 100 million yen or less):

For annual taxable income up to 8 million yen: 15%

For annual taxable income exceeding 8 million yen: 23.2%

(2) Local Corporate Tax: 10.3% of the corporate tax amount

(3) Corporate Enterprise Tax (standard rates):

Income portion:

Annual income up to 4 million yen: 3.5%

Annual income from 4 million to 8 million yen: 5.3%

Annual income exceeding 8 million yen: 7.0%

Added value portion: 1.2%

Capital portion: 0.5%

(4) Corporate Inhabitant Tax:

Prefectural inhabitant tax: 1% of corporate tax amount + per capita levy (ranging from 20,000 to 800,000 yen)

Municipal inhabitant tax: 6% of corporate tax amount + per capita levy (ranging from 50,000 to 3 million yen)

Considering all these tax rates comprehensively, the actual combined tax burden for Japanese companies is about 29.74% (using Tokyo as an example). However, this rate may vary depending on the region and size of the enterprise.

1.3 Overview of Tax Incentive Policies

To encourage innovation and development in the manufacturing industry, the Japanese government has formulated a series of tax incentive policies. These policies mainly include:

(1) R&D Tax Credit: Allows enterprises to deduct a certain percentage of R&D expenses from their tax payable. This policy aims to encourage enterprises to increase R&D investment and improve technological innovation capabilities.

(2) Accelerated Depreciation: For specific equipment investments, enterprises are allowed to use higher depreciation rates in the early stages of asset use, thereby reducing the short-term tax burden on enterprises.

(3) Investment Tax Credit: For investments in certain specific areas, such as environmental protection equipment and energy-saving equipment, enterprises are allowed to deduct a certain percentage of the investment amount from their tax payable.

(4) Special Measures for SMEs: Provide more favorable tax rates and more tax reduction opportunities for small and medium-sized enterprises to support their development.

(5) Regional Revitalization Measures: Provide additional tax incentives for enterprises investing in specific regions (such as post-disaster reconstruction areas, economic special zones, etc.).

(6) Overseas Market Development Support: Provide tax credits for enterprises’ expenditures related to developing overseas markets to encourage enterprise internationalization.

(7) Intellectual Property Incentives: Provide tax incentives for income derived from patents and other intellectual property to encourage innovation and commercialization of intellectual property.

These preferential policies not only reduce the overall tax burden on enterprises but also guide their investment direction and development strategies to some extent. However, it should be noted that these policies often have specific application conditions and restrictions, and enterprises need to carefully evaluate and plan when using them.

Tax Policies for the Automobile Manufacturing Industry

2.1 Industry Overview

The automobile manufacturing industry is one of Japan’s pillar industries, including world-renowned brands such as Toyota, Honda, and Nissan. In 2023, Japan’s automotive industry accounted for about 3% of the gross domestic product (GDP), with an annual output value of 9.5 trillion yen. The Japanese automobile manufacturing industry not only dominates the domestic market but also has strong competitiveness in the global market.

The characteristics of Japan’s automobile manufacturing industry include: high technological innovation capability, particularly in hybrid and hydrogen fuel cell technologies where it leads the world; a well-developed supply chain system, forming a complete industrial chain from parts to whole vehicles; strong quality management and lean production systems, ensuring high product quality and production efficiency; active layout in overseas markets, with production bases in North America, Europe, and Asia.

2.2 Special Tax Policies

(1) R&D Tax Credit

The R&D tax credit is an important policy of the Japanese government to support innovation in the automobile manufacturing industry. According to Article 42-4 of the Special Taxation Measures Law, automobile manufacturing enterprises can enjoy tax credits for R&D expenses. The specific policies are as follows:

a. Basic Credit:
Tax credit amount = Eligible R&D expenses × (6% + (R&D expenses as a percentage of sales – 10%) × 0.3)
The maximum credit amount should not exceed 25% of the current year’s tax payable.

b. Additional Credit:
If an enterprise’s R&D expenses increase compared to the previous year, it can enjoy an additional credit:
Additional credit amount = (Current year R&D expenses – Average R&D expenses of the past 3 years) × 5%
The sum of the additional credit amount and the basic credit amount should not exceed 30% of the current year’s tax payable.

c. Collaborative Research Credit:
For R&D projects conducted in collaboration with universities or public research institutions, a higher credit rate can be enjoyed:
Collaborative research credit amount = Collaborative research expenses × 30%

Case Analysis:
Automobile Company A had sales of 100 billion yen in 2023, with R&D expenses of 15 billion yen, including 2 billion yen for university collaborative research. The R&D expenses in 2022 were 14 billion yen, and 13.5 billion yen in 2021. Calculate the R&D tax credit amount it can enjoy:

Basic Credit:
R&D expenses as a percentage of sales = 15 billion / 100 billion = 15%
Credit rate = 6% + (15% – 10%) × 0.3 = 7.5%
Basic credit amount = 15 billion × 7.5% = 1.125 billion yen

Additional Credit:
Average R&D expenses of the past 3 years = (14 billion + 13.5 billion + 13.5 billion) / 3 = 13.667 billion yen
Additional credit amount = (15 billion – 13.667 billion) × 5% = 0.067 billion yen

Collaborative Research Credit:
Collaborative research credit amount = 2 billion × 30% = 0.6 billion yen

Total credit amount = 1.125 billion + 0.067 billion + 0.6 billion = 1.792 billion yen

Assuming Company A’s tax payable for the current year is 7 billion yen, the actual creditable amount would be 1.792 billion yen (not exceeding 30% of 7 billion, which is 2.1 billion yen).

(2) Tax Incentives for Environmentally Friendly Vehicles

To encourage the development of new energy vehicles, the Japanese government provides acquisition tax and weight tax reductions for vehicles that meet environmental standards. The specific policies are as follows:

a. Vehicle Weight Tax Reduction:

Pure electric vehicles, fuel cell vehicles: 100% reduction

Plug-in hybrid vehicles: 75% reduction

High-efficiency hybrid vehicles: 50% reduction

b. Vehicle Acquisition Tax Reduction:

Pure electric vehicles, fuel cell vehicles: Exempt

Plug-in hybrid vehicles: 50% reduction

High-efficiency hybrid vehicles: 25% reduction

c. Vehicle Tax (Environmental Performance Levy) Reduction:

Pure electric vehicles, fuel cell vehicles: Exempt

Plug-in hybrid vehicles: 75% reduction

High-efficiency hybrid vehicles: 50% reduction

These preferential policies not only reduce the cost for consumers to purchase environmentally friendly vehicles but also indirectly encourage automobile manufacturers to increase their investment in the research, development, and production of new energy vehicle models.

(3) Accelerated Depreciation for Equipment Investment

To encourage automobile manufacturing enterprises to update production equipment and improve production efficiency, the Japanese government allows enterprises to use accelerated depreciation for new equipment that meets certain conditions. The specific policies are as follows:

Eligible equipment: New equipment that improves production efficiency by more than 30% or reduces energy consumption by more than 30%.

Accelerated depreciation rate: 50% special depreciation can be made in the first year the equipment is put into use.

Case Analysis:
Automobile Company B purchased a batch of new production line equipment worth 5 billion yen, which is expected to improve production efficiency by 35%. According to the accelerated depreciation policy, Company B can depreciate in the first year:
5 billion × 50% = 2.5 billion yen
This is 2 billion yen more depreciation than the normal straight-line depreciation method (assuming the equipment has a useful life of 10 years), significantly reducing the enterprise’s taxable income for the current year.

2.3 Industry Cases

Toyota Motor Corporation, as Japan’s largest automobile manufacturer, actively utilizes various tax incentive policies. In the 2022 fiscal year, Toyota invested 1.1 trillion yen in R&D, accounting for 3.9% of its sales. Through the R&D tax credit policy, Toyota estimates it saved about 60 billion yen in taxes.

At the same time, Toyota has increased its investment in hydrogen fuel cell vehicles, with its Mirai model not only enjoying acquisition tax and weight tax reductions but also receiving subsidy support from local governments. These policies significantly reduced the production and sales costs of the Mirai, helping Toyota maintain competitiveness in the new energy vehicle market.

Furthermore, Toyota also utilized the accelerated depreciation policy for equipment investment to make large-scale investments in its smart factory project. By adopting advanced automation and Internet of Things technologies, Toyota not only improved production efficiency but also enjoyed considerable tax benefits.

Toyota’s case demonstrates how the Japanese automobile manufacturing industry can fully utilize tax incentive policies to support technological innovation, improve production efficiency, and promote the development of new energy vehicle models. This not only enhances the competitiveness of enterprises but also drives the transformation and upgrading of the entire industry.

Tax Policies for the Electronics Manufacturing Industry

3.1 Industry Overview

The electronics manufacturing industry is another important manufacturing sector in Japan, encompassing various sub-industries such as semiconductors, displays, and electronic components. In 2023, the output value of Japan’s electronics manufacturing industry reached 12.3 trillion yen, accounting for approximately 2.4% of GDP. The characteristics of Japan’s electronics manufacturing industry include:

High technological innovation capability, particularly in semiconductor materials and precision electronic components, where Japan holds a world-leading position.

Well-developed industrial clusters, forming a complete industrial chain from upstream materials to downstream applications.

Strong quality management capabilities, with Japanese electronic products known for their high reliability and durability.

Active global market expansion, with numerous production bases established in Southeast Asia and China.

However, in recent years, Japan’s electronics manufacturing industry has faced intense competition from regions such as South Korea and Taiwan. To maintain and enhance industry competitiveness, the Japanese government has formulated a series of targeted tax policies.

3.2 Special Tax Policies

(1) Equipment Investment Tax Credit

According to the Industrial Competitiveness Enhancement Act, electronics manufacturing companies can enjoy tax credits when purchasing advanced equipment. The specific policies are as follows:

a. Basic Credit:

5% tax credit on the investment amount for qualifying advanced equipment purchases.

An additional 2% tax credit if the equipment investment leads to a 1% or more increase in production efficiency.

The total credit amount should not exceed 20% of the company’s tax liability for the year.

b. Special Measures for Small and Medium-sized Enterprises (SMEs):

SMEs can enjoy a 7% tax credit on the investment amount for qualifying advanced equipment purchases.

An additional 3% tax credit if the equipment investment leads to a 1% or more increase in production efficiency.

The total credit amount should not exceed 25% of the company’s tax liability for the year.

c. Energy Efficiency Improvement Measures:

An additional 2% tax credit if the new equipment is at least 10% more energy-efficient than the old equipment.

Calculation Formula:
Tax Credit Amount = Equipment Investment Amount × (Basic Credit Rate + Efficiency Improvement Credit Rate + Energy Efficiency Credit Rate)

Case Analysis:
Company B (a large enterprise) invested 50 billion yen in advanced semiconductor production equipment in 2023. This equipment improved the company’s production efficiency by 1.5% and was 12% more energy-efficient than the old equipment. Calculation of the tax credit:

Basic Credit Rate = 5%
Efficiency Improvement Credit Rate = 2% (as production efficiency increased by more than 1%)
Energy Efficiency Credit Rate = 2% (energy savings exceeded 10%)
Total Credit Rate = 5% + 2% + 2% = 9%
Tax Credit Amount = 50 billion × 9% = 4.5 billion yen

Assuming Company B’s tax liability for the year was 25 billion yen, the actual credit amount would be 4.5 billion yen (not exceeding 20% of 25 billion, which is 5 billion yen).

(2) Special Depreciation System

To support technology upgrades in the electronics manufacturing industry, the Japanese government allows companies to use a special depreciation system for qualifying equipment. According to Article 44-3 of the Special Taxation Measures Law:

a. General Provisions:

Companies can depreciate 30% of the acquisition value of equipment in the first year of use.

b. Special Measures for SMEs:

SMEs can depreciate 45% of the acquisition value of equipment in the first year of use.

c. High-tech Equipment:

For equipment recognized as high-tech (such as 5G communication equipment, AI-related equipment), 50% depreciation is allowed in the first year.

Case Analysis:
Company C (an SME) purchased a 5G communication equipment production line worth 1 billion yen. Under the special depreciation system, Company C can depreciate in the first year:

1 billion × 50% = 500 million yen

This is 400 million yen more than the normal straight-line depreciation method (assuming a 10-year equipment life), significantly reducing the company’s taxable income for the year.

(3) R&D Expense Super Deduction

In addition to the previously mentioned R&D tax credit, the electronics manufacturing industry can also enjoy an R&D expense super deduction policy. Specifically:

Companies can deduct 110% of qualifying R&D expenses when calculating taxable income.

For R&D projects recognized as “core technologies,” 120% of R&D expenses can be deducted when calculating taxable income.

This policy can be used in conjunction with the R&D tax credit, further reducing the tax burden on companies and encouraging increased R&D investment.

3.3 Industry Case Study

Sony Corporation, as one of the representative companies in Japan’s electronics manufacturing industry, actively utilizes tax incentive policies to promote technological innovation. In the 2022 fiscal year, Sony invested 530 billion yen in R&D, accounting for 5.8% of its sales. Through R&D tax credits and equipment investment tax credits, Sony estimated tax savings of about 30 billion yen.

Additionally, Sony’s investment in next-generation image sensor production lines benefited from the special depreciation system, significantly reducing the initial tax burden. Sony also used the R&D expense super deduction policy, applying a 120% super deduction for its R&D expenditures in core technology areas such as 8K display technology and AI chips, further reducing its taxable income.

Sony’s case demonstrates how Japan’s electronics manufacturing industry can comprehensively utilize various tax incentive policies to support technological innovation and industrial upgrading. This not only helps companies maintain advantages in fierce international competition but also promotes the transformation of Japan’s electronics manufacturing industry towards high value-added areas.

Tax Policies for the Machinery Manufacturing Industry

4.1 Industry Overview

The machinery manufacturing industry is an important component of Japan’s manufacturing sector, including industrial robots, precision instruments, engineering machinery, and other fields. In 2023, the output value of Japan’s machinery manufacturing industry reached 15.7 trillion yen, accounting for approximately 3.1% of GDP. The characteristics of Japan’s machinery manufacturing industry include:

High precision machining capabilities, especially in CNC machine tools and industrial robots, where Japan holds a world-leading position.

Strong system integration capabilities, able to provide comprehensive solutions for customers.

Emphasis on quality and reliability, with Japanese machinery products known for their high precision and longevity.

Active expansion in overseas markets, occupying an important position in the global industrial automation field.

However, Japan’s machinery manufacturing industry also faces fierce competition from countries such as Germany and the United States, especially in the fields of Industry 4.0 and smart manufacturing. To maintain and enhance industry competitiveness, the Japanese government has formulated a series of targeted tax policies.

4.2 Special Tax Policies

(1) Overseas Market Development Support

To encourage machinery manufacturing companies to explore overseas markets, the Japanese government provides tax credit policies for overseas exhibition expenses. According to the relevant provisions of the Foreign Trade Act:

a. Basic Policy:

Companies participating in designated international exhibitions can claim a 15% tax credit on exhibition expenses.

An additional 5% credit is available for first-time participation in the exhibition.

The total credit amount should not exceed 5% of the company’s tax liability for the year.

b. Special Measures for SMEs:

SMEs participating in designated international exhibitions can claim a 25% tax credit on exhibition expenses.

An additional 10% credit is available for first-time participation in the exhibition.

The total credit amount should not exceed 10% of the company’s tax liability for the year.

c. Emerging Market Development Support:

An additional 5% credit for participating in exhibitions held in emerging market countries.

Calculation Formula:
Tax Credit Amount = Exhibition Expenses × (Basic Credit Rate + First-time Participation Credit Rate + Emerging Market Credit Rate)

Case Analysis:
Company C (an SME) participated in an industrial automation exhibition in India for the first time in 2023, with total exhibition expenses of 100 million yen. Calculation of the tax credit:

Basic Credit Rate = 25% (for SMEs)
First-time Participation Credit Rate = 10% (first-time participation)
Emerging Market Credit Rate = 5% (India is an emerging market)
Total Credit Rate = 25% + 10% + 5% = 40%
Tax Credit Amount = 100 million × 40% = 40 million yen

Assuming Company C’s tax liability for the year was 500 million yen, the actual credit amount would be 40 million yen (not exceeding 10% of 500 million, which is 50 million yen).

(2) Artificial Intelligence and Internet of Things Investment Incentives

To promote the intelligent transformation of the machinery manufacturing industry, the Japanese government provides tax incentives for companies investing in Artificial Intelligence (AI) and Internet of Things (IoT). According to the Industrial Competitiveness Enhancement Act:

a. Large Enterprises:

Companies can enjoy a 30% special depreciation or a 3% tax credit on investments in AI and IoT-related equipment.

The tax credit amount should not exceed 20% of the company’s tax liability for the year.

b. SMEs:

SMEs can choose between a 45% special depreciation or a 10% tax credit.

The tax credit amount should not exceed 25% of the company’s tax liability for the year.

c. Software Investment:

100% immediate depreciation is available for AI and IoT-related software investments.

d. Human Resource Training Expenditure:

Companies can enjoy a 120% expense deduction for expenditures on AI and IoT-related training for employees.

Case Analysis:
Company D (a large enterprise) invested 5 billion yen in smart factory solutions, including 4 billion yen in hardware investment and 1 billion yen in software investment. The company also spent 100 million yen on related training for employees. Calculation of tax incentives for Company D:

Hardware Investment:

Choosing special depreciation: 4 billion × 30% = 1.2 billion yen (additional depreciation in the first year)

Software Investment:

100% immediate depreciation: 1 billion yen (fully depreciated in the current year) Resource Training:

Expense deduction: 100 million × 120% = 120 million yen (can be deducted when calculating taxable income)

These incentive measures significantly reduced Company D’s taxable income for the year, encouraging investment in smart manufacturing.

(3) Overseas Subsidiary Profit Repatriation Incentives

To encourage Japanese machinery manufacturing companies to expand global operations and repatriate overseas profits, the Japanese government introduced the following incentive policies:

95% of dividends received from overseas subsidiaries are exempt from corporate tax.

An additional 5% tax exemption is available for funds repatriated from overseas subsidiaries used for domestic investment, R&D, or employee training.

This policy not only reduces companies’ global tax burden but also encourages them to use overseas profits for domestic innovation and development.

4.3 Industry Case Study

FANUC Corporation is a leading company in Japan’s industrial robotics field. In the 2022 fiscal year, FANUC invested 68 billion yen in R&D, accounting for 4.5% of its sales. Through R&D tax credit policies, FANUC estimated tax savings of about 4 billion yen.

At the same time, FANUC actively invested in AI and IoT technologies, benefiting from a 30% special depreciation on its investments in smart factory solutions, significantly reducing the initial tax burden. FANUC also expanded its global market share by participating in international exhibitions and utilizing overseas market development support policies.

Furthermore, FANUC fully utilized the overseas subsidiary profit repatriation incentive policy. In 2022, 80% of the profits repatriated from its overseas subsidiaries were used for domestic R&D and equipment investment, enjoying an additional 5% tax exemption. This not only reduced the company’s overall tax burden but also provided funding for domestic innovation projects.

FANUC’s case demonstrates how Japan’s machinery manufacturing industry can comprehensively utilize various tax incentive policies to support global strategies and technological innovation. These policies not only help companies maintain competitiveness in international markets but also promote the transformation of Japan’s machinery manufacturing industry towards high-end intelligent manufacturing.

Conclusion

The Japanese government has effectively supported the development and innovation of the manufacturing industry through a series of targeted tax policies. These policies not only reduce the tax burden on enterprises but also guide them to increase R&D investment, promote technological upgrades, and explore international markets. Specifically, the effects of these policies are mainly reflected in the following aspects:

• Promoting technological innovation: Through R&D tax credits and super deduction policies, companies are encouraged to increase R&D investment and enhance innovation capabilities.
• Supporting equipment upgrades: Through equipment investment tax credits and accelerated depreciation policies, companies are encouraged to update production equipment and improve production efficiency.
• Driving industrial upgrading: Through investment incentives for emerging technologies such as AI and IoT, the manufacturing industry is pushed towards intelligent and digital transformation.
• Encouraging internationalization: Through overseas market development support and overseas profit repatriation incentives, companies are supported in expanding global operations.