The government and the ruling coalition consider services based on information technology to be pivotal to future economic growth. The expanded R&D credit is to be included in the package of fiscal 2017 tax code reforms due out on Dec. 8.
"We're discussing tax measures to promote forward-looking corporate initiatives, including innovative R&D investment," Finance Minister Taro Aso said Wednesday.
The tax break as currently written covers research spending related to manufacturing, as well as improving, designing or inventing technology. As such, it is mostly claimed by manufacturers such as automakers and drug makers.
The proposed change would explicitly include service development, a step sought by the Japan Business Federation. The credit itself would also be recast to better reward companies that increase R&D spending.
For service businesses, the tax break would apply to such costs as labour and R&D outsourcing, along with purchases of computers, sensors and other necessary equipment. The industry and finance ministries are hammering out details. Examples of R&D themes that could qualify include monitoring services that use sensors help farmers tend their crops or alert day care workers when a child is sick.
The service sector makes up 70% of Japan's gross domestic product. Yet productivity in nonmanufacturing industries stands at around half that in the U.S. after having risen just 25% or so since 1970. Manufacturing productivity tripled over the same period. Higher productivity would help ease labour shortages among service businesses.
The manufacturing sector accounted for nearly 90% of the 670 billion yen (US$6.11 billion at current rates) in R&D tax credits claimed in fiscal 2014, Finance Ministry data show.
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