The government decided to revise the tax code to give corporations up to 50% more corporate tax relief for production, research and development (R&D), and investment outside the capital region than inside it. The aim is to induce the transfer of corporations' key functions to the provinces.
Japan introduced a similar local-preference tax system in 2015. But most local governments reportedly have no record of attracting corporations. Analysis found that regional infrastructure and the availability of skilled talent had a greater impact on corporations' investment decisions than tax incentives.
◇ Up to 50% more tax credit for production-R&D-investment outside the capital region
The Ministry of Economy and Finance, in the '2026 tax reform plan,' said it would amend the Act on Restriction on Special Cases Concerning Taxation to differentiate by location, starting next year, tax credits for corporations such as the domestic production tax credit, research and development (R&D) expense tax credit, and integrated investment tax credit.
The formula multiplies the credit amount by a local-preference coefficient. The coefficients are ▲1 for the capital region ▲1.1 for non-capital-region metropolitan cities and for preferred areas within the capital region that have small populations and are far from Seoul ▲1.3 for non-capital-region areas that are not metropolitan cities ▲1.5 for preferred areas outside the capital region. The preferred areas will be finalized through an enforcement decree revision in Feb. next year.
◇ Japan adopted "tax benefits for local transfer" 10 years ago, but most local governments have no record
Japan was the first to introduce a system that provides larger tax credits for corporations' local investment. In 2015, viewing excessive concentration in Tokyo as a problem, Japan introduced the "regional hub strengthening tax system." If a Tokyo-based corporation transfers its headquarters or research and development (R&D), planning, or human resources departments to the provinces, up to 7% of the corporation's investment amount is deducted from corporate tax.
However, according to Nikkei, among 45 local governments eligible for tax benefits due to corporations' local transfer from 2015 to 2024, 23 had no record of attracting corporations. Nikkei said, "It was difficult to offset with tax benefits the advantage for corporations of remaining in Tokyo, where talent and information concentrate," adding, "The complicated approval process from infrastructure project planning to groundbreaking was also a reason corporations shunned the provinces."
The Local Tax and Finance Standing Committee, a policy discussion body of Japan's metropolitan governments, said in a 2024 report that "corporate tax credits are not a strong enough incentive for corporations to decide to transfer their headquarters after investing from tens of billions of won to trillions of won." In the report, the local government heads noted, "For not only corporations but also employees to relocate, company housing and welfare facilities must be expanded, yet there are no tax credits for this portion."
◇ OECD says "tax incentives are a secondary factor influencing decisions after sites are shortlisted"
The Organisation for Economic Co-operation and Development (OECD), in its 2024 report, The Role of Incentives in Investment Promotion, said, "In most countries, corporations did not consider tax incentives a core factor when deciding whether to invest." The findings came from a comparative analysis of the ▲objectives and types ▲design methods ▲operational status ▲use of investment promotion incentives across 35 member countries.
In the importance assessment (out of 10), non-tax incentives scored highest at 6.5. These included infrastructure quality, skilled labor, and a favorable legal environment. Corporate tax incentives scored a relatively low 5.3, and other tax incentives scored 4.7. The report analyzed that "because corporations first select sites that meet basic production conditions and then compare tax benefits, tax incentives are a factor that influences the final stage after narrowing down candidate sites."
A Ministry of Economy and Finance official said, "Policies to secure talent, such as reductions in earned income tax for small and medium-sized enterprises' newly hired employees and tax exemption for relocation allowances, are also included in the tax reform plan." The official added, "Policies for conditions for settlement or infrastructure and other environments are likely being reviewed (in ways other than tax incentives)."