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Branch Offices as Well as Head Offices can Have a Major Impact on Local Economies and Local Government Finances
- Local governments should harness their contribution to employment and production, but be cautious about using them as a means of increasing tax revenues -

July 11, 2008

Overview

A survey of the deployment of branch offices in other prefectures reveals that in 8 prefectures, including Hokkaido and Kanagawa, most companies have a branch office in Tokyo, while in 4 prefectures, including Kyoto and Hyogo, most companies have a branch office in Osaka. Among the most common locations for branch offices, other than Tokyo and Osaka, are Fukuoka, Aichi and Miyagi Prefectures. Meanwhile, a survey of the most common locations for the head office of branch offices other than those of local companies reveals that in 36 prefectures, including Osaka and Aichi, branch offices of companies with their head office in Tokyo, and in 6 prefectures, including Tokyo and Kyoto Prefecture, branch offices of companies with their head office in Osaka are the most common. In the Kyushu Region, companies with their head office in Fukuoka are a growing presence.

As indicated by the fact that the expression "branch office economy" does not always have a positive connotation, the importance of branch offices tends to be underestimated, but a survey of companies with multiple places of business reveals that the ratio of head office employees, which in 1986 accounted for 36.5% of all employees, had fallen to 27.8% in 2006, whereas the ratio of employees working at branch offices in prefectures other than that where the head office was located, rose to 38.1% over the same period. In 37 prefectures, employees working at branch offices of companies that have their head office in another prefecture are more numerous than head office employees of local companies and employees at branch offices of local companies situated in the same prefecture as their head office.

In the 7 prefectures of Miyagi, Ibaraki, Tochigi, Saitama, Kanagawa, Mie, and Shiga, employees working at branch offices of companies that have their head office in another prefecture account for more than 20% of all employed persons in the prefecture, and the establishment of branch offices by companies based outside the prefecture is helping to generate local demand for labor.

Among companies with multiple places of business the ratio of head office employees to total employees is highest in Tokyo. In 12 other prefectures, including Osaka and Aichi, the ratio is also fairly high as compared with the average for all prefectures, although low in comparison to that recorded in Tokyo. The Tokyo Metropolitan Government estimates the production value of head office services provided by head offices located within the city of Tokyo to branch offices both within and outside the city at approximately ¥29.3 trillion. The production value of such services in Osaka Prefecture is around 30-40% of this figure.

Besides contributing to the local economy through their production activities and employment, the head and branch offices of companies are important to central and local government as taxpayers. The major taxes paid by business enterprises include corporation tax at the national level and corporate enterprise tax, corporate resident tax (levied on a per capita basis and as a ratio of corporation tax), fixed asset tax, city planning tax, and business facility tax at the local level. The corporation tax and the two corporate enterprise taxes (corporate enterprise tax and corporate resident tax) are the two largest. Fixed asset tax also generates considerable tax revenues.

Because corporation tax is paid where the head office of the company is located, the distribution of places of tax payment is similar to the distribution of the head offices of the large companies which, although they account for only around 1% of the total number of companies, pay around 70% of the total amount of corporation tax revenue collected, around two-thirds being situated in Tokyo, Osaka and Aichi. However, as corporation tax is a national tax, the tax revenue is not allocated to the area in which it is collected.

The corporate enterprise tax is often criticized on the grounds that it is unevenly distributed, being levied in only in a few prefectures, but as compared with the uneven distribution of places of tax payment for the corporation tax, its concentration at the top end is relatively mild. This is because when a company has places of business in several different prefectures, the tax base is divided up, and the amount of tax due is determined according to the tax base after division. For this reason, if a branch office is located in the prefecture, the local government will receive tax revenues even if the head office is not located in the prefecture. Opinion is divided as to whether the corporate enterprise tax is still "uneven" after this division, but since a rapid response to the problem of disparities in fiscal strength is a matter of urgency in political terms, as an interim measure until a fundamental reform of the tax system can be carried out, a system has been created which splits off part of the corporate enterprise tax (a local tax) to create a special local corporation tax (a national tax), and transfers the revenue from this special local corporation tax to the prefectures, under the title of special local corporation transfer tax.

Because the corporate resident tax levied as a ratio of corporation tax is also divided up if a company has places of business in several different prefectures, it shows the same kind of concentration at the top end, but the unevenness of its distribution is less severe than that of the distribution of places of tax payment for the corporation tax. Regardless of whether the per capita levy of the corporate resident tax is included in the calculation of profits or not, because any place of business in the prefecture is subject to taxation, the concentration at the top end is further reduced and the distribution becomes closer to that of the places of business.

Because the fixed asset tax is levied on the land occupied by a company's head office or branch offices, and any buildings and depreciable assets on that land, its distribution is similar to that of places of business, with a weak concentration at the top end. The city planning tax and business facility tax, owing to the method by which they are levied, tend to be higher in prefectures where there are relatively large cities, and as the presence of branch offices as well as head offices affects the amount of tax due, their concentration at the top end is less severe than that of the corporation tax, which is payable en bloc at the location occupied by the head office.

For communities where there are many head and branch offices of companies, and communities that are making an effort to attract new companies, business enterprises not only boost production and employment but can also be expected to contribute to an improvement in local government finances through an increase in tax revenues. The presence of many head and branch offices not only increases the amount of revenue from company-related local taxes but also from individual inhabitants tax paid by employees, fixed asset tax on employees' housing, etc.

For this reason, many local governments are attempting to attract companies by means of tax reductions, etc. Others, however, are attempting to increase tax revenues in view of the large numbers of head and branch offices in their area. Until now, in order to promote devolution, the autonomy of local governments in matters of taxation has been respected because an expansion of local sources of tax revenues is considered necessary to reduce the gap between local government expenditure and local tax revenues and to clarify the relationship between the benefits to and burden on local residents. However, rather than clarifying the relationship between the benefits to and burden on local residents, there has in fact been a tendency among local governments to seek to avoid giving residents (individuals) the perception that they are bearing a burden and, instead, to tax business enterprises, which do not have voting rights. It would surely be best for local governments to focus on expanding the contribution made by company offices to the local economy through employment and production, thereby achieving natural growth of tax revenues, and to avoid adopting policies for increasing tax revenues that place too great an emphasis on companies.

For more information on the content of this report, please contact Kiyoshi Yoshimoto , the Japan Research Institute, Limited.

Tel: 06-6534-5204

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