Japan to Startups: No Tax in Quake-Hit Areas

New companies that set up shop in parts of Japan devastated by a massive earthquake and tsunami in March will be exempt from paying corporate taxes for five years, the government said on Tuesday, as it looks to combat snowballing unemployment in the region.

Startups in special industrial zones in the country's northeast will be immune from corporate taxes as the country looks to stem an exodus from areas that were already suffering from rapidly shrinking populations prior to the March 11 disaster, Vice Finance Minister Fumihiko Igarashi told reporters after a meeting of the government's tax panel.

Even though the devastated region accounts for only about 5 percent of Japan's GDP, economists say it could serve as a testing ground for policies that, if successful, could be tried nationwide to reinvigorate the economy following the disaster that caused material damage worth 17 trillion yen ($221 trillion).

"We want to increase payrolls in the quake-hit area mainly in the manufacturing industry," Igarashi said.

As part of its reconstruction programme, the government has drawn up plans to create so-called 'special industrial zones' with looser regulations and incentives such as tax breaks, as worry spreads that companies could relocate elsewhere.

"Such a five-year tax-free measure is unprecedented in Japan's postwar history ... We needed to come up with a step that has a substantial impact given the magnitude of the disaster," Finance Minister Jun Azumi told reporters.

Under the plans announced by the tax panel on Tuesday, new companies that set up in the affected regions will be allowed to treat their investments as losses, effectively exempting them from tax payments.

The government has already put in place tax breaks for housing loans for 10 years for people in quake-hit areas, along with measures on inheritance and gift taxes.

Tokyo, at the same time, has mapped out plans to raise 9.2 trillion yen over a decade from increases in income, corporate and tobacco taxes to help pay for reconstruction as it cannot afford to add to a debt pile twice the size of the economy.

Those plans still need to pass through a divided parliament, however, and it is far from certain that hostile opposition parties that control parliament's upper house will be compliant.

Tokyo plans total spending of 19 trillion yen over the next five years to rebuild the northeast coastal areas, including 6 trillion yen already passed by parliament in two extra budgets for the fiscal year to next March.

The government last week approved the outline of a 12 trillion yen extra budget for the bulk of the spending plans.

Japan's corporate tax is among the highest in industrial nations at around 40 percent, and is often blamed for making its markets less attractive.

($1 = 76.730 Japanese Yen) (Reporting by Rie Ishiguro; Editing by Joseph Radford)