Japan tax reform may help repatriate company funds

TOKYO, May 9 (Reuters) - Japan's trade ministry on Friday proposed a tax reform to induce repatriation of corporate funds held at overseas affiliates, prompting market players to speculate its impact on the yen's exchange rates.

The Ministry of Economy, Trade and Industry said it would request the Ministry of Finance to exempt from tax companies' incomes from their overseas affiliates starting from the next fiscal year.

"The reform will promote domestic investment in such activities as research and development and further strengthen competitiveness of Japanese companies in overseas markets," said Tadao Yanase, director of corporate tax policy section at the trade ministry.

Japanese companies were retaining earnings of more than 12 trillion yen ($115.7 billion) at their overseas affiliates as of the end of the fiscal year 2005/06, Yanase said.

In tandem with rapid expansion of Japanese companies' business activities abroad, earnings retained overseas increased to 2.1811 trillion yen in the fiscal year 2004/05, nearly 16 times the amount in 2001/02, according to the trade ministry's data.

But Japanese companies' dividend incomes from the affiliates, meanwhile, only increased about 60 percent to 862.2 billion yen from 527.0 billion yen.