Corporate-based hometown tax contributions enable a new form of regional contribution. A co-creation-based future design that achieves both sustainable growth for regions and companies.

Launched in 2016, the Regional Revitalization Support Tax System, commonly known as the "Corporate Hometown Tax," is a program allowing companies to make donations to local governments' regional revitalization initiatives and receive tax deductions. However, the value of this system extends beyond tax incentives. Its true worth lies in enabling companies and regions to co-create and conduct pilot projects to solve social challenges.

This article features interviews with three companies providing the "Regional Co-creation SX Program," an initiative launched in 2023 to accelerate the Corporate Hometown Tax system. With Tak uya Kagata of Dentsu Consulting Inc. as facilitator, Taikai Nishitō of Kōsaku Inc. and Tsutomu Iizuka of Dentsu Inc. – both working with regions and companies on social challenges – discussed regional contribution through the Corporate Hometown Tax system.

Connecting with Regions Through Corporate Hometown Tax Donations

Kagata: Please explain the basics of the Corporate Hometown Tax system and its benefits.

Nishitō: The basic mechanism is the same as the individual version of the hometown tax donation system: companies receive tax deductions when they donate to municipalities. Moreover, using this system allows companies to request how their donations are spent by the municipalities. This is the great thing about the system – it enables municipalities and companies to collaborate on various initiatives for sustainable community development. Understanding the system's philosophy allows companies and regions to co-create, maximizing both social and economic value.

For example, I see great potential in collaborative projects like joint research where companies listen to residents' voices to identify new social challenges, or pilot tests to verify whether new products or services under corporate development truly contribute to solving social issues.

Kagata: The Corporate Hometown Tax system began in 2016. Are more companies utilizing it?

Nishitō: Corporate donations in the first year totaled about 700 million yen, but by fiscal year 2023, this had increased to approximately 47 billion yen. The number of participating companies also reached 7,680, and this figure is expected to continue growing. Furthermore, about 90% of municipalities now accept the Corporate Hometown Tax system, indicating that regional preparations are also progressing.

Kagata: Mr. Iizuka, you are involved in creating new business ventures and brand consulting for companies. From the corporate perspective, what are the attractions of the Corporate Hometown Tax system beyond the tax incentives?

Iizuka: Even when companies invest in creating new businesses, they may not always achieve the desired results. However, even if the outcomes aren't as expected, the relationship formed between the municipality and the company—working hand in hand to solve regional challenges—remains. Therefore, leveraging that relationship could very well open up opportunities for new initiatives later on.

Kagata: Kōsaku, where Mr. Nishitō serves as a director, supports municipalities in designing their programs and facilitates matching between local governments and companies. What kinds of co-creation projects have you been involved with in the past?

Nishitō: One meaningful project we were involved in was between Ōsaki Town in Kagoshima Prefecture and a major hygiene products manufacturer. Ōsaki Town boasts Japan's highest waste recycling rate, but it still faced the challenge of reducing waste further, as nearly 20% inevitably ended up in landfills. This is where the major hygiene products manufacturer saw an opportunity. By recycling disposable diapers, which account for about 25% of landfill waste, Osaki Town could extend the lifespan of its landfill. For the major hygiene products manufacturer, it offered an opportunity to contribute to the community while also creating a case study for overseas expansion, particularly in markets like Europe where circular economy initiatives for products are highly valued. Thus, both parties collaborated on a circular recycling system to produce new disposable diapers from used ones.

This initiative requires collecting used diapers from households, making municipal cooperation essential. The collaboration between the municipality and the company holds significant meaning, contributing not only to Ōsaki Town but also to solving environmental challenges for society as a whole. It was a mutually beneficial co-creation.

The "Regional Co-creation SX Program" Connecting Communities and Businesses

Kagata: That said, opportunities like the example you just mentioned are rare. What hurdles do you think exist for making this kind of initiative a reality?

Iizuka: First, companies face challenges in decision-making. Departments handling operations and finance departments handling taxes and accounting are often separate. Unless senior management makes the decision, progress is difficult. Additionally, there's the question of whether the challenges faced by the municipality and the company actually align. Solving these two problems makes the discussion immediately more concrete.

Nishitō: Local governments face similar challenges. They need to coordinate internally to break down departmental silos and also coordinate with companies—requiring dual coordination. Beyond that, it's crucial to articulate the overlapping areas of mutual concern and clearly define goals. For example, while promoting recycling might be a shared broad objective, companies ultimately aim to create economically viable products/services through recycling, while local governments seek to solve societal challenges. Both sides need to thoroughly align on their respective objectives.

Kagata: To address these challenges, dentsu Japan (the domestic Dentsu Group) offers the "Regional Co-creation SX Program." This program brings together KAKUBA, which has extensive experience collaborating with local governments, and various domestic Dentsu Group companies that support corporate new business creation and sustainability initiatives. By combining these perspectives, we provide a program that incorporates the viewpoints of both local governments and corporations.

Nishitō: KAKUJO is based in Kagoshima Prefecture, and our employees live locally. This makes it challenging to grasp the needs and challenges of companies in the city center, which is why we decided to develop the program together with the domestic Dentsu Group.

Kagata: This program establishes objectives, content, and plans for co-creation between local governments and companies through seven steps. We begin with a boarding session to deepen understanding of Sustainability Transformation (SX) and clarify goals.

Kagata: For the Future Session, we also utilize the " Dentsu Future Mandala," a mid-term future forecasting tool developed by the Dentsu Group Japan to explore social issues. We discuss exciting hypotheses about what could be achieved in the future. Once challenges become apparent, we consider which municipalities would be suitable partners. Since the domestic Dentsu Group and KAKUBA have expertise in local governments, we can coordinate municipalities that are proactive in addressing these challenges. The "Regional Co-creation SX Program" is currently collaborating with seven municipalities.

Nishitō: Since each municipality has different social challenges as their main themes—such as carbon neutrality, water circulation, forest utilization, and disaster prevention—we can cover nearly all sustainability-related issues. Beyond these seven municipalities, Kōsaku can introduce nearly 250 municipalities nationwide through our partner companies, enabling us to address any challenge.

Visiting the local government in person before starting a project is also crucial. Being on-site dramatically increases the clarity of the challenges and can spark new business ideas. Partnering with unique regions allows us to uncover challenges that wouldn't be thought of in urban centers.

Kagata: Through these iterative sessions, we visualize the ideal future for both local governments and companies, developing concrete plans to realize a sustainable future.

Iizuka: Crucially, we must align the objectives of both the municipality and the company. Initially, their desired solutions may differ, but deep engagement where each party shares their true thoughts is vital to building a shared future and moving forward together.

Developing facilities through reversible processes, addressing both software and hardware aspects

Kagata: Teaming is also crucial in local government-corporate co-creation. In joint projects, we support the local government side in thoroughly identifying regional challenges and handling practical matters like accepting donations and building the business.

Nishitō: Companies take time to make decisions, but local government systems are also complex. Accepting corporate proposals requires preparation, so we ask for understanding on that point. Whether a local government has the capacity to accept proposals and whether it has bridge personnel to facilitate communication with companies determines half the success of a co-creation project. At Kyōsaku, we've supported local governments for over a decade, so please feel assured in entrusting us with your project.

Kagata: Previously, corporate regional revitalization efforts often focused on social contribution. Now, however, business ideas that balance social and economic value are required. In this regard, the expertise of the Dentsu Group in Japan should prove valuable.

Nishitō: As Japan's population continues to decline, business forecasting will become increasingly difficult. This is precisely why alliances with local communities will grow ever more crucial. Moreover, these challenges will likely emerge worldwide. I believe the very model of creating business in collaboration with regions, as a pioneer in solving such challenges, will become the global standard in 50 years. It is with this conviction that I wish to advance co-creation projects.

Local governments and corporations differ not only in their co-creation objectives but also in the pace at which they advance projects. The "Regional Co-creation SX Program" uses the corporate version of the hometown tax system as a starting point. By establishing concrete roadmaps and aligning the efforts of local governments and corporations to advance projects, it supports the sustainable growth of both parties.