The officials said the industry ministry has decided to include this plan in its tax reform proposals for fiscal 2009, to be submitted to the Finance Ministry this summer.

Under the current system, profits earned by overseas affiliates of Japanese companies are taxable if they are repatriated to headquarters.

In many cases, Japanese companies would have to pay more in taxes if they bring home foreign-source profits, although these are subject to deductions.

As a result, Japanese companies are increasingly choosing to keep their earnings overseas.

The Ministry of Economy, Trade and Industry is concerned that a decline in repatriation of foreign-source earnings would lead to less investment in Japan and have negative implications for the country's development of innovative technologies, the officials said.

In fiscal 2005, 2.28 trillion yen worth of profits generated by overseas arms of Japanese firms remained outside the country, the officials said, adding that the accumulated amount stood at more than 12 trillion yen.

The foreign production ratio of Japanese manufacturers topped 30 percent in the same fiscal year and overseas markets are increasingly becoming their source of profits in recent years, according to the ministry.

A majority of industrialized economies have adopted a territorial tax system, under which double taxation of corporate earnings is avoided as each country taxes only income that is generated within its boarders.

The United States and Britain, which like Japan also use a worldwide tax system, are themselves considering reforming their frameworks to exempt repatriated earnings from taxation, according to the officials.