Tax

August 2001

The government is planning to enact a securities tax revision this fall. The coalition parties agreed to give top priority to revising the securities tax code in the extraordinary Diet session in September. Specifically, the ruling coalition is reviewing to reduce the tax rate on securities capital gains reported in individual income tax returns and letting investors carry over investment losses to the following year or later. Chairman of the Liberal Democratic Party's policy research council, said that the tax rate should be slashed to 10% from the current 26%. It is hoped that the proposed tax changes will lure more individual investors to the stock market. The LDP's tax panel, however, contends that any change to the tax code should be handled toward the end of the year when the government draws up its fiscal 2002 budget. The three parties agreed that legislation to set up a government entity for purchasing banks' shareholdings should be enacted in the extraordinary session. Party officials also agreed to form a council to tackle job issues. Party representatives will discuss ways to nurture new business areas for job creation, the expansion of vocational training programs, extension of periods for unemployment benefits payout and macroeconomic measures aimed to fight unemployment. (August 30, the Nihon Keizai Shimbun)

Government tax proposals put focus on supporting structural reform. The government tax proposals emphasize revitalizing the nation's slumping stock market, supporting job creation and encouraging land transactions to put property collateral. With concerns that sliding stock prices could hamper the Koizumi cabinet's reform initiatives, the government will push to get securities tax reform passed at this fall's extraordinary Diet session. The Financial Services Agency (FSA) and the Ministry of Economy, Trade and Industry (METI) hope to encourage individuals to put money into the stock market by lowering the capital gains tax rate and offering other tax incentives. Their tax reform blueprint calls for a reduction in the capital gains tax rate from the current 26% to 10%, half the rate that applying to interest income on savings accounts. The FSA and METI are also pushing to keep in place a withholding tax option, in exchange for raising the rate from 1.05% of the transaction amount to around 2%. In addition, the FSA and METI plan to create a system for allowing investors to carry forward capital losses to offset gains in future years. Another item on the agenda is a reduction in the withholding rate on distributions from equity investment trusts from 20% to 10%. METI and the Ministry of Land, Infrastructure and Transport, meanwhile, are proposing a fundamental reform of land-related taxation for breaking the logjam in the land market that is hindering urban renewal and other reform programs. The view is widespread in financial circles that the cleanup of nonperforming loans will not progress until market participants are able to see a bottom to the extended slide in land prices and banks are able to sell off the property collateral now on their books. The ministries are calling for a reduction of the capital gains rate that applies to land sales and the elimination of a special landholding tax that was imposed to curb land prices during the bubble economy of the late 1980s. The Ministry of Finance, however, is taking a cautious stance on land tax cuts, arguing that various special provisions are already in place. Ministries and agencies are also backing a number of proposals for revitalizing industry and encouraging job creation. METI is making a strong push to introduce consolidated taxation, which would allow companies to reduce their group tax burden by offsetting profits at money-making units with losses at others. Expanding the existing tax incentive for stock option programs is one of the core ideas being proposed to encourage the development of entrepreneurial companies. The Ministry of Health, Labor and Welfare, meanwhile, plans to allow company employees who go back to school or undertake other forms of training at their own expense to deduct tuition costs from income.　　(August 30, the Nihon Keizai Shimbun)

The Ministry of Economy, Trade and Industry (METI) will seek to reduce inheritance and gift taxes affecting small and midsize businesses in tax reforms planned for fiscal 2002. Lower inheritance taxes will mean proprietors are not forced to close or scale back businesses to avoid the heavy tax burden they face when inheriting on operations to family members. Many owners have considerable business assets in the form of stock and property. Being forced to sell off some assets to pay inheritance taxes often makes continuing operations difficult. METI believes the current top inheritance tax rate of 70% is excessively high compared to the 37% income tax rate. It will call a lower top rate and a less progressive tax system. The ministry also wants lower valuations of stock in private companies, currently measured against the value of stock in similar publicly listed firms. Depending on the size of the company, privately held stock in small and midsize firms is valued at 30-50% lower than stock in listed companies in the same industry. The ministry wants privately held stock to be uniformly valued at 50% lower. However, the Ministry of Finance is reluctant to allow further reductions in business inheritance tax rates, saying the law already provides for a deduction of up to 80% on the value of land for business use. (August 30, the Nihon Keizai Shimbun)

The government aims to allocate in the fiscal 2002 budget 200-300 billion Yen for this fiscal year from automobile-related tax revenues to projects other than road construction. The Ministry of Finance (MOF) plans to start spending these revenues set aside specifically for road construction and repair on other general projects like urban renewal in fiscal 2003. However, the Ministry of Land, Infrastructure and Transport is resisting the plan, determined to keep intact the basic framework governing the use of such tax revenues. Both ministries will soon begin negotiations to compromise the matter, a focal point in the compilation of the fiscal 2002 budget. The fiscal 2001 initial budget projected a total of about 6 trillion Yen in automobile-tax revenues. Under current law, revenues from gasoline and other taxes are only to be used for public works projects related to road construction. This year's budget has earmarked about 500 billion Yen of the 6 trillion Yen for projects such as monorail construction in urban areas. Although the law allows the government to spend up to 75% of auto-weight tax revenues on its general projects, 80% of these revenues have gone to road construction and repair since the tax was created. That portion in the current year's budget totals about 700 billion Yen. MOF plans to appropriate the portion for projects other than road construction in next year's budget. Facing rising criticism for the use of auto-related tax revenues only for road construction, the Transport Ministry now seems ready to see a significant portion of such revenues diverted to finance other projects. Later this month, the ministry will request a budget of about 2 billion Yen to subsidize automakers for developing environment-friendly vehicles. It will also request that about 500 million Yen to 1 billion Yen of the 2 billion Yen should come from road tax revenues. Until now, the Transport Ministry has opposed using such revenues for automobile development. MOF's initiative will decrease funds for road construction, especially in low-priority rural areas. (August 25, the Nihon Keizai Shimbun)

The LDP panel mulls cutting preferential tax treatment for firms. The panel will review all tax provisions that give special privileges to certain industries, aiming to abolish them as part of the fiscal 2002 tax system reform. The LDP Research Commission on the Tax System intends to make taxation simpler and fairer by scrapping or limiting privileges granted companies as incentives for economic pump-priming, developing industry infrastructure and protecting the environment. There are 78 preferential provisions, including tax deductions and special depreciation benefits for buying ships, trucks and machines. The special measures reduce corporate tax revenue by 490 billion Yen for fiscal 2001, or about 4% of the total amount due. Most preferences are granted for a set period, but 18 of them, including special depreciation for ships and pollution control devices, have been in force for more than 30 years. They have become a permanent benefit for some industries. In view of Prime Minister Koizumi's plan not to increase taxes amid the current economic slowdown, the panel will study corporate tax reduction simultaneously with the review of tax preferences. The elimination of tax privileges and a cut in the corporate tax rate will offset each other. If all the privileges are abolished, the current tax rate of 30% can be reduced by 1 percentage point. (August 22, the Nihon Keizai Shimbun)

The Liberal Democratic Party (LDP) panel calls for tax cuts for urban revitalization. A LDP's task force on housing and land compiled a list of tax code reform proposals for fiscal 2002, including office and landholding tax cuts designed to encourage private-sector spending on urban redevelopment projects. In addition to its focus on urban renewal measures, the task force is also calling for the creation of special measures to encourage housing purchases. The panel will work out further details in cooperation with the Ministry of Land, Infrastructure and Transport, and will encourage the LDP's key tax research panel to incorporate the proposals into the ruling party's annual taxation reform proposals. The tax office is currently imposed on existing offices and new additions in municipalities with populations of more than 300,000. To meet fiscal demands for urban infrastructure development, the tax has gradually become a burden for companies in light of declining tenant income since the collapse of the economic bubble in the early 1990s. As the tax has now become a factor in deterring private-sector urban development efforts, the LDP task force will propose changes that would alleviate the tax burden for new office additions.
The LDP task force intends to propose eliminating the special landholding tax, which is imposed on underutilized land. The tax was created in 1973 with the intent of limiting speculative land transactions. Under the current rules, a parking lot, if deemed as being in permanent use, is exempt from the tax. It is widely believed that this actually deters the effective use of land. The panel will also discuss other tax code revisions to facilitate property sales and transfers. Other proposed tax code revisions are aimed at helping salaried workers to purchase new homes. Many homeowners who made purchases during the bubble period are now suffering from ballooning paper losses. Consequently, home building demand has faltered. Current law only allows salaried workers to deduct losses for the year, when the sale of the home takes place, and for the following three years. If a new tax cut is introduced, they will be able to retroactively deduct capital losses from their income taxes for the year before the sale of their homes and receive tax refunds. (August 22, the Nihon Keizai Shimbun)