Tax

August 2007

Tax Debate To Focus On Fate Of Capital Gains Incentives
Smaller measures, such as reduced tax rates on securities income, will likely come to the fore during tax debates this fall now that hopes for major reforms, including a consumption tax hike, have been dashed by the ruling parties' thrashing in last month's upper house election. In 2003, the government lowered the tax rates from 20% to 10% for capital gains and dividends to shore up the slumping stock market on condition that the original rates be reinstated in January 2008 for capital gains and the following April for dividends. But the breaks have been extended by one year. The Financial Services Agency insists on extending the capital gains tax break by one more year and making the 10% rate permanent for dividends. But the Finance Ministry aims to end the breaks, and instead introduce net taxation of financial income, which will allow taxpayers to deduct financial losses from total financial gains, including interest and capital gains. At the end of last year, the main opposition Democratic Party of Japan sought to end the breaks during this fiscal year. The tax debate will also focus on ways to support environmental efforts. The Land, Infrastructure and Transport Ministry is requesting a tax incentive for energy-saving homes, while the Ministry of Economy, Trade and Industry is insisting on exempting biofuels from the gasoline tax. Although the industry opposes the introduction of an environmental tax, the DPJ is proposing a levy to be used mainly for efforts to fight global warming, such as developing energy-saving technologies. The LDP's Research Commission on the Tax System is expected to begin debating tax reform issues in November as usual, with plans to compile basic guidelines by mid-December. Considering that the DPJ controls the upper house as the largest opposition party, senior members of the LDP tax council plan to set up a consultative body between the two to pave the way toward discussing a consumption tax hike and other major issues. But DPJ President Ichiro Ozawa, who is seeking to force Prime Minister Shinzo Abe to dissolve the lower house for a general election, is not likely to endorse such negotiations. The DPJ intends to reshuffle its tax panel, with the goal of drawing up its own tax reform plans, to show its potential as a governing party. The opposition party has pledged that the consumption tax will not be raised at least until the next lower house election. Therefore, it would be difficult for the LDP and the DPJ to find common ground easily. The DPJ is not enthusiastic about lowering the corporate tax rate, saying that such a measure benefits only large businesses. But some members favor a tax reduction for smaller businesses, an area in which both parties could come to an agreement. (The Nihon Keizai Shimbun, August 30, 2007)

Consumption tax hike difficult: LDP tax chief
Chances of a consumption tax hike have receded since the LDP-Komeito coalition lost control of the upper house in the July election, LDP tax czar Yuji Tsushima said in an interview with The Nikkei. "The opposition now holds a majority in the upper house, and we simply cannot go ahead with our game plan," Tsushima said, referring to a possible hike in the consumption tax rate, now at 5%. Tsushima chairs the LDP's Research Commission on the Tax System, a panel that has held a lot of sway over the nation's tax reforms. The government has been seeking to include a consumption tax hike in the guidelines for fiscal 2008 tax reform, which will be released in December. The reason why is it and the ruling parties have decided to boost the government's contribution to the nation's basic pension plan by fiscal 2009. The consensus within the ruling parties had been that the consumption tax rate would be raised to finance the expanded pension outlays. The fiscal 2007 tax reform guidelines spell out that "fundamental reform in the tax system, including the consumption tax, should be implemented in fiscal 2007." According to this scenario, tax reform discussions were slated to begin this fall. But last month's upper house election, in which the LDP suffered a major defeat, has entirely altered the political dynamics. The opposition Democratic Party of Japan, which has emerged as the largest force in the upper house, insists that the consumption tax rate be left unchanged for the time being. Even if the ruling parties submit tax legislation that includes a consumption tax hike, the upper house would likely turn it down. The ruling parties could override the upper house with a two-thirds vote in the lower chamber. But many LDP lawmakers think this high-handed approach is untenable, especially considering that the hike would directly affect consumers, sometimes referred to as voters."A new problem has emerged from the gap between our plan and a political situation that the people have created," Tsushima said, calling for a fresh debate on tax reform between the ruling and opposition parties. Tsushima also said that lowering the effective corporate tax rate will now be difficult, given the likelihood of a political deadlock that would stall tax debate. "It would be hard to draw a conclusion if our debate on tax reform as a whole has to come to a halt." Japan's effective corporate tax rate of about 40% is the highest among major countries. (The Nikkei Weekly, August 27, 2007)

METI Eyes Expanded Tax Breaks To Boost Investments In Venture Firms
Individuals will be able to deduct 20% of their investments in venture capital firms from their taxable income as part of fiscal 2008 tax reform measures being considered by the Ministry of Economy, Trade and Industry. The move is part of steps to expand the scope of the so-called angel tax system, where tax breaks are given to individuals investing in nonlisted venture firms that meet certain requirements. Under the current system, investors can deduct investments from capital gains earned from selling shares in other firms, reducing their taxable income for the fiscal year. In addition, if investors sell shares in a venture firm, they can reduce their taxable gain by half. However, there are no benefits for investors who do not profit from the sale of shares in other firms. Also, investors are unlikely to log gains from the sale of shares in the venture as long as it remains unlisted. Investments under the angel tax system reached around 2.5 billion yen in fiscal 2005, but dwindled to some 1.3 billion yen last fiscal year. METI attributes the decline to a lack of tax benefits. To make the system more attractive, METI will ask that 20% of the investment, up to 2 million yen, be deducted from taxable income. Both the U.K. and France have similar systems. Because tax breaks are guaranteed when the investment is made, the ministry hopes individuals will be encouraged to invest in venture firms. (The Nihon Keizai Shimbun, August 22, 2007)

Strategic Step Toward Adopting Intl Accounting Standards
The Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) recently reached an agreement to eliminate by 2011 all the differences between Japan's accounting standards and the international rules set by the IASB. The ASBJ's decision to move toward convergence with international standards reflects an accelerating global trend and is a welcome policy shift. Over 100 countries have already adopted the worldwide bookkeeping rules, known as the International Financial Reporting Standards (IFRS), which aim to harmonize financial reporting. Due to the globalization of corporate and investment activities, accounting rules are assuming increasing importance for efforts to support domestic companies operating overseas and attract foreign businesses and investors to domestic markets. In 2005, the European Union required European companies to use the international standards, and is now demanding that foreign companies operating within the euro zone to adopt accounting rules equivalent to the IFRS by 2008. In the developed world, Japan and the U.S. are almost the only countries that still stick to their own accounting regimes. But the U.S., which had been unwilling to accept anything other than its own accounting standards, has changed its policy and decided to allow domestic companies as well as foreign firms to use the IFRS. The U.S. move has apparently been prompted by intensifying global competition for investment. Japan would risk international isolation if it continued to buck the trend, and the economic logic of harmonization is simply too compelling to ignore. The key area of difference between Japanese and international standards is corporate consolidation. In the case of an equal merger, for instance, Japanese rules allow the acquiring company to take over the assets of the other company at book value. But U.S. and European standards require that such assets be assessed at their market value. Japanese companies oppose the adoption of the Western approach for "cultural" reasons, but the market value method would be beneficial for investors because it injects more transparency into the accounting process. Whether or not Japanese companies have a strong case for opposing this and other changes needed for the planned convergence of Japanese and international rules, the country is not able to turn its back on this global trend. Through a series of accounting reforms since the late 1990s, Japan has been bringing its standards closer and closer to those used in Western industrialized countries. But Western accounting rules have evolved further in the meantime as the world economy has become increasingly globalized and market-oriented, and Japan has lagged behind other major industrialized countries in adjusting its accounting regime to the new economic environment. There are still many hurdles that must be cleared to accomplish the envisioned convergence. One big challenge is how to adjust the corporate tax code so that the necessary changes in accounting rules will not provoke strong opposition from the business community out of concern about tax disadvantages. Such fundamental changes in the tax and accounting regimes require joint efforts between the public and private sectors underpinned by a clear and coherent strategy. (The Nihon Keizai Shimbun, August 13, 2007)

Japan's Govt Eyes Bigger Tax Breaks For IT, Staff Investment By Smaller Firms
The Ministry of Economy, Trade and Industry plans to call for the expansion of tax breaks for smaller companies that invest in personnel training and IT infrastructure in its proposals for fiscal 2008 tax system reform, ministry sources said Saturday. Small and midsize firms are currently eligible for tax benefits only if they increase their annual spending on staff training from year-earlier levels, but many of them cannot boost the expenditure on an ongoing basis. The ministry will propose allowing these firms to deduct 10% of employee training expenses from their annual taxable income. Smaller companies can also deduct 7% of information technology-related investment from taxable income within a certain limit if they spend at least 3 million yen annually on IT. METI will call for lowering the threshold to 1 million yen for leased equipment and 700,000 yen for purchases so more firms will be able to take advantage of the tax break. In another proposal related to small businesses, the ministry will recommend raising the amount inheritors of unlisted shares in family-owned companies can deduct from their inheritance taxes to 80% of the assessed value of the shareholdings from 10% because it believes the current heavy tax burden is forcing many family firms to go out of business. The measure would result in total tax savings of several tens of billions of yen a year. (The Nihon Keizai Shimbun, August 12, 2007)

Govt Panel Eyes Raising Taxes On Retirement Bonuses, Pensions
Yutaka Kosai, chairman of the government's tax commission, indicated Wednesday that the panel will consider boosting taxes on pension benefits and retirement bonuses to reduce the burden on younger generations. Taxation on retirement bonuses "seems to be based on the assumption of lifetime employment," Kosai said in a news conference at the Japan National Press Club. With the nation's birthrate declining and the population aging, the tax burden on younger workers is expected to increase. Kosai has decided to consider a more evenhanded distribution of the tax burden among different generations. Currently, the system works to reward workers based on their time spent in the work force: the longer the service, the lower the tax rates on retirement bonuses. Kosai stressed the need to change the system to reflect today's labor mobility. He also indicated that the panel will consider reducing deductions for public pension benefits and ask for more taxes from seniors. (The Nihon Keizai Shimbun, August 09, 2007)

Japan looking at global accounting standards by 2011
The Accounting Standards Board of Japan has set 2011 as a target year to eliminate the differences that exist between Japan's corporate accounting rules and those that are widely applied around the world. The biggest difference that is cited most often is how Japanese rules treat mergers and acquisitions. In Japan, companies are allowed to use a book-value method to assess assets instead of market value. International and U.S. accounting rules both require the application of a market-value method due to a lack of transparency in book value. The ASBJ will require that market value be used to assess assets. Another difference between Japanese and international accounting rules is how goodwill is treated during a corporate acquisition. In Japan, if the value of an acquired business declines, a company is required to book the loss as well as a certain amount of expenses every year. Overseas, however, companies are only required to write off the loss. The ASBJ will consider eliminating the booking of expenses. (The Nikkei Weekly, August 6, 2007)