Tax News - August 2002

News Articles - Archive

Tax

August 2002

The government's Tax Commission has demonstrated a striking indifference to calls for a reduction in the effective rate of corporate taxation. The sense emerging of the Tax Commission's basic issues panel is that the commission is giving higher priority to securing tax revenues than to cutting taxes. The committee agreed on the necessity of expanding tax breaks designed to encourage corporate spending on research and development, yet it also confirmed that it would seek the introduction of a new form of business tax, based on company scale, not income, that would pull in tax revenues even from unprofitable companies. The panel was almost unanimous in agreeing that the current system of tax breaks for corporate R&D is inadequate. The main problem is that companies get a tax reduction only when they are increasing research spending. The predominant view inside the panel is that Japan should consider adopting a system like that of the U.S., in which companies get a tax credit equivalent to a certain percentage of research spending, whether spending is going up or down. The details about the spending percentage allowed as a tax credit and the nature of the research qualified for tax breaks are to be hammered out in future discussions. The basic issues panel also focused on the introduction of a tax pegged to company scale, an idea that is drawing sharp criticism from small and midsize business groups and others. Although some argued for a cautious approach, there were others on the committee who pushed for the reverse, moving ahead without adopting special provisions to aid small and midsize businesses. The private-sector members of the influential Council on Economic and Fiscal Policy are calling for a reduction in the effective tax rate, arguing that a lower tax burden is necessary to raise the international competitiveness of Japanese companies. Prime Minister Koizumi is also highlighting the corporate tax rate, directing the Tax Commission to consider a rate reduction as part of tax code revisions for fiscal 2003. The issue is not scheduled to come up for discussion at the Tax Commission before a general meeting on Sept. 3. (August 28, the Nihon Keizai Shimbun)

The Cabinet Office issued a report on the heavy tax burden borne by Japanese companies, disputing the claim by Ministry of Finance'(MOF) that Japan's corporate tax rate is comparable with that of other industrialized countries. The ministry claims that the effective corporate tax rate, or the ratio to income of national and local taxes actually paid by companies, now stands at 40.87%, which is comparable with the U.S. However, countries use different means of calculating taxable income and many allow companies to make fixed deductions from the gross tax amount. Taking those factors into account, the office estimated the actual tax burden on Japanese companies and concluded that it is heavy; tax payments by electronics makers operating in Japan were found to be more than five times those of firms in the U.S. The Cabinet Office said that the gap in the tax burden exists, since the fixed amount of tax deductions permitted for research and development is larger in the U.S. than in Japan. The MOF claimed that the estimate does not reflect the reality of corporate taxes, as it assumes a model company among the top five firms in an industry and applies figures in a particular fiscal year. A similar confrontation over corporate taxes emerged within the government this spring as the Ministry of Economy, Trade and Industry estimated the tax burden on Japanese and U.S. companies by adopting a method similar to the Cabinet Office's and concluded that domestic firms shoulder a heavier burden. The different ways of analyzing corporate taxes, as revealed through those conflicts, have both advantages and disadvantages; the tax rate alone does not show the actual tax burden on businesses, while international comparisons of the burden are difficult if made on the basis of tax deductions, which differ from company to company and from year to year. The question then is how the tax burden should be lowered to improve the international competitiveness of Japanese companies. Indeed, a rate reduction is a sure means of lowering the tax burden on businesses, given the difficulty of international comparisons. Though tax breaks for R&D programs and investment are important. However, a rate cut is a boon to all firms that are profitable and improves the overall competitiveness of Japanese industry. The government's Tax Commission says that tax breaks for R&D spending are more effective, despite its usual insistence that tax measures be neutral and broadly implemented. The commission is abandoning its basic principle in this case and calling for tax incentives since it prioritizes the maintenance of tax revenues. A cut in the tax rate is a permanent step, while tax cuts to promote specific policies are temporary and do not permanently affect tax revenue. As far as tax incentives are concerned, businesses can expect to see their burden drop only for a set period. Tax incentives are necessary to prop up economic activity by stimulating investment in plant and equipment. Without other tax reductions, they will end up as only a limited step on the long road toward energizing the Japanese economy. (August 26, the Nihon Keizai Shimbun)

Finance Minister Shiokawa proposed slashing corporate and other taxes by 2 trillion Yen a year for three years, while offsetting the reductions with increases implemented over a five-year period. Shiokawa earlier proposed cutting certain taxes by 2 trillion Yen in fiscal 2003 while increasing others by 1 trillion Yen. He expressed hopes for enacting the proposals for the tax cut and increase. The minister said that the proposed cuts should be designed to produce immediate stimulative effects for the economy, indicating that the reductions should be policy-linked tax incentives, such as those intended to encourage corporate R&D and capital investment. Shiokawa also said that the cuts should be temporary measures to be implemented for three years. The proposed tax increases, however, will likely become permanent measures. Concerning the proposed 1 trillion Yen tax increase for fiscal 2003, Shiokawa said that the increases would target areas that would likely be able to shoulder an additional tax burden. He said such increases would come through a review of deductions currently granted to personal income and consumer tax exemptions for smaller businesses with annual sales of no more than 30 million Yen. (August 24, the Nihon Keizai Shimbun)

The fact that the Ministry of Finance is discussing a tax break for a new type of government bond tailored for individuals reflects persistent fears about the market's ability to absorb the swelling tide of government bond issuance. These fears have been exacerbated by moves by U.S. and European credit rating institutions to downgrade their ratings of Japanese government debt. As a result, the MOF is turning to individuals for support. Japan already has a program that provides a tax break for the elderly who hold government bonds. For those of 65 and older, the interest income from government bonds on holdings of up to 3.5 million Yen in face value is tax-free. But this program is to be phased out starting next year. The ultimate decision on the tax break for the new bonds will be hammered out as part of the year-end review of tax system changes for fiscal 2003, a process that will involve the ruling coalition parties. Although the MOF's Tax Bureau is extremely wary about the idea of making interest income from the new bonds tax-free, Finance Minister Shiokawa has taken a proactive stance and the chances are high that some form of tax break will be granted. Another problem is that a shift of deposits among financial institutions is occurring as depositors gear up for the full reinstatement of a ceiling on deposit insurance protection in April of next year. It is almost certain that the government will face objections to the idea of tax benefits for individuals holding the new securities. The principal complaint is likely to be that the state is utilizing unfair leverage to absorb money that would otherwise be channeled into private-sector investment vehicles. (August 21, the Nihon Keizai Shimbun)

With a new securities tax code being introduced in January, confusion among individual investors is growing because of its complexity and the variety of tax incentives. On September 2, brokerages will begin accepting customer applications to open specially designated accounts for tax purposes, which will facilitate individual investors to pay capital gains taxes. With these accounts, brokerages will pay taxes on behalf of investors. Depending on how investors choose to calculate the capital gains, the tax payment amount will vary substantially. In addition, many tax incentives are attached with different time limits. A midsize brokerage recently received a request from a regional tax accountant organization for a seminar about the new tax code, highlighting the fact that even tax professionals are finding the changes difficult to follow. These complex and somewhat bizarre regulations are fanning confusion among retail investors. Some market observers warn that they may alienate retail investors, instead of encouraging their participation in the stock market. Thus, a growing chorus is urging that the implementation of the new code be delayed. Brokerages holding seminars for retail investors have heard investors frustrations and confusion about the complexity of the changes in the tax structure. About 75% of the investors attending these seminars are seeking individual consultations. Most of the inquiries are focused on two areas. The first consists mainly of questions about acquisition prices, which are the basis for calculating capital gains or losses, how to figure out the acquisition prices on inherited stocks. With the two existing capital gains tax payment methods to be consolidated into one in January, investors will be required to file actual, amounts of capital gains for tax purposes. Under the new tax code, an option allowing investors to pay a withholding tax pegged to the size of a stock sale, not the actual capital gain, will be eliminated. Brokerages are required by law to keep 10 years' worth of customer transaction records, so the acquisition prices of stocks purchased within that time span can be found at brokerage houses. Investors will have to choose one of the three following steps. If the acquisition dates can be verified from the back of stock certificates, then investors can search for the acquisition prices in old newspapers and other sources. Another choice is to peg 80% of the stocks' closing price on Oct. 1, 2001, and use this as the assumed acquisition price. Investors can also sell and repurchase stocks before the new code takes effect. Brokerages are being fielded as to which stocks investors should deposit in the special accounts. The acquisition prices of the deposited stocks will be assumed at 80% of the closing price on Oct. 1, 2001, if they were purchased before January 1, 1993. (August 20, the Nihon Keizai Shimbun)

The government is toying with the idea of raising taxes to offset a revenue shortfall resulting from tax cuts scheduled for next fiscal year, to achieve revenue neutrality by fiscal 2006. The idea is based on basic economic revitalization guidelines approved in June by the Cabinet calling for the completion of tax reform by fiscal 2006. Coming tax reform deliberations among government officials and Economic and Fiscal Policy (CEFP) members would focus on how to decide on a time frame for the achievement of this revenue neutrality. Prime Minister Koizumi believes that the resulting revenue gap should be filled over the following several fiscal years, and Finance Minister Shiokawa expects to achieve it in five years beginning next fiscal year. CEFP Minister Takenaka said that it should be completed by 2006 or 2007. The basic guidelines that include the government's economic revitalization strategy state that tax reforms should begin in fiscal 2003 and be completed in fiscal 2006. Government sources view that based on these guidelines, the measures aimed at offsetting the revenue decline due to tax cuts must be finished in four years. This implies that revenue neutrality would have to be achieved a year before Shiokawa's proposal dictates. And if tax hikes are used to achieve revenue neutrality by that year, the yearly tax increase will be larger than Shiokawa's proposal, which would have a larger negative impact on the economy than under Shiokawa's idea. Opinions are also sharply divided as to how to offset the revenue shortfall, which will be another crucial area of debate. The Finance Ministry intends to cover the shortfall solely by tax hikes following revisions in the current tax laws. However, for offsetting next fiscal year's proposed tax cut of more than 1 trillion Yen with tax hikes alone, even a five-year time frame for achieving fiscal neutrality could potentially have an adverse impact on the economy. Takenaka wants to cut government expenditures to finance the tax cuts and is also counting on a "natural" increase in tax revenue from the economic recovery that would be brought about by tax cuts. The Finance Ministry's interpretation of Koizumi's directive, however, does not recognize natural revenue increases among the measures to achieve future tax revenue increases. The ministry also does not want to use spending cuts as a way to finance tax cuts. When the government stated that fiscal 2006 would mark the completion of tax reform in June, many CEFP members sought to avoid tax hikes and, instead, reduce government expenditures and use the savings from administrative reforms to finance any tax cuts. The view among key government officials, however, seems to be running counter to their ideas, calling for fiscal neutrality over revenue neutrality. (August 14, the Nihon Keizai Shimbun)

Government Tax Commission Chairman Hiromitsu Ishi said that the Government Tax Panel should accept the more than 1 trillion Yen tax cut plan announced by Prime Minister Koizumi. However, Ishi maintained that the tax cut be financed with a future increase in income or other taxes, slightly different than the idea proposed by Economy Minister Heizo Takenaka, who apparently wants to cover a revenue shortage expected from the lower tax by reducing government spending.　Ishi suggested that the panel needs to accept Koizumi's decision on the tax cut for bolstering the economy, as concern about business conditions in Japan is growing due in part to the slowdown of the U.S. economy. Until recently, Ishi insisted that any tax cut be balanced with a tax hike in the same fiscal year. He opposed to a proposal by private-sector members of the Council of Economic and Fiscal Policy to reduce the effective rate of the corporate tax. With only a third of companies paying corporate tax, the effect of the cut will be limited. (August 3, the Nihon Keizai Shimbun)

Finalizing the framework of the fiscal 2003 initial budget, the Council on Economic and Fiscal Policy (CEFP) endorsed its plan to reduce corporate taxes next fiscal year for boosting the economy. The CEFP, however, did not specify the scale of tax cuts. According to the overall budgetary picture, the CEFP will call for tax cuts and other measures to stimulate private-sector demand and revitalize the economy, such as reducing corporate taxes and reviewing inheritance and gift taxes with a view to integrating the two. To finance a reduction in corporate and other taxes, the CEFP plans to use savings from spending cuts. It also said that the government should use increased revenue as part of comprehensive tax reform, hinting that tax cuts will require future tax hikes. Although private-sector members of the CEFP had submitted a proposal for about a 1 trillion Yen reduction in taxes, this was not included in the budgetary picture. Prime Minister Koizumi indicated that the specific size could be determined later. (August 3, the Nihon Keizai Shimbun)