Tax

December 2001

The fiscal 2002 tax system overhaul endorsed by the ruling coalition falls far short of the fundamental reforms needed to revitalize the nation's ailing economy.　　Although the policy-makers did decide to introduce consolidated corporate taxation, a measure widely expected to aid corporate restructuring, they were shackled by the need to plug tax revenue shortfalls. Prime Minister Koizumi has indicated that he will grapple with a structural reform of the tax system early next year. If fiscal requirements take precedence, then the reform drive will go nowhere. Now is the time to start thinking about a tax system that works for the economy instead of taxation at the economy's expense. Given the Koizumi cabinet's overarching goal of limiting new government bond issuance to 30 trillion Yen, the debate inside the LDP's influential Research Commission on the Tax System was confined to a "small playing field." As a result, the final blueprint ended up with no large tax increases, but no large cuts, either. While taxes are a bill for the public services provided by the central and local governments, taxation can be an effective tool to bolster the economy. The introduction of consolidated corporate taxation is a good example of using the tax system as a policy tool. Although the adoption of a surcharge on companies that opt for group taxation will dilute its effectiveness, the system will still make it easier for firms to split off unprofitable divisions and take other corporate restructuring steps. When Koizumi's Council on Economic and Fiscal Policy tackles the issue of tax reform next year, one of its major themes should be how to adjust the tax system to support the activities of companies exposed to global competition. Reforming land taxation will be another key issue. Setting aside tax rates themselves, simply streamlining the three layers of taxes that hit buying, owning and selling land should help not only to facilitate the cleanup of bad loans, but also to encourage private-sector investment in urban redevelopment. It will also be vital to zero in on securities taxation, making for fundamental changes to encourage investment in new industries and attract personal financial assets to the stock market. The elimination of a tax break on interest income earned by senior citizens marks a step in the right direction. But the Koizumi government will have to keep moving forward toward shifting the tax incentives from savings to investment. (December 15, the Nihon Keizai Shimbun)

A package of tax reforms adopted by the ruling coalition for fiscal 2002 met with unfavorable reaction from business leaders, who complained that the proposed measures will be ineffective in stimulating economic activity. The ruling parties should have shown ''a path to fundamental tax reforms,'' according to Yotaro Kobayashi, chairman of the Japan Association of Corporate Executives. Nobuo Yamaguchi, chairman of the Japan Chamber of Commerce and Industry, added that the coalition failed to introduce bold tax steps to pull the domestic economy out of the doldrums. With regard to a proposal to introduce a ''pro forma standard tax'' system in fiscal 2003 to levy local corporate taxes based not on profits but on the size of companies, Yamaguchi said the plan is ''beyond understanding'' in light of Japan's serious economic weakness. While the proposed introduction of a consolidated corporate taxation system is welcome, Takashi Imai, chairman of the Federation of Economic Organizations, said that companies may shun the system for fear of an increase in tax payments as it will be accompanied by a surtax. However, the coalition's decision to scrap proposals to raise taxes on cigarettes and ''happoshu'' low-malt, beer-like liquor was praised by the business sectors concerned. Eiichiro Okumoto, chairman of the Japan Securities Dealers Association, welcomed the decision to introduce a system to let securities companies prepare and file tax returns on behalf of individual stock investors, when the current withholding capital-gains tax system is abolished in January 2003. Among critics close to consumers, Moeko Tawara said that the proposed tax reform will ''victimize'' the weak, especially the aged, referring to the decision to phase out tax breaks on the savings of people aged over 65. (December 15, Kyodo)

The coalition parties prepared a final draft of a fiscal 2002 tax reform package that calls for only minor revisions. With the deteriorating economic situation, major tax hikes would have led to a public uproar, but the government also has no funds with which it can engineer a major tax break. "Unlike tax reform packages in recent years, the latest one is not centered on tax breaks to stimulate demand. In light of the government's current fiscal policy, which is not expansionary, the scale of tax revisions had to remain small". But the package includes some key items to help revitalize corporate activities. The coalition agreed to scrap the "Maruyu" program, which exempts aged people from a 20% tax on interest and yields on savings of up to 3.5 million Yen. Abolishing this special treatment is expected to encourage the elderly to channel more money into stocks and other financial instruments. A main feature of the tax reform package is the introduction in the next fiscal year of the consolidated corporate taxation system. The package calls on the government to enact the group tax system as early as possible and make it retroactive to the April 1 start. Consolidated taxation allows a corporate group to offset profits with losses within group companies when calculating its taxable income, which often results in lower tax payments. The package, however, calls for charging a 2% surtax on companies for two years to compensate for the estimated 800 billion Yen decline in tax revenue resulting from the revision. (December 14, the Japan times, the Nihon Keizai Shimbun)

The framework for the fiscal 2002 tax code reform places an emphasis on securing short-term revenue and does too little to stimulate the economy. The tax reform for the new fiscal year will be the first undertaken by the Koizumi Administration, who plans to flesh out the details once the New Year begins. Critics argue that the measures must incorporate structural taxation reform measures for stimulating the bleak domestic economy. Although proposed tax increases on low-malt beer and cigarettes were shelved, the ruling coalition parties plan to impose for two years a 2% surtax on companies making use of the consolidated taxation system. According to Finance Ministry estimates, the introduction of consolidated taxation will lead to a tax revenue decrease of about 800 billion Yen. In light of Koizumi's pledge to keep new government bond issuance at 30 trillion Yen, the ministry asserted that measures to offset the tax revenue decline were necessary. In addition to the 2% surtax, the introduction of restrictions on loss carry-forwards for subsidiaries before consolidation and elimination of tax-deductible retirement payment reserves are expected to offset the revenue hole that consolidated taxation will create. Regardless of the tax amount, the 2% surtax makes the consolidated tax system unattractive and could have the potential of ruining companies' efforts to rebuild operations to boost growth and profitability. Business leaders welcomed the introduction of group taxation, but the surtax is somewhat unwelcome. The Finance Ministry and Liberal Democratic Party tax panel's decision to place securing government revenues before supporting corporate group strategies has distorted the original intention of the consolidated taxation system. Even small to midsize firms and others that do not select group taxation will be affected by the tax reform measures. Unlike the surtax that will directly affect companies switching to group taxation, firms with retirement payment reserves will be asked to make sacrifices as well in the name of tax revenue. The elimination of tax-deductible retirement allowances will increase companies' tax burden by 300 billion Yen. (December 13, the Nihon Keizai Shimbun)

The three-party ruling coalition has agreed on a broad framework for the fiscal 2002 tax reform package. The plan includes a system that relieves individual investors of the burden of filing income tax returns on capital gains. However, many fundamental reforms, including preferential tax treatment for investment trusts and a reduced tax rate on dividend income, have been postponed. The new tax reporting system is designed to prevent investors from shunning stock trading after the elimination of the system of separate taxation at source at the end of next year. Under the new system, individual investors will set up dedicated accounts at securities firms, which will then calculate capital gains or losses for their customers. If their stock trading yields gains, securities firms will pay taxes each month on their behalf. Investors, however, will still have to complete formalities on their own to claim tax refunds at the end of the year if they overpaid taxes for the year. They will also be able to claim tax refunds if they are eligible for preferential treatment allowing capital gains of up to 1 million Yen to be tax-exempt. The coalition parties are still ironing out differences on the issue of eliminating a tax exemption granted to income from interest on bank and postal deposits by senior citizens aged 65 and older. (December 13, the Nihon Keizai Shimbun)

The Finance Ministry has given up its initial plan to raise the tax on low-malt beer to the same level as for beer and has opted for a smaller tax hike instead. It now calls for raising the tax by about 10 Yen starting from May 2002 shipments and is considering another 10 Yen hike in two years. The ministry will submit to the LDP's tax research panel a bill to make such revisions. However, due to opposition from the panel and the industry, the bill may be revised further before it is passed. The tax on low-malt beer now stands at 37 Yen per 350ml can. Last week, the ministry proposed a two-step tax hike: raise it by about 20 Yen per 350ml can starting from May 2002 and by another 20 Yen two years later to about the same rate as for beer. But the LDP's tax panel would be difficult to raise it to the same level as beer. With Prime Minister Koizumi and Finance Minister Shiokawa voicing opposition, a majority of those on the LDP's tax research panel will likely be against the revised proposal. However, the Finance Ministry will continue to argue for a tax hike, citing the need to secure tax revenue. (December 12, the Nihon Keizai Shimbun)

The government Tax Commission will recommend that a surcharge tax on companies that have opted for consolidated taxation be imposed, only if a fall in tax revenue cannot be covered by any other means. In its proposals for fiscal 2002 tax reform, the panel will also seek to abolish tax deductions for premium payments of life and casualty insurance and tax exemptions on deposit interests for the elderly. The recommendations will state that the government should avoid any reform likely to lead to reduced tax income. Opposing the use of tax as a policy tool, it will call for scraping or scaling down policy-linked tax incentives as much as possible. The panel will seek to implement consolidated taxation for companies from the beginning of fiscal 2002, and will recommend making up for an estimated shortfall of 800 billion Yen in tax revenue by expanding the taxable base. The panel regards the introduction of the surtax as a last resort. It also supports a plan by the Ministry of Public Management to levy a corporate tax based on sales, salary and other factors as well as income, which will force even loss-making companies to pay tax, advising early introduction if economic conditions allow this. Hiking the tax on low-malt beers to the same level as regular brews is also mooted. The report will state that many panel members favor freeing up taxes strictly earmarked for road-use for other uses. After adopting the proposals, the panel will submit the report to Prime Minister Koizumi. Written with the medium- to long-term prospective in mind, the proposals are different from tax reform guidelines suggested by the ruling parties, which will be incorporated in next year's reforms. (December 12, the Nihon Keizai Shimbun)

The ruling Liberal Democratic Party's Taxation System Research Council began to study raising the tax on cigarettes to offset an expected shortfall in government revenue. Under the proposal being debated by the panel, the government would impose a levy of 2 Yen per cigarette, in addition to the 7 Yen currently collected. A 1 Yen rise in the tax translates into 100 billion Yen in added income each for the national and local governments. The increase would boost total revenue from cigarette taxes to 400 billion Yen. The price of a typical pack of 20 cigarettes would rise 40 Yen to 290 Yen. The growing interest in higher tobacco taxes stems from a major government revenue shortfall for the year to start in April. The government tax revenue on interest income will fall by 2 trillion Yen in fiscal 2002, as many high-yield postal time-deposits are expected to mature in the current fiscal year. The deteriorating economy will likely worsen the revenue shortfall. Members of the LDP tax panel appear to prefer raising the tax on tobacco rather than the levy on low-malt beer, due to the well-known dangers of smoking. Coalition partner New Komeito originally floated the idea of a 2-yen hike in the tobacco tax as part of a plan to use proceeds from the added levy on social welfare spending. Although Finance Minister Shiokawa supports the idea, opposition remains strong within the LDP to earmarking the tax for specific purposes. (December 11, the Nihon Keizai Shimbun)

Members of the LDP's tax research council opposed the idea of imposing a surcharge tax on firms taking advantage of corporate consolidated taxation. A 2% surcharge on top of the 30% corporate tax would discourage companies from benefiting from consolidated taxation, which will be introduced in April. The opposition forced the council to postpone making a final decision. The consolidated taxation system is intended to reduce firms' tax burdens by allowing corporate groups to offset profits and losses within group firms. A 2% surcharge would be too much of a burden. The surcharge was proposed by the Finance Ministry as a way to make up for an estimated 800 billion Yen annual shortage in tax revenue expected to result from consolidated taxation. The Japan Federation of Economic Organizations (Keidanren) also voiced its opposition. The surcharge would stop firms from using consolidated taxation. Such a penalty tax is unheard of even in other countries. The METI's Vice Minister Katsusada Hirose also said that a surcharge goes against the purpose of the consolidated taxation system. (December 7, the Nihon Keizai Shimbun)

Prime Minister Koizumi said that he intends to start a comprehensive review of the tax system in February, with a view to instituting sweeping reform. The review process usually begins in autumn, but will start early to provide time to lay the groundwork for dramatic change. "Tax reform is one of the pillars of structural reform and will start with a review beginning around February to last for six to 12 months," Koizumi said in an interview. Until now, the ruling LDP's tax panel has been the most important venue for deliberations on changes to the tax system. The government Council on Economic and Fiscal Policy, however, will also actively engage in debate on tax reform. Koizumi also stressed his determination to avoid raising taxes, saying "We will look at reducing unnecessary spending before increasing levies." The prime minister also reasserted his intention to apply revenues from the vehicle weight tax, which are now earmarked for road-construction projects, to other areas requiring funds. He also said that the use of road-construction funds from other sources should be discussed in connection with the compilation of the fiscal 2003 budget. Koizumi reiterated that the fate of public corporations -not among the seven bodies already selected for scrapping or privatization- will also be given serious consideration. The premier stressed his determination to open up mail-delivery services to private competition. He seemed willing to consider setting certain conditions on private concerns entering the field, however, as long as competition remains unfettered. Concerning the question whether to postpone the termination of the unlimited government guarantee of bank deposits set for April, as called for by some ruling party members, Koizumi said simply, "No change." (December 7, the Nihon Keizai Shimbun)

The ruling LDP's Research Commission on the Tax System endorsed the introduction of corporate consolidated taxation from next April. The party is also considering charging a 2% surcharge tax on companies taking advantage of the new tax, which will levy taxes on a corporate group as an entire organization rather than on each group firm. Such a surcharge, which would be levied for four years, will likely make up for part of the estimated 800 billion Yen annual shortage in tax revenue resulting from the consolidated tax system. The LDP intends to include the decision in its fiscal 2002 tax reform proposals. The Ministry of Finance had previously sought to delay the introduction of the consolidated tax from fiscal 2002, citing a delay in finishing the legislation. But, facing strong calls from the LDP, other ruling coalition parties and the business community for early implementation, the ministry recently decided to put the tax into effect even though the related bills will not be submitted to the Diet until the latter half of next year's regular session. Consolidated taxation allows companies to offset profits at some group firms with losses at other group companies in calculating tax, which often results in lower total tax payments. Considering the cash-strapped state of government finances, however, the LDP panel wants to impose the additional 2% surcharge tax on companies using the consolidated method, aiming to generate about 100 billion Yen for the state in the first year. Other Finance Ministry measures are to make up for the revenue shortfall include a reduction in nontaxable reserves for retirement pay (300 billion Yen) and disallowing subsidiaries' losses prior to the introduction of the consolidated tax system, which could be used to reduce the profits of the entire group (50 billion Yen). (December 6, the Nihon Keizai Shimbun)

The ruling Liberal Democratic Party (LDP) tax panel will propose a cut in the inheritance tax for individuals who inherit their parents' small or midsize business next fiscal year. The measure will aim to prevent heavy tax payments from forcing such businesses to collapse or scale down their operations. The lower tax will encourage older owners to hand over businesses to younger generations, helping to revive the economy. The LDP plan calls for expanding the tax deduction, aiming to halve the tax. There are currently nine tax brackets, with a maximum rate of 70%. Heavy inheritance taxes levied on company properties, shares in the company and other assets often cause significant financial difficulty to smaller firms. The LDP panel believes that further closures of small companies are certain to boost unemployment. In October, New Komeito, the LDP's junior coalition partner, proposed an inheritance tax cut for small business owners to Finance Minister, who agreed to consider the tax cut. Other proposals under consideration call for lowering the tax rate and allowing inheritors to defer tax payments for a certain period. Several major industrialized countries, including Britain, Germany and South Korea, are also introducing inheritance tax abatement measures. France allows inheritors to deduct 50% of the value of their business operations from taxation, on condition that they operate the businesses for five years after inheriting. (December 3, the Nihon Keizai Shimbun)

A proposal to increase the tax on Happoshu, a low-malt beer-like liquor, met strong opposition at a meeting of the ruling LDP's tax panel. Members of LDP Tax System Research Commission's subcommittee were opposed to such a tax hike, as it would deprive the public of a modest form of pleasure and companies that developed the beverage should be rewarded for their efforts. The Ministry of Finance is aiming to introduce the tax hike to compensate for an expected shortfall in tax revenues, but it is unclear whether the increase will be implemented. Shipments of Happoshu have risen steadily since the beverage's introduction and now accounts for 30% of the domestic market for beer and Happoshu. The majority of committee members agreed with proposal to abolish tax-free small-sum savings systems, "Maruyu." Under the Maruyu system, people aged 65 or older are not taxed on interest and dividends from deposits, investment trusts, bonds and other securities with principles of up to 3.5 million Yen. Many members said individuals should instead be encouraged to increase investments in their assets. (December 4, the Yomiuri Shimbun, the Daily Yomiuri, December 3, the Nihon Keizai Shimbun)