Tax

December 2002

The finalized tax reform measures proposed by the Liberal Democratic Party's Research Commission on the Tax System will feature a total of about 2 trillion yen in tax cuts, including reductions of more than 400 billion yen in national and local real estate taxes and about 1.2 trillion yen in R&D and investment tax cuts. Even without a planned tax hike on cigarettes and low-malt beer that will total more than 500 billion yen, the tax cut amount will be an effective 2 trillion yen. Although the real estate tax cuts sought by the LDP tax commission aim to reduce the 5% registration and license tax to 2%, for a three-year period starting next fiscal year, the commission wants to lower that even further to 1%. As a result, the reduction in the registration and license tax will total 200-250 billion yen next fiscal year alone. Revenues from the registration and license tax imposed on real estate registration currently total around 540 billion yen. The tax cut is expected to slash that figure by almost half. As for local taxes, the planned reduction in the real property acquisition tax is set to total 120 billion yen. Meanwhile, the suspension of the special land ownership tax should reduce taxes by 40 billion yen. The Finance Ministry and the Public Management Ministry are hoping that the proposed tax cuts will spur real estate transactions. The LDP tax panel, intends to skip a reduction in the current 26% capital gains tax on land sales. A cutback in fixed-asset taxes that the business community has lobbied may not come about next fiscal year. As part of the core cuts in R&D and investment taxes, the LDP panel is eyeing a corporate tax exemption next fiscal year that is equivalent to 10-12% of total research expenses. The reduction is expected to total around 600 billion yen. The tax cut for capital investments is poised to total 600 billion yen as well. Companies would be able to choose between a tax exemption equal to 10% of capital investment in information technology areas or a 50% special write-down. Small and midsize companies would also be eligible for a suspension of the tax imposed on internal reserves. Possible tax increases on cigarettes, low-malt beer and wine are also on the table. Specifically, a 2 yen tax hike per cigarette for a total 430 billion yen tax increase is under consideration. As for taxes on alcohol, the Finance Ministry is eyeing a 20 yen tax hike per 350ml can of low-malt beer and per 720ml bottle of wine. If these proposed tax hikes are realized, the total tax reduction would be a net figure of about 1.5 trillion yen, a figure close to the amount suggested by Finance Minister Shiokawa for front-loaded tax cuts. However, some in the ruling coalition are calling for smaller tax hikes on cigarettes and low-malt beer. Next fiscal year's real-term tax cuts will amount to 1.5-2 trillion yen even if the tax hikes are smaller than initially anticipated. (December 12, the Nihon Keizai Shimbun)

The government and ruling coalition drafted a tax revision plan for fiscal 2003 that features deductions for corporate research & development of up to 15% to boost the economy. The draft calls for cuts in taxes for securities and land transactions to bolster stock market activity and fight asset deflation. The draft will serve as the basis for a final report by the LDP and two coalition parties. According to the draft, tax deductions for R&D would be 8%, but a 2% increase would be added for the first three years. For companies that fulfill special requirements, such as higher portions of R&D expenses when compared with their sales, the deductions would total 10% to 15%. As for securities taxation, the draft calls for a reduction to 10% from 20% for the taxation of dividends, capital gains and distributions from investment funds for a period of five years from January. Under the government current reform plan for securities taxation, the capital gains tax would be reduced from the current 26% to 20% in January. The rate would be cut to 10% for stocks that investors hold for more than a year and sell by the end of 2005. The draft changes that reform plan, which has been criticized as being complex. The draft also aims to promote the transfer of assets from the wealthy elderly to a younger generation by expanding the amount of tax-free funds parents can give their children to acquire homes from 5.5 million yen to 35 million yen for three years. The Ministry of Finance proposed raising the tobacco tax by 2 yen per cigarette, increasing the tax for "happoshu" by about 20 yen per can and that for wine by about 20 yen per bottle. (December 11, the Japan Times)

Key members of a powerful tax panel under the ruling Liberal Democratic Party (LDP) agreed to introduce in fiscal 2004 a tax system based on business size that will slap taxes on loss-making companies. The members of the LDP's Tax System Research Commission will exclude from the plan small and midsize corporations capitalized under 100 million yen to ease the impact of the plan in the business sector. The system is designed to tax corporations on the basis of business size, such as the number of employees and the size of capital, rather than profits. If introduced, it would pave the way for the government to tax companies in the red. About 70% of Japanese firms are loss-making. The agreement was reached as part of discussions for the LDP's tax reform plan. Whether the controversial system will be included in the plan will require some coordination with ruling bloc lawmakers who oppose it. When asked about the panel's decision, Prime Minister Koizumi said further discussions will be needed to introduce the system, noting that although local governments want it, businesses in rural areas are fiercely opposed to it. The panel's senior members also moved closer to reaching an agreement on the size of the tax cuts to be carried out in fiscal 2003. The panel is debating a plan to carry out tax cuts of a net 1.5 trillion yen in the fiscal year by implementing tax reductions in such areas as corporate research and development and land transactions. The tax cut is expected to total about 2 trillion yen. The reductions will be combined with smaller tax hikes aimed at offsetting revenue shortfalls from the cuts. Policy-makers had been divided over the size of the tax cuts, with Finance Minister Shiokawa saying the upper limit of the reductions should be 1.5 trillion yen, but economic and fiscal policy minister Heizo Takenaka supports calls for tax cuts of 2.5 trillion yen. As part of efforts to secure revenue, the panel agreed to raise the tobacco tax by about 2 yen per cigarette. The tax hike, planned for fiscal 2003, would bring in revenues of about 400 billion yen. Among other tax-hike steps are reducing or abolishing special deductions for family members, and changing the consumption tax collection system to force business operators currently not required to hand over the tax to the government. Those steps will be taken only after fiscal 2004 in a bid to prevent them from dampening the economy-boosting effects of the tax cuts. （December 9, Kyodo News）