Tax

December 2003

The government will provide a wide range of tax incentives to encourage investments in start-up companies, according to the fiscal 2004 tax reform blueprint finalized by the ruling coalition parties. Tax incentives designed to nurture venture capitalists will be expanded. Although it has been six years since this program was launched, only 384 individuals have taken advantage of it. The Ministry of Economy, Trade and Industry expects this number to grow by 6,000 a year following the implementation of the tax reform measures. In addition, the government, which had planned to levy a 26% tax on capital gains from the trading of stock investment trusts beginning in January, has decided to cut the rate to 10%, the same level for listed stocks. It will also cut from 26% to 20% a capital gains tax applied to unlisted shares. (December 18, the Nihon Keizai Shimbun)

The ruling coalition's blueprint for the fiscal 2004 tax reform features big changes in the taxation of stock investment trusts. These developments, widely applauded by the securities industry, are expected to help fuel the growth of the investment trusts market. Under the plan, publicly offered stock investment trusts will be accorded the same favorable tax treatment as ordinary listed shares, including a reduced capital gains rate and loss carryforwards. Moreover, stock investment funds will be made eligible for inclusion in special brokerage accounts designed to simplify capital gains taxation for investors. The securities industry got almost everything on its wish list related to taxation of stock investment trusts. The capital gains tax rate for investment trusts, originally will be set at 26%, will be lowered as of Jan. 1, 2004, to 10%, the same reduced rate as on listed stocks. Stock investment trusts will also have a loss carryforward period of three years. An initial expectation was that the offsetting of capital gains and losses on shares and stock investment trusts would be restricted to one combination: losses on stock investment trusts and gains on shares. But the final tax reform plan does not limit the possible combinations. As a result, investors will be able to offset gains on stock investment trusts and losses on shares, as well as gains on stock investment trusts and losses on stock investment trusts. (December 18, the Nikkei Financial Daily)

Tax cut is eyed for negative equity homeowners. New tax reform plans to be finalized by the ruling coalition will give taxpayers who have sold their homes income tax deductions equivalent to the amount of housing loans yet to be paid by them for their formers homes. The plan will cover those still unable to repay their housing loans even after selling off their homes or condominium units amid a sharp decline in land prices. The decision seeks to ease the financial burdens shouldered by businessmen and other in the form of negative equity incurred as a result of the collapse of the bubble economy. The reform plans also call for implementing drastic tax reforms, including a change in the consumption tax system, in fiscal 2007. The reform plans for fiscal 2004 also include a proposal to incorporate a portion of income tax gains into general revenues to be collected by local governments, instead of adopting an earlier plan to transfer the tobacco tax to the category of tax revenue sources controlled by the local governments. The planned income tax reduction will apply to those whose housing loans have yet to be cleared despite their selling off their homes and condominium units after living in them for more than five years. These taxpayers will be given income tax deductions for up to three years. (December 17, the Yomiuri Shimbun, Daily Yomiuri, the Nihon Keizai Shimbun)

The Finance and Home ministries are finalizing regional plans to reduce fiscal 2004 tax revenue grants to local governments for the first time in five years. These tax grants, designed to offset revenue shortages among local governments, totaled Y17.4 billion in the central government's fiscal 2003 general account budget, making it the second-largest outlay next to the Y19 trillion for social welfare spending. As part of three-pronged reforms designed to revamp central government funding to regional governments, the Finance and Home ministries are focusing how to limit tax revenue grants along with subsidy cuts and a shift in tax revenue bases to localities. Regional finance plans, which serve as fiscal guidelines for the local authorities, will be reduced by about Y2 trillion to Y84 trillion. This would mark the third straight year of reductions and the largest cut to date. As a result, local governments are likely to face pressure to limit spending and maximize operating efficiency. (December 16, the Nihon Keizai Shimbun)

The government tax panel proposed transferring tobacco tax revenues from the national government to local governments as a temporary measure in fiscal 2004. The panel also advocated de facto tax hikes for wealthy elderly people in a final report on fiscal 2004 tax reforms submitted to Prime Minister Koizumi. In the long term, the Tax Commission recommended that the government should hand over part of its income tax powers to localities by fiscal 2006. The central government will allow local governments to collect Y420 billion in taxes in fiscal 2004 to help cover a Y1 trillion cut in subsidies for local projects. The proposal is part of a drive to reform the national tax system to review the debt-ridden finances of both the central and local governments. Empowering local governments to raise taxes on their residents would be a better way to increase localities independence. The report by the tax panel represents part of the process of forming a tax package for fiscal 2004. In an effort to tackle the nation's ballooning fiscal debts, the Tax Commission advocated de facto tax hikes for wealthy elderly people. The Commission voiced caution over the much-vaunted extension of tax breaks for housing loans. The tax breaks will terminate the end of this year. The report urges the government to cut tax deductions for pensions as well as for income earned by people aged 65 or older. The proposal is aimed to ease the heavy financial burden on younger generations expected to result from the aging population and the falling birthrate. (December 16, the Japan Times, Kyodo News)