Tax

December 2005

LDP Policy Chief Nixes Consumption Tax Hike In FY'07
A top policymaker of the dominant Liberal Democratic Party said Sunday that the consumption tax will not be raised from the current 5 percent in fiscal 2007. Hidenao Nakagawa, chairman of the LDP Policy Research Council, made the remark in an appearance on a television program of public broadcaster NHK. A bill for raising the consumption tax ''will not be ready by a regular Diet session in 2007,'' he said. ''It's impossible to carry out the tax hike during fiscal 2007.'' Yoshihisa Inoue, policy chief of the LDP's coalition partner, New Komeito party, echoed Nakagawa's opinion on the same program, saying, ''It's unlikely that the tax hike will be implemented in fiscal 2007.'' Separately, a senior New Komeito lawmaker, who declined to be identified, told reporters that the increase in the value-added tax will probably come around fiscal 2009. Their comments came after the ruling coalition unveiled its tax reform outline Thursday for fiscal 2006, calling for a 2 trillion yen tax increase in the year beginning in April while alluding to the possibility of raising the consumption tax in fiscal 2007. Finance Minister Sadakazu Tanigaki has expressed a desire to submit legislation necessary for increasing the consumption tax to a regular Diet session to be convened in early 2007. (Kyodo News, December 18, 2005)

Ruling Bloc Eyes 2 Trillion Yen in Effective Tax Hikes in FY06 Reforms
The ruling coalition is finalizing fiscal 2006 tax reforms that would effectively result in tax hikes totaling about 2 trillion yen at the national and regional levels, The Nihon Keizai Shimbun learned Tuesday. The Liberal Democratic Party's and New Komeito's tax commissions have begun discussions in earnest to work out tax reform plans for next fiscal year. They plan to complete final guidelines as early as Thursday. The tax burden would increase primarily because the 1999 tax cuts implemented by the government of Prime Minister Keizo Obuchi would be eliminated in light of the strong economic recovery. The government decided to halve these tax reductions as part of fiscal 2005 tax reforms, and the ruling coalition's fiscal 2006 reforms would abolish the remaining portion. Eliminating this tax cut alone would increase the taxpayer burden by 1.65 trillion yen. The ruling coalition seeks to improve the health of government finances by promoting both spending cuts and tax increases. But it plans to include in its reform guidelines a provision that allows the tax cuts to be reinstated in the event of an economic slowdown. The ruling coalition also seeks to scale back past corporate tax cuts in light of brisk corporate earnings. The tax structure aimed at promoting information technology investment would be abolished, while tax breaks related to R&D investment would face cutbacks. The ruling parties are also eyeing new tax credits targeting such spending as software investments to support the development of information infrastructure. But the overall tax breaks offered to industry will be scaled back. The coalition will take into consideration the tough business environment for small and midsize companies as well as struggling regional economies. The tax structure designed to support investment by small and midsize companies would be expanded to include information technology-related spending. To address anemic recoveries of land prices in nonmetropolitan areas, the ruling coalition will extend measures to reduce registration and license taxes on real estate transactions. Other new additions include a proposed income deduction for earthquake policy premiums as a way to better promote preparedness for major earthquakes. This incentive would enable policyholders to deduct up to 50,000 yen a year from their taxable income for earthquake insurance. Among the remaining issues that the ruling coalition needs to address is the fate of cigarette taxes. LDP Policy Research Council Chairman Hidenao Nakagawa and LDP tax commission advisor Toranosuke Katayama both back cigarette tax hikes. But LDP tax commission Chairman Hakuo Yanagisawa is opposed to such plans. (The Nihon Keizai Shimbun, December 14, 2005)

LDP Panel Aims To Close Tax Loopholes For Foreign Firms
The tax panel of the ruling Liberal Democratic Party will move to strengthen a rule intended to prevent foreign-owned businesses in Japan from unfairly reducing their tax burdens, The Nihon Keizai Shimbun learned Saturday. The current rule aims to foil efforts by foreign capital businesses to save on local tax payments by increasing the amount of loans obtained from their overseas parents. The Research Commission on the Tax System plans to expand the application of the rule to cover loans obtained by Japanese subsidiaries from third-party firms if repayment is guaranteed by the corporate parent. When a foreign-owned firm in Japan borrows from an overseas business that owns a stake of 50% or more in the Japanese entity, the current rule allows the local unit to count as expenses for taxation purposes interest payments on the debt valued at up to three times the amount of capital put up by the company abroad. The rule, however, has prompted a growing number of Japanese subsidiaries to devise tactics to avoid tax liability, such as taking out low-interest loans from lenders other than the corporate parent and curbing loans and capital subscriptions from the parent. The LDP panel will seek to tighten the rule from next fiscal year as part of the ruling coalition's fiscal 2006 tax reform program. (The Nihon Keizai Shimbun, December 11, 2005)