Tax

February 2002

The current fixed-asset tax is too heavy a burden on businesses and should be reduced, according to an advisory panel to the Ministry of Economy, Trade and Industry (METI). The panel was set up by METI to review the corporate taxation system, for reinvigorating business activity through tax reform. According to METI, the nation's companies paid a record high of 4.4 trillion Yen in fixed-asset taxes in fiscal 1999, up 100 billion Yen on the year. The panel also intends to formulate corporate tax reform proposals that will support businesses in their R&D and capital investment, and submit to the Council on Economic and Fiscal Policy for consideration in its tax reform discussions. (February 27, the Nihon Keizai Shimbun)

The LDP panel on housing and land research adopted a proposal to change the gift tax scheme to benefit homebuyers and promote housing demand as part of the party's measures to fight deflation. The nontaxable limit for a financial gift will be raised from the current 5.5 million Yen to 30 million Yen when it is provided to help acquire homes, as a 5-year temporary step. The panel said that the increase in the nontaxable amount would be an incentive for parents of potential homebuyers to provide financial assistance, for spurring housing demand and boosting economy. The LDP panel said that the project change in the gift tax scheme would have economic effects worth 2.1 trillion Yen. Although it would reduce revenues from the gift tax by 18 billion Yen, it would increase consumption tax income by 55 billion Yen with housing constructions. (February 23, the Japan Times)

The call for tax cuts is increasing within the government. Tax reform priority should go to cuts and priming the economy. Finance Minister Shiokawa expects that tax changes will stimulate and revitalize the economy. The government's Tax Commission discussed various proposals to make financial assets move more easily from older generations to younger ones, such as by reducing the gift tax. Tax Commission Chairman Hiromitsu Ishi said he would consider a tax system that encourages the intergenerational movement of assets. Shiokawa suggested that permanent tax cuts, temporary tax cuts and even tax increases should be well balanced. He added that short-term tax reforms designed to stimulate the economy should be considered separately from the longer-term tax reforms that will lead to structural change. Thus far, tax reduction proposals have come mainly from within the Liberal Democratic Party, such as from the LDP's Tax Research Commission. The problem is that if tax-cut-prioritized reform is pushed through the Diet during fiscal 2002, where will the money come from? The first budget for fiscal 2002 has held fast to Prime Minister Koizumi's pledge to keep new government bond issuance within 30 trillion Yen through cuts to expenditures and others, but such calculations did not include any talk about tax cuts. The government's Tax Commission agrees on tax reforms that push longer-term structural reform. It is likely to deliberate new problems thus far left untouched, how to deal with the problem that income will not increase much as Japanese society grays, and to what degree the public burden for social insurance should be kept. It is unclear how the commission's basic policy will combine short-term measures to stimulate the economy and longer-term measures to rebuild Japan's tax system. (February 20, the Nihon Keizai Shimbun)

The Japan Federation of Economic Organizations (Keidanren) released its official tax reform proposal, urging preferential treatment for urban renewal projects and tax cuts for investments in other priority areas. Japan's most influential business lobby said these measures should be implemented by the end of fiscal 2002 to enable corporations to combat the worsening deflationary trend. As a medium-term measure, lowering the level of the minimum taxable income should reform individual income tax. The organization also wants the government to increase the threshold for taxation on gifts and provide more assistance to home buyers through tax exemptions by the end of fiscal 2002. Taxes on developers engaged in urban renewal projects in government-designated areas and for tenants that lease office or dwelling space from these developers, should be cut. In the medium-term from 2003 to 2006, the minimum taxable income for individuals should also be slashed to widen the tax base and make taxation less progressive, Keidanren said, adding that reducing corporate income tax to about 20%, a level comparable to other Asian countries, is also needed. The lobby suggested the separation of income from securities and money market investments from salaries and wages, and a tax cut for investment income. Keidanren said that these measures would give individuals more incentive to invest in and stimulate the financial markets, Keidanren said. (February 19, the Nihon Keisei Shimbun)

Hideyuki Aizawa, chairman of the Liberal Democratic Party's Taxation System Research Council, called for debate on tax reforms to center on tax reductions aimed at combating deflation. The council began discussion on a radical overhaul of Japan's tax system, breaking with the convention of waiting until the last few weeks of the year to wrap up debate on tax changes. Council members paid little attention to this overhaul drive in their discussions, however, focusing instead on the use of tax cuts to fight deflation. Participants called for an immediate start to debate on economic stimulus measures and the postponement of discussions on long-term structural reform of the tax system. Members called for a reduction in property transaction taxes, tax changes designed to encourage a shift in individual financial assets from savings to investment, and raising the basic deduction on money received as a gift. The council plans to meet once a month for the time being, with the next meeting to be held in mid-March. The government's own tax panel and the Council on Economic and Fiscal Policy will set a basic policy agenda by the end of June. However, the LDP council will not decide until year-end on its outline for fiscal 2002 tax system reform and longer-term tax changes. (February 14, the Nihon Keizai Shimbun)

There are few tax breaks, especially in the short-term, that could be used to fight deflation, according to Hiromitsu Ishi, the head of the Japanese government's tax commission. Ishi said that the commission will study what steps could be taken to reform the whole tax system to beat deflation. He said possible steps included inheritance, gift, real estate and stock market tax breaks. While some people have mentioned investment taxes, he said that wasn't really a good idea, as Japan already was suffering from overcapacity. Next month, the panel will study the tax reforms of former U.K. Prime Minister Margaret Thatcher as well as the taxation of information technology and e-commerce. (February 15, Dow Jones)

The Japan Federation of Economic Organizations (Keidanren) will call on the government for immediate tax cuts on housing loans and reductions to corporate levies in the near future to fight deflation and improve the economy. Keidanren will call on the government to allow interest on mortgages to be deducted from income. This would be an additional measure to the current tax break, in which 1% of the balance of housing loans (up to 500,000 Yen) can be deducted from taxes for 10 years. The group hopes to give mortgage holders a choice between its proposed tax break and the one already in place. Although the proposed break would likely lead to greater deductions over the whole mortgage term, the existing system would remain advantageous for those wishing to reduce their tax burden for a set period. The body will also put forward a proposal that would widen tax breaks on funds provided by relatives for the purchase of a home. Under the current system, when a person with an annual income of up to 12 million Yen is given such funds, 5.5 million Yen worth is tax exempt. The group will recommend that the income borderline be drawn at 30 million Yen and gifts of up to 11 million Yen be made tax exempt. Keidanren expects these expanded tax breaks to raise housing investment by 520 billion Yen. The business group will also suggest that a certain percentage of investment made in promising sectors such as information technology and biotechnology be made tax exempt for a limited period to encourage companies to make capital investment in these areas. According to Keidanren, corporate tax should also be reduced from an effective rate of 40.87%, comparable to 40.75% in the U.S., to below 30%, the level seen in the rest of Asia. This step should be taken in the near future in order to help Japanese firms "maintain competitiveness in relation to Asian rivals and cope with the hollowing out of domestic manufacturing." (February 15, the Nihon Keizai Shimbun)

The Ministry of Land, Infrastructure and Transport began discussing how to cut taxes to prop up falling asset prices and revitalize the housing and real estate market. The ministry hopes to lower all property-related taxes, including fixed-asset and other real estate holding charges, as well as those related to buying and selling real estate, such as registration/license fees and real estate acquisition tax. The ministry hopes its plan will be reflected in tax reform debates held by the government's Council on Economic and Fiscal Policy. The ministry formed a team of scholars to discuss the future of property taxes and monitor council debates before composing a report by June. The current tax system is designed to prevent land prices from skyrocketing, even though any advantage to holding land assets burst along with the bubble economy of the late 1980s and early 1990s. Critics say buyers are discouraged by the registration and license tax, which is paid when purchased property is registered. As part of fiscal 2002 tax reform, the ministry sought to abolish the real estate acquisition tax and to lower the registration and license tax. However, tax authorities watered down the proposed tax cuts to fear a decline in revenue. The ministry decided to again submit a proposal to reduce property taxes. (February 14, the Nihon Keizai Shimbun)

The government will seek to establish a tax system to boost revitalizing the Japanese economy. Commenting on the goals of tax reforms now being discussed by the Council on Economic and Fiscal Policy, Prime Minister Koizumi said that his government "would like to develop a comprehensive tax system to help revitalize the economy and reward taxpayers for their efforts, and not merely devise tax cuts or increases". The prime minister also said the current system has a number of problems that must be addressed. The ratio of taxes to national income in Japan is the lowest among major industrialized countries, and the minimum taxable income is the highest. The prime minister indicated his intention to trim statutory tax deductions to lower the minimum taxable income. Heizo Takenaka, Minister for Economic and Fiscal policy, said: "The Council on Economic and Fiscal Policy, which counts the governor of the Bank of Japan among its members, last year targeted overcoming deflation in two years, meaning that it set moderate general price inflation targets. That's a very significant step toward countering deflation." In regard to the critical issue of deflation, Finance Minister Shiokawa told the panel: "Having the Bank of Japan pump sufficient funds into the financial system is the key to staving off a deflationary spiral. Currently, the central bank buys 800 billion Yen a month worth of government bonds without resale agreements. The government is now asking the BOJ to raise the amount of outright purchases to 1 trillion Yen." (February 12, the Nihon Keizai Shimbun)

Following the revision of the Commercial Code last April, firms reorganized 156 times under the new legal framework as of the end of January, with many major electronics makers taking advantage of the amendment to revamp their operations, according to Recof Corp. The revision has facilitated to reorganize business divisions, and preferential tax treatment made available since the revision is also serving as an incentive for large firms active in many areas to restructure to improve profitability. Hitachi Ltd. plans to merge the parent's white goods operations with those of two manufacturing subsidiaries and integrate its industrial machinery operations with four subsidiaries in April. NEC Corp. also plans five such consolidations, including integrating its electronic parts business with that of group firm Tokin Corp. in April. Kuraray Co., Ricoh Co. and Kawasaki Heavy Industries Ltd. each have three reorganization plans. The new legal framework can be used to reorganize operations straddling parent firms and subsidiaries, sell off business divisions to other companies, spin off a division to form a subsidiary or transfer operations to a holding company. Since the revision, the largest number of changes involved reorganizing operations within a group, at 76; followed by spin-offs, at 50; reorganizations involving nongroup firms, at 23; and seven reorganizations aimed at transferring operations to holding companies. The data comprises cases announced by companies and include spin-offs carried out by unlisted firms. (February 10, the Nihon Keizai Shimbun)

Japanese financial institutions shouldn't suspend their use of mark-to-market accounting standards, according to Hiroshi Okuda, chairman of the business lobby Japan Federation of Employers' Associations (Nikkeiren), who opposes the suspension. Takashi Imai, chairman of the Japan Federation of Economic Organizations (Keidanren) said that the use of mark-to-market accounting by financial institutions should be suspended to allow them to speed up their bad loan disposals. Mark-to-market accounting, which was adopted in Japan in September, requires companies to evaluate their assets at market value. The broad slide in the price of Japanese shares, of which Japanese banks are major holders, has dealt financial institutions a heavy blow, especially as they have traditionally used capital from their shareholdings as a cushion at writing down their bad loans. Mark-to-market accounting was implemented in September and has become an international promise. Poor corporate profits have dragged down share prices, but that they may improve in the next fiscal year as the U.S. economy rebounds. Okuda added that tax reform would also help lead to a recovery in share prices. (February 6, Dow Jones)