Tax

July 2002

Prime Minister Koizumi advocates implementing net tax cuts of 1 trillion Yen in fiscal 2003 to boost the nation's economy. Prime Minister proposed the plan to the Council on Economic and Fiscal Policy. The private-sector members of the council had earlier said that the government should slash taxes, primarily those affecting companies, by 1 trillion Yen and pay for them with fiscal 2003 spending cuts. Under Koizumi's plan, tax cuts would initially exceed spending cutbacks, with the difference being balanced out at a later date. Although Koizumi did not mention any specific figures while speaking to the reporters, Minister Takenaka said that 1 trillion Yen is a likely figure. With signs of a fledging economic recovery threatened by sagging stock prices and volatility on the foreign exchange markets, Koizumi came under increasing pressure to take action to bolster the nation's economy. Although those calling for economy boosting measures will laud the tax cut plan, it may face opposition from the Ministry of finance, which is adamant that any spending cutbacks should be used to reduce the nation's huge public debt, not to finance the tax cuts. Ruling lock lawmakers are also demanding that the government avoid spending cutbacks in the fiscal 2003 budget, claiming a move of this kind would throw cold water on the economy. Core general expenditures should be slashed to maintain fiscal discipline, according to the private-sector members of the council. They suggested that general expenditures, which cover public works spending, social welfare and other policy-related measures, should be set at around 47 trillion Yen. (July 27, the Japan Times, the Mainichi Shimbun, the Asahi Shimbun, the Nihon Keizai Shimbun)

The members on the Council for Economic and Fiscal Policy (CEFP) plan to propose corporate tax cuts by 1 trillion　Yen. These members plan to present the idea as part of a proposal that will envision the ideal fiscal 2003 budget. They believe that lower corporate taxes will stimulate private-sector demand and the economy. Ushio Inc. Chairman Jiro Ushio, Toyota Motor Corp. Chairman Hiroshi Okuda and other members from the business community will submit the proposal to the council. They will call for reducing general government expenditures by about 800 billion Yen compared with figures presented under a medium-term economic and fiscal outlook report compiled by the CEFP in January. The proposal will suggest using the money saved to finance the shortfall in corporate tax receipts that will result from reducing corporate tax burdens by about 1 trillion Yen at both the national and local levels. The proposal will also insist on unifying the inheritance and gift taxes to lower the overall tax burdens for gifts presented while the givers are still alive. It will also suggest separating financial-source income from wage incomes and taxing all financial income together. The members will stress their idea of shifting leadership in economic activity from the public sector to the private sector, with reducing government spending as one way to achieve this goal. (July 26, the Nihon Keizai Shimbun)

The private-sector members of the government's influential Council on Economic and Fiscal Policy (CEFP) will propose a 500 billion Yen cut in fiscal 2003 general expenditures paired with a reduction in corporate taxes. In a fiscal 2003 budget outline to be presented to the CEFP, the four council members from business and academic circles will propose trimming general expenditures to around 47 trillion Yen. This would mark a 500 billion Yen reduction from the initial budget for the current fiscal year, but would require an effective cut of some 2 trillion Yen after taking into account automatic increases in social welfare spending and other items. The private-sector members will also propose channeling a portion of the savings from expenditure curbs to finance tax cuts, reducing the effective rate of corporate taxation by 5 percentage points without increasing issuance of government bonds. The budget proposal is being pushed by Jiro Ushio, chairman of Ushio Inc.; Hiroshi Okuda, chairman of Toyota Motor Corp.; Masaaki Honma, professor of economics at Osaka University; and Hiroshi Yoshikawa, professor of economics at the University of Tokyo. These CEFP members are stressing the importance of focusing first on revitalizing the economy and only then worrying about restoring tighter fiscal discipline. By curbing expenditure and cutting corporate taxes, they aim to shift the leadership of economic activity from the public sector to the private sector. The hope is that the plan will become a springboard for debate as the government in early August sets the budgetary guidelines that will cap the appropriation requests by various ministries and agencies for the fiscal 2003 budget. Actually implementing the ideas outlined in the proposal is a different matter, according to political analysts. The ruling coalition parties are almost certain to raise objections to steep expenditure cuts. And the Ministry of Finance is cool to the idea of using expenditure curbs to finance tax cuts. Estimates made by the CEFP suggest that general expenditures in the fiscal 2003 budget will swell to 47.8 trillion Yen, even factoring in a 3% cut in public works spending, a 0.5% reduction in personnel costs and other cuts. Although the plan does not lie out the specifics, the council members are believed to be considering steeper cuts in other areas. (July 26, the Nihon Keizai Shimbun)

Government Tax Commission Chairman Hiromitsu Ishi said at a tax seminar in Akita Prefecture that the commission is mulling reducing a special spousal deduction currently allowed to households, if the spouse of main wage earner is not working or earns only a small income. Under the current income tax structure, the spousal deduction is 380,000 Yen, and the special spousal deduction can be added on by up to a maximum of 380,000 Yen, as long as the spouse's income is less than 1.03 million Yen and the main wage earner's annual income is 10 million Yen or less. The sum can be deducted from the main wage earner's annual income. Amid growing criticism that the current structure heavily favors households with full-time homemakers and therefore hinders women to be actively involved in society, Prime Minister Koizumi has called for an overhaul as part of next fiscal year's tax reforms. The commission aims to implement the change as part of its fiscal 2003 tax reform. As the spouse's income grows larger, the amount of the special spouse deduction drops further after the spouse's income exceeds the 700,000 Yen threshold. Ishi said that if the special spousal deduction is eliminated altogether, it will amount to a tax increase of about 400 billion Yen to households. To reduce the burden that any changes to the current system may bring, the commission might expand a standard deduction of 380,000 Yen that is allowed to any household regardless of family composition. (July 20, the Nihon Keizai Shimbun)

A number of taxpayers who participated in a tax forum held in the city of Akita on Friday expressed concerns about the government's plan to introduce a business-size-based corporate tax that would levy taxes even on money-losing firms. The forum in Akita was part of a second round of tax hearings sponsored by the government's Tax Commission. Some participants were particularly concerned about the plan presented by Prime Minister Koizumi calling for the introduction of an enterprise tax on companies that will also collect taxes from unprofitable firms. They said that small and midsize companies would be hit the hardest. But overall, the discussions at the forum appeared somewhat subdued. As for topics such as future increases in tax burdens, only a few said that spending cuts should be a top priority. Tax Commission officials urged forum participants to contribute whatever opinions they might have. For Tax Commission members such as Chairman Hiromitsu Ishi, who said previously that members were prepared to face opposition from participants, the discussions did not pack much of a punch. The government held its first round of such meetings between taxpayers and the government in March-April as a way to create dialogue about tax reform issues. The commission plans to hold four more forums in other areas nationwide. (July 20, the Nihon Keizai Shimbun)

The debate on property tax reduction will come under the spotlight as the Land Ministry and business circles are stepping up their calls to incorporate such a cut in fiscal 2003 tax reform. The Ministry of Land, Infrastructure and Transport steps up a reduction in the local property tax as part of its overall tax reform proposal for fiscal 2003. The proposal is to be finalized by the end of August. The influential Japan Business Federation will push for a steep cut in the property tax as part of a tax reform proposal to be issued in early September. Japan's business circles are particularly vocal in their complaints about the property-related tax burden, arguing that the weight of such taxes is becoming heavier amid declining land prices. The Home Affairs Ministry is reluctant to back such a proposal as it fears that property tax cuts would greatly reduce tax revenues for local governments. The current property tax is levied on some 170 million lots nationwide, with property values reassessed once every three years. The assessed values for tax purposes are set at 70% of official land prices published by the government. The taxable base is reduced further to 60-70% of the assessed value. Ultimately, the taxable base is supposed to be set at 42-49% of the official land price. The concrete formula for arriving at the final taxable base is more complex. If the taxable base in the prior fiscal year is more than 70% of the new assessed value, the new taxable base is set at 70% of the new assessed value. If the taxable base from the prior fiscal year is 60-70% of the new assessed value, the new taxable base is kept unchanged. If the taxable base from the prior year is less than 60% of the new assessed value, the new taxable base is raised in steps until it tops 60% of the new assessed value. The rate of taxation is 1.4% of the taxable base. The effective tax rate is targeted at 0.6% to 0.7% of official land prices. The Land Ministry argues that this effective tax rate is too high. According to its calculations, the actual effective rate was 0.6% in fiscal 2001 for commercial properties, already in the range targeted by the tax authorities. However, the revenues generated by commercial properties, with the exception of a few prime properties, are falling, which means that the relative burden of the property tax is rising. The weight of the property tax is one factor in the deterioration of the real estate market. Real estate companies are voicing complaints about the fact that property tax levies are rising even as land prices are falling. The Japan Business Federation is considering to urge a reduction in the percentage used to arrive at the taxable base from the assessed value to the 50% level. (July 18, the Nihon Keizai Shimbun)

The government should simplify the tax system for securities trading and require the postal savings system to bear the same tax burden as private-sector institutions, a panel of experts on financial administration said in a report. Its report also called on the government to revamp the nation's financial system, which is built around banking operations involving deposits and lending. The focus should be more on direct financing with the capital market. The report consists of two parts: one proposing a future vision for the financial system and the other detailing administrative tasks, such as resolving the bad-loan problem and strengthening the capital market. Based on the report, the FSA plans to draw up its medium-term vision this fall. The report's proposals will also be discussed by the Financial System Council. The panel envisions a financial system in which banks raise lending rates based on borrowers' credit risks and handle a wider variety of products, such as securitized debt claims. Even if market-oriented financial transactions become widespread, some regional institutions would continue to exclusively serve local customers. On the reform of public-sector financial institutions, the panel focused on the postal savings system, which will be handed over to the Postal Public Corp. in April 2003. The report points out that the postal savings system is exempt from the taxes levied on private financial institutions as well as the insurance premiums paid to the Deposit Insurance Corp. It should shoulder the same financial burden as private financial institutions and work to improve information disclosure. One topic not broached was privatizing the postal savings system. It is important to have public financial institutions operate under the same market principles. The privatization of the Postal Public Corp. is expected to become a sticking point in compiling the FSA's medium-term vision. The report urged the government to thoroughly revise the existing complex system, citing the current securities tax system sets different income categories and applies different tax rates depending on the investment vehicles, such as cash stocks, stock futures and investment trusts. The panel also supported introducing a dual income tax system designed to separate investment income, such as such dividends and interest, from earned income. Panel members concurred that having an effective macroeconomic policy is a key to preventing fresh nonperforming loans from emerging. Although the panel backed using public funds to bolster the capital of banks that have a chance of reviving their businesses, it dropped from the report the idea of using public funds to help the Resolution and Collection Corp. purchase nonperforming loans. (July 13, the Nihon Keizai Shimbun)

The government's Tax Commission resumed tax reform discussions intending to focus on such changes for next fiscal year as reducing exemptions in personal income taxes. However, the topic of reducing corporate taxes is likely to dominate the agenda. Private-sector members of the Council on Economic and Fiscal Policy (CEFP) are calling for substantial cuts in effective rates on corporate taxes. With Finance Minister Shiokawa also expressing hopes that cuts in investment-related taxes will be carried out soon as well, measures to reduce the tax burden on corporations are likely to take center stage. The Tax Commission will work on fleshing out the five key areas instructed by Prime Minister Koizumi as the focus for next fiscal year's tax revisions. Of the cited areas, private-sector members from the CEFP are calling for a reduction of about 5 percentage points in the effective corporate tax rate, now around 41%. In saying so, these members are trying to force the Tax Commission to place the highest priority on revitalizing corporate activities. The Tax Commission and the Finance Ministry are cautious about carrying out sharp cuts in the effective corporate tax rate, which includes corporate taxes levied by the central government corporate taxes at a basic rate of 30%. They believe the implementation of a proposed enterprise tax that would require even companies suffering from losses to share some of the tax burden will reduce the effective rate for profitable firms by nearly 3 points from current levels. Since companies in the black will also be required to shoulder the enterprise tax, the Japan Research Institute warns that it will not lead to any real reduction in the tax burden. The CEFP-Tax Commission debate over cutting the effective tax rate and taxes on investment would heat up even further. The question of how to finance tax cuts is also proving contentious. CEFP's private-sector members are urging cuts in spending to offset tax cuts. Shiokawa showed support for cuts in general spending instead of raising some taxes in order to cut other taxes. But "the deflationary effect of spending cuts will be stronger than the stimulating effects of tax cuts," Tax Commission Chairman Hiromitsu Ishi warned. He indicated the view that tax cuts financed through reduced spending will not lead to economic revitalization, highlighting a sharp difference in opinion between the CEFP and the Tax Commission. As for tax cuts for R&D and investments -- both cited by Koizumi as areas to consider for tax reform -- Shiokawa stressed that action must be taken quickly. "There is a need to pick up speed and move forward. The Ministry of Economy, Trade and Industry's request for fiscal 2002 tax revisions to be compiled by the end of August is expected to serve as a starting point for discussions. The Tax Commission is pressing for cuts in exemptions in personal taxes. Among the changes being considered is an overhaul to the spousal exemption in the income tax, which would increase the tax burden on households with full-time homemakers. The commission, which plans to hold public forums on taxes to hear the public's views, will likely face strong opposition to such proposals. (July 13, the Nihon Keizai Shimbun )

The Japanese government's tax commission will draft tax reform proposals for next fiscal year by the end of November. Items to be covered by the November report include breaks on gift and inheritance taxes, the shape of a local corporate tax based on factors other than just income, research & development and investment tax cuts, and revamping tax breaks for dependents and the consumption tax. Although In June, Prime Minister Koizumi said these five topics would be included in tax plans for the next fiscal year, most analysts don't expect massive cuts, as his administration is more concerned reining in spending. Ishi said that the report would incorporate feedback from meetings the panel is holding across the nation with taxpayers. Ishi said other topics would be picked up by the commission early next year. (July 12, Dow Jones)

The Financial Services Agency (FSA) will introduce tax incentives to encourage mergers between financial institutions, including a reduction in registration and license taxes. These incentives will be included in the fiscal 2003 tax reform. The government is calling for the creation of an administrative structure that will allow direct involvement of financial authorities making financial institutions to reorganize their operations. With the full-scale reintroduction of caps on deposit insurance protection scheduled for next April for ordinary deposits and other accounts, the FSA will work out measures for facilitating mergers between financial institutions, particularly smaller banks that will be more severely hit by the end of full deposit protection. Such mergers would help bolster the sound operations of financial institutions' operations. Tax incentives are set to be the centerpiece of the proposed items. Registration and license taxes at the time of a merger are now just 0.1% of capitalization, a reduction from the usual 0.7%, under a law for corporate restructuring and industry revival. As the law will expire in March, the FSA is mulling an expansion of the special tax measure. The agency is eyeing areas such as tax incentives for dealing with losses resulting from the consolidation or elimination of branches as well as investments for computer systems. But uncertainties remain in the FSA's ideas, such as overhauling the deposit insurance system and providing capital infusions to financial institutions that merge. A proposal to protect depositors whose accounts surpass the cap for deposit insurance protection as a result of mergers between banks was met with criticism inside the ruling coalition parties. To increase the cap on protection for depositors not to be disadvantaged by mergers, the plan was criticized as a superficial remedy. For a plan to offset declines in capital ratios due to post-merger increases in assets through public fund infusions, even some in the FSA are skeptical, citing difficulties in setting terms. But some in the government are calling for the creation of a framework beyond the FSA's proposals to support financial institution mergers. Finance Minister Shiokawa indicated his plan to propose the creation of guidelines by the Council on Economic and Fiscal Policy to overhaul financial institutions. In the meantime, the council is projecting to call on banks to present earnings targets and meet them. If not accomplished, the government will urge reorganizations, since this appears to closely match Shiokawa's ideas. However, the FSA continues to view that private-sector financial institutions need to take the initiative in reforming their operations. (July 10, the Nihon Keizai Shimbun)

The Council on Economic and Fiscal Policy (CEFP) will review its own role. The council will begin a review of its activities later this month in light of fears it has lost much of its effectiveness due to resistance from government ministries to its proposals on tax reform. Specifically, the council will consider whether its main function should be to make recommendations on economic policy or to coordinate between the ruling political parties and ministries and agencies. The CEFP was created in January 2001 with a view to shifting greater responsibility for economic and fiscal policy to the prime minister and the Cabinet and away from bureaucrats. It is unclear what the outcome of the review is likely to be, as Finance Minister Shiokawa views that the council should not have too much sway over the specifics of economic policy. While the council proposes the outlines of given policy, whether or not relevant ministries and agencies implement these ideas is decided by the Cabinet. However, proposals made by the council often become watered down as they go through debate among members of the ruling coalition parties, ministry and agency representatives. This has prompted, Minister Takenaka to consider having the panel tailor its approach to the particular matter under discussion. Specifically, Takenaka wants to have the Cabinet decide on basic policy proposals put forward by the council, after thorough discussion among the ruling parties and ministries. One of the key economic reform issues is that the prime minister should issue directives to relevant Cabinet members, as the minister hopes to give the Cabinet a leadership role in forging ahead with structural reform. Among key issues on the council's agenda for the rest of this year are vocational training, the social security system and reform of government-affiliated financial institutions. None of these issues would not be able to resolve unless the government adopts a top-down approach to reaching decisions, according to many observers. Everything will depend on whether Prime Minister Koizumi can demonstrate the necessary leadership. In the tax reform debate, the premier was forced to make concessions to the Finance Ministry, allowing tax reform policy to be geared toward revenue enhancement rather than tax cuts. The prime minister must rally ministers to get behind proposals made by the council, if the group is to have a real effect on the state of the nation's economy. When the government decided on a new package of measures to combat deflation in February, the prime minister, Takenaka and Minister of Economy, Trade and Industry Hiranuma agreed on key policy points aimed at stabilizing the financial system. This attempt to engage in top-down decision-making on applying more rigorous standards in bank inspections and public release of the results had little effect in the final analysis. This is due to the fact that the government was subsequently forced to put on hold its plan to inject public funds into troubled banks, as the proposal met with stiff resistance from the FSA. The basic policy on structural economic reform the council hammered out was also significantly revised during debate among the ruling parties and ministry representatives. A call for sweeping reviews of government expenditure in such areas as public-works projects was exercised from the policy paper. A council proposal that would have seen public benefit payouts linked to the inflation rate was also replaced, with a more moderate phrase stating that the government will take price trends into account, when reviewing pension payouts appearing in the final version. (July 1, the Nihon Keizai Shimbun)