Tax

June 2002

The Ministry of Finance will review a 2% surcharge on the group corporate tax rate with filing the consolidated corporate tax system. Relevant regulations on the group tax system are expected to take effect on Aug. 1, as the bills are set to pass a plenary session of the upper house. The ministry may scrap the surcharge tax rate in fiscal 2003, one year ahead of schedule, due to strong opposition from the business sector. If the laws are to be enforced as expected, companies closing their books on March 31 must file with the commissioner of the National Tax Administration to use the group tax system by the end of September. They will be able to use the new corporate tax system from the current fiscal year at the earliest. The ministry initially planned to apply the 2% extra tax rate on top of the current 30% corporate tax for two years from fiscal 2002 to cover an expected fall in revenue resulting from the consolidated tax system. Most companies may pay less corporate tax using the group filing system as profit at some group companies will be offset by losses at others. If the extra rate is applied, some companies would pay a higher tax than under the current system. Thus only a few companies have indicated their intention to apply the group tax system. Finance Minister Shiokawa admitted a problem with the group tax system, saying there was a possibility that no one will pay attention to the new law. The ministry expects a decline of 800 billion Yen in corporate tax revenue following introduction of the new system. If fewer companies use the group tax system, the decline in tax revenue will be smaller. Shiokawa admitted at the upper house committee on financial affairs that the earlier scrapping of the extra tax rate may occur. (June 26, the Nihon Keizai Shimbun)

The government's Tax Commission eyes greater tax exemption for gifts from over 65 years old, the measure to promote financial-asset transfers from older to younger generations, calling for expanded tax exemptions on gifts given by those 65 or older to beneficiaries. The proposal, in line with ideas put forward by Prime Minister Koizumi, would see inheritance tax exemptions extended to cover assets transferred before a benefactor dies. Current inheritance tax guidelines allow for 50 million Yen to be gifted tax free plus 10 million Yen per heir. Assuming that a benefactor has four heirs, a total of 90 million Yen would be inherited tax free, or 22 million Yen per heir. The Ministry of Finance estimates that if exemptions granted on gifts are kept to within the region of 22 million Yen per recipient, the portion of assets that can be transferred free of tax will rise significantly without this increase leading to a reduction in the government's overall tax revenue. The figure of 22 million Yen is considerably greater than the current basic gift tax deduction of 1.1 million Yen a year and special exemption of 5.5 million Yen a year for funds given for the purpose of buying a home. The government is hoping that unifying gift and inheritance taxes will spur the transfer of assets from the relatively wealthy older generation to the younger, stimulating spending on housing. The government is aiming to incorporate the measure in its fiscal 2003 tax reform plans. The measure, if adopted, will be retroactive to January 2003. (June 20, the Nihon Keizai Shimbun)

Finance Minister Shiokawa said that proposed tax cuts for the current fiscal year will be carried out boldly and will be financed by spending cuts. Tax revenues will increase if the economy is reinvigorated through economic revitalization measures, including tax cuts. Prime Minister Koizumi and his ruling coalition partners agreed to introduce tax cuts that will go into effect in January as part of a second anti-deflation package. The measures include expanding tax incentives to promote research and development spending and investment by businesses, and an easing of the gift and inheritance taxes to help promote transfer of assets between generations. According to Minister Shiokawa, any tax cuts should be balanced by future tax hikes, but he is leaning toward the idea of fiscal neutrality. Tax cuts will be balanced by a wide range of measures, including reductions in spending. (June 19, the Japan Times the Nihon Keizai Shimbun)

The government compiled an additional package of anti-deflation measures that includes tax cuts in fiscal 2002 and the creation of special deregulation zones to promote private-sector activities. The package's tax measures are centered on breaks to promote investment and corporate research and development. The inheritance and gift taxes would be lowered to encourage the transfer of financial assets from older to younger generations in a bid to spur spending. These tax steps would be introduced within the current fiscal year due to the ruling block's pressure on the government to quickly shore up the country's fragile economy. The government will legislate the tax cuts early next year. It will make them retroactive to January 2003, thus making tax breaks within fiscal 2002 possible. To fiance the tax reductions, the government aims to consolidate and scale down some tax deductions currently in place rather than depend on more government bond issuance. The size of the latest tax cuts is expected to remain small. To accelerate the government's structural reforms, the package seeks the establishment of special zones in which regulations would be drastically eased to promote private-sector activities. The leaders agreed to quickly work out the specifics of the zones. In addition, the anti-deflation package calls on the financial Services Agency to draw up a midterm vision of the nation's financial system so economic revitalization can be firmly supported by the financial sector. Meanwhile, the package does not mention the controversial issue of postponing the full-scale introduction of caps on deposit insurance protection scheduled for April. The first phase of the deposit insurance cap applied to time deposits and was launched April 1. It limits the government guarantee to up to 10 million Yen per depositor per bank. (June 18, the Japan times, the Nihon Keizai Shimbun)

The Ministry of Finance will re-estimate the drop in tax revenue likely to result from the introduction of the consolidated taxation system. Companies using the new taxation system will be subject to a 2% tax surcharge, which many firms oppose. The ministry plans to consider dropping the extra charge after estimating the effects of the new tax system on tax revenues. The consolidated taxation system, under which the profits and losses of group companies offset each other, tends to lower the overall tax charges on corporate groups. The ministry has decided to impose a tax surcharge for the initial two years. Companies whose fiscal year ends March 31 can begin using the new tax system for the current fiscal year if they apply by the end of September. The ministry will wait until that deadline before surveying the finances of companies already using the system and re-estimating the change in tax revenues caused by consolidated taxation. At present, the ministry expects consolidated taxation to reduce tax revenues by 800 billion Yen. If fewer than expected companies are using the system, any tax revenue decrease will fall short of the estimated figure, which should prompt companies to call for ending the surcharge by the end of the current fiscal year. (June 15, the Nihon Keizai Shimbun)

At the meeting of G-7 finance ministers held in Halifax, Canada, Japanese Finance Minister Shiokawa will unveil Japan's plans to implement tax cuts and reform its tax system to stimulate the economy. Shiokawa is well aware that the U.S. and European nations have a harsh assessment of the Japanese economy. He has repeatedly told Prime Minister Koizumi that Japan "might be ignored by the rest of the world if it fails to unveil specific measures" at the G-7 meeting. In April, Shiokawa declared in the meeting of finance ministers and central bank governors from the G-7 nations that Tokyo would draft an economic stimulus package by the end of June. He hopes to fulfill the "promise" by indicating the outlines of Japan's tax reform efforts and additional anti-deflation measures. There have been persistent calls for Japan's early implementation of tax cuts within the Bush administration, although the U.S. government has so far refrained from calling for it openly. However, it is not certain whether other G-7 participants will recognize Tokyo's efforts, since the plan is of small-scale tax cuts. (June 14, the Nihon Keizai Shimbun)

A government panel has proposed introducing environmental taxes in 2005. The panel calls for the imposition of special levies on oil, coal, natural gas and other fossil fuels in order to reduce greenhouse gas emissions. The Central Environment Council has proposed taxing importers of unprocessed fossil fuels as well as recommending special levies on retailers of gasoline, light oil and kerosene. The group also suggests levying taxes on companies according to the amount of carbon dioxide, a greenhouse gas, emitted by their factories. The panel pointed out that raising tax rates on fuels that produce high levels of CO2 is an efficient way to cut emissions of gases that contribute to global warming. Revenues from environmental taxes should be used to promote alternative, environment-friendly energy sources, according to the group. As a stopgap measure before the introduction of green taxes, the panel proposed allocating tax revenue now earmarked for road-building to development of low-pollution vehicles. The government on June 4 ratified the Kyoto Protocol, an international initiative to combat global warming. The accord calls on Japan to reduce the average emission of greenhouse gases in 2008-2012 by 6% from 1990 levels. European countries are beginning to introduce green taxes as part of an effort to meet the targets they agreed as signatories to the protocol. (June 13, the Nihon Keizai Shimbun)

A proposed local tax based on business size should not be viewed to reduce the effective corporate tax rate, but should be used to secure fiscal revenues for municipalities, according to Hiromitsu Ishi, chairman of the government's Tax Commission. "It is not our intention to introduce a new local enterprise tax based on business size in order to cut the effective corporate tax rate," said Ishi. Ishi's view runs counter to the instructions that Prime Minister Koizumi issued to the government Tax Commission last week in formulating tax reform plans for next fiscal year. Koizuimi has ordered the tax panel to draw up plans to introduce a local tax based on business size, so that even money-losing firms will be taxed. In exchange, Koizumi called for reducing the rate affecting corporate earnings and lowering the effective corporate tax rate as a whole. Ishi's remarks indicate that the tax panel's priority lies in securing tax revenues, rather than lightening the tax burden on companies. (June 12, the Nihon Keizai Shimbun)

The chairman of the government Tax Commission suggested that the basic exemption on taxable income for all people could be raised, pushing it above the current threshold of 380,000 Yen, if tax may be increased in other areas. Hiromitsu Ishi said that the basic exemption may be expanded in exchange for reducing special exemptions granted to the main income earner in a household and other tax breaks. The commission plans to present basic policies for tax system reform, including the reduction of income tax exemptions. We will start making changes that can be implemented early next fiscal year. He indicated his intention of reducing the special exemption of up to 380,000 Yen for the main income earner with a spouse and the exemption of up to 630,000 Yen for households including dependent high-school and university students. (June 6, the Nihon Keizai Shimbun)

Prime Minister Koizumi will instruct the Council on Economic and Fiscal Policy (CEFP) to spell out in tax reform guidelines the objective of lowering income and corporate tax rates while broadening the tax base. Scheduled to draw up basic guidelines on tax reform by month's end, the key government panel has clashed with the Tax Commission over the direction of tax reform. Some members of the ruling parties are calling for tax cuts before the end of this fiscal year. Therefore, Koizumi aims to take the lead in compiling the guidelines, but will refrain from giving specific instructions. He will also make clear his intention to reduce expenditures by curbing public works spending. The prime minister will first discuss the direction of tax reform with relevant ministers, then use the discussion results as the basis for his instructions to the CEFP. He will also call for introducing tax breaks to spur corporate spending in research and development. (June 5, the Nihon Keizai Shimbun)

The Koizumi Cabinet aims at cuts in corporate tax. Prime Minister Koizumi and his economic ministers agreed to consider cutting the corporate tax rate to create a tax system for collecting taxes from a wider base at lower rates. Koizumi now plans to instruct the Council on Economic and Fiscal Policy to discuss specific measures based on this agreement. Finance Minister Shiokawa said that the cabinet plans to consider cutting the effective corporate tax rate. Specifically, his comments appeared to hint at a tax rate cut followed by the implementation of a corporate enterprise tax system based on sales, salaries and other factors, like the local corporate tax introduced by Tokyo. The introduction of such a tax system would expand the tax base, enabling the government to cut the effective corporate tax rate. Although Japan's effective corporate tax rate of 40.87% is close to levels in the U.S., Japan's local corporate enterprise tax and corporate residence tax burdens are believed to be heavier. By using factors other than income to tax companies, the effective corporate tax rate would create room for a cut of several percentage points. A corporate enterprise tax based on factors such as sales and salaries would require companies in the red to pay taxes as well, so the government's plan is certain to meet stiff opposition from business circles as well as ruling coalition members. As for possible tax cuts this fiscal year, Minister Takenaka said that fiscal management must be in line with the government's reform policy and that discussions will continue until fiscal 2003 tax reform measures are agreed upon. His comment suggested that tax cuts might be limited to those on a smaller scale in areas such as lowering gift taxes when the money is spent exclusively on purchasing a home. (June 6, the Nihon Keizai Shimbun)