Tax

March 2003

The Financial Services Agency (FSA) will strengthen ties with the Bank of Japan (BOJ) to stabilize the nation's banking system. The two entities will jointly create a new system to inject public funds into banks and also beef up cooperation in monitoring financial institution management. The FSA and BOJ need to cooperate on broad terms and not just macroeconomic policies, easing credit risk concerns is the major task from now, according to Economics and Financial Services Minister Heizo Takenaka. The decision to strengthen FSA-BOJ ties stems from Takenaka's views being similar to those of Toshihiko Fukui, who became BOJ governor. Favoring the injection of public funds into banks, Fukui cited the need for such measures during a recent Diet session. A channel to inject public funds into banks is necessary as a preventative measure even when they are not in a crisis. Fukui is considered more positive about public fund injections even in times of normality than his predecessor, Masaru Hayami. The advisory organ, which plans to conclude talks in May, wants to create the new system with support from the central bank, which is just as informed about the plight of financial institutions as the FSA. The FSA and the BOJ plan to permit public fund injections before banks are in such dire situations. They are planning to create a system under which they can force-feed funds without being asked to by banks. Another agenda item is reviewing the tax system. Takenaka has often ordered banks to toughen their assessment of capital ratios in line with the BOJ's views. In exchange, he has stressed the need to support banks' disposal of bad loans, such as expanding the range of tax-free depreciation. The FSA and the BOJ are expected to work together to draft a tax reform plan and jointly submit it to the ruling coalition, which effectively controls tax policy. Critics have pointed out that the inspections overlap and are imposing burdens on banks. Analysts view that the two entities need to share information and cooperate in considering measures to improve bank management. (March 24, the Nihon Keizai Shimbun)

The ruling coalition proposed the government to exempt shares companies intend to hold for the long term from market value accounting rules and instead offer companies the option of assessing their portfolio shares at book value or market value. The proposal was floated when the ruling coalition, the government and the Bank of Japan (BOJ) held a meeting to devise emergency economic measures in response to the U.S.-led war against Iraq. They agreed that the proposal should be discussed by the Accounting Standards Board of Japan. If firms are given the option, life insurance companies and others that own large amounts of shares for the long term will be shielded from market volatility and the financial system will become more stable. Tax measures were also on the agenda at the meeting. Participants shared the view that the government's Tax Commission should promptly study extending from the current one year the period banks are allowed to have taxes paid in the past returned when they chalk up losses to dispose of nonperforming loans. Participants also want the Tax Commission to discuss expanding the scope of nontaxable loan write-offs. The Financial Services Agency (FSA) will devise ways to make it possible to proactively inject public funds into financial institutions. Measures for helping smaller businesses will include expanding the credit guarantee program as a way to increase loans to them and creating a framework that lets government-affiliated financial institutions provide loans to midsize businesses. (March 24, the Nihon Keizai Shimbun)

The government's Tax Commission will expand the scope of taxation on for-profit operations conducted by public interest corporations and nonprofit organizations. Except for 33 operations that are currently subject to taxation, these corporations are exempt from taxation even if they run business for making profits. Based on the idea that such a tax system is creating inequalities between these corporations and private firms, the government will expand the number of operations subject to taxation. The government will also consider raising the corporate tax rate for public interest corporations and nonprofit organizations from the current 22% to near the 30% standard rate for ordinary companies. Tadatsune Mizuno, a Hitotsubashi University professor, will present his tax reform proposal to a Tax Commission subcommittee meeting. The subcommittee intends to compile its official proposal by mid-March and incorporate it into a tax reform package that the government plans to finalize by the end of the month. The government plans to treat public interest corporations, nonprofit organizations and alumni associations equally as nonprofit corporations and tax them accordingly. It aims to implement the tax revision in fiscal 2006. (March 4, the Nihon Keizai Shimbun)