Tax

November 2001

The Diet approved revisions to the securities taxation law, which calls for bringing forward the abolition of the withholding tax option of stock capital gains taxes. The law, to be effective on Nov. 30, will impose no capital gains tax on shares purchased for up to 10 million Yen between Nov. 30, 2001 and Dec. 31, 2002, if sold during 2005-2007. Aimed at boosting the securities market, those involved in the securities industry are asking for additional tax breaks including dividend payouts and investment trusts. At present, sellers of stocks have two choices for tax payments: (1) a withholding tax of 1.05% on the amount of sale, which is automatically deducted and paid by brokerages on behalf of investors, (2) a self-assessment tax on the amount of capital gains that earners are required to pay themselves by filing a tax return. The new law moves up the removal of the withholding tax to the end of 2002 from the end of March 2003. The rate of capital gain tax will be lowered to 20% from the current 26% in January 2003, after the withholding tax is scrapped. Furthermore, the tax rate for shares held for longer than one year will be further cut to 10% for three years from 2003. The tax exemption on capital gains from shares bought for up to 10 million Yen, a core incentive in the new measures, will be applied to shares purchased between the implementation of the revision on Nov. 30 and the end of 2002, and then sold between 2005 and 2007. A yearly maximum 1 million Yen in capital gains on shares held for longer than one year has already been tax exempt since October. Although the special measure was originally scheduled to end in March 2003, the revised law pushes this deadline back to the end of 2005. The steps "will make most capital gains by individual investors tax free," encouraging trade of stocks." Arguing the ministry should introduce a simple tax return filing system if the withholding tax option is scrapped, FSA proposes allowing brokerages to pay the self-assessment tax in place of investors, under next year's tax reforms. . It is often argued that the purchase prices of stocks are hard to calculate, if they were bought numerous times or were split after the purchases. (November 26, the Nihon Keizai Shimbun Monday)

The Finance Ministry decided to postpone the introduction of the consolidated tax-filing system for April 2002. Until now, the ministry had been working out details with the Ministry of Economy, Trade and Industry (METI) and the Japan Federation of Economic Organizations (Keidanren). It decided to delay the system's introduction due to a lack of prospective ways to offset the expected 800 billion Yen decline in tax revenues. The Finance Ministry also determined that it would not be able to finalize a legislative bill in time for submission to the ordinary Diet session at the start of the New year. Should the LDP tax panel accept the ministry's plans, many companies that have crafted their group business strategies in anticipation of the new system would be forced to readjust their plans. The consolidated tax-filing system better serves the needs of corporate groups, including those that have holding company structures. Business has lobbied heavily for it as a way to rebuild operations. But if the system is implemented, then losses from a group firm in the red can be subtracted from the black ink of a profitable group company. The reduction in taxable income is an advantage for the group, but not for the Finance Ministry, which in turn loses tax revenues. (November 22, the Nihon Keizai Shimbun)

The Ministry of Finance and an influential business lobby have finally agreed that companies adopting consolidated taxation will not be allowed to offset subsidiaries' losses, which were incurred before becoming a consolidated unit with a parent's profit.　　The Federation of Economic Organizations　（Keidanren） had previously called for some of the losses held by subsidiaries before becoming consolidated units to be offset by profits at other group firms. But the ministry was concerned that companies would increase stakes in loss-making affiliates to make them subsidiaries so that their taxable income would be reduced. The new measure should cut several tens of billions of yen out of the tax revenue shortfall created by consolidated taxation. Consolidated taxation, to be adopted in fiscal 2002, aims to lighten the tax burden of corporate groups by permitting them to provide a combined figure for taxable income that offsets profits and losses at consolidated firms. The Finance Ministry estimates that consolidated taxation will generate a shortfall of 800 billion Yen in the government's tax revenue. Since Prime Minister Koizumi is keeping his pledge to cap fresh government bond issuances for fiscal 2002 at 30 trillion Yen, the ministry, Keidanren and others have been discussing measures to cover the lost tax revenue. To compensate the shortfall, the ministry has proposed introducing a surtax of several percent that would be added on top of the corporate tax for companies adopting consolidated taxation. However, the Keidanren opposes this idea, claiming that a special tax burden is unfair. The ministry is also considering establishing special tax measures and abolishing cost items that can be counted as losses under the current tax law. But, the LDP Research Commission on the Tax System, a key decision maker in taxation reform, is concerned that these measures will increase the tax burden on small and midsize firms who will not benefit from consolidated taxation. The LDP's tax panel will hold a general meeting to start discussions to change the taxation system for the next fiscal year. Hideyuki Aizawa, head of the panel, said it would be difficult to introduce consolidated taxation if there are no funds to cover the lost tax revenue. If negotiations between the Finance Ministry and the business lobby do not make progress, there will be growing demands to postpone the introduction of the system. (November 19, the Nihon Keizai Shimbun)

The Financial Services Agency (FSA) has crafted a plan to have brokerage firms collect capital gains taxes for the government, thus eliminating the need for individual investors to report capital gains data when filing their tax forms. The FSA plan aims to ease the burden on individual investors stemming from a planned overhaul of capital gains taxation that will eliminate a popular withholding tax option in January 2003. Pegged to the size of a stock sale irrespective of the capital gain or loss, the withholding tax option is often favorable to investors with large capital gains. Investors also like the tax as it involves no extra record-keeping or paperwork. The FSA plan would ease the pain of filing for capital gains taxation by putting brokerage firms in charge of keeping records, collecting taxes and remitting to the government. Under the system, individual investors would be required to open "qualified accounts" at brokerage firms. Brokers would keep track of all transactions conducted through these accounts and collect the appropriate taxes on capital gains. By using qualified accounts, brokers will have a clear record of stock purchase dates and other data needed to calculate taxation. The system would eliminate the work that individual investors would have to file for capital gains taxation. It would also satisfy a need for privacy, as only the brokerage firms would know the details of an individual's stock-trading activity. The tax authorities would not see this information. The one obvious drawback to the system is that it would require individual investors to file separately a tax refund for taking advantage of an exemption on the first 1 million Yen of capital gains or to offset gains and losses at accounts set up at different brokerages. Having brokerage firms mail out an annual record of transactions at all qualified accounts is expected to help streamline the work of filing for tax refunds. Although the FSA plan would add to the administrative burden shouldered by brokerage firms, the Japan Securities Dealers Association has already voiced support for the plan as the securities industry does not want to see an outflow of individual investors leaving the stock market because of their unhappiness with the tax system. The FSA wants to introduce the system in January 2003 as the withholding tax option is eliminated, however, it will require legislative revisions. Although the Ministry of Finance is taking a cautious stance, the Liberal Democratic Party and its coalition allies have shown support and the agency hopes to hammer out a conclusive blueprint as part of discussions on fiscal 2002 tax revisions. (November 14, the Nihon Keizai Shimbun)