Tax

November 2002

The ruling Liberal Democratic Party's influential tax panel has been discussing a hike in the tobacco tax. Lawmakers were tilting toward raising the tax, although some voiced strong opposition to the idea. The panel is likely to propose an increase in the tobacco tax, in a bid to secure funds for financing the planned increase in overall tax cut for fiscal 2003, while maintaining fiscal discipline. The government is now moving to expand the tax cut to 2 trillion yen from the initially planned 1 trillion yen. An increase of 2 yen per cigarette should generate a combined 400 billion yen worth of tax revenue at central and local governments. The LDP and government believe that hiking the tobacco tax will be accepted more readily by the increasingly health-conscious public. However, the tobacco industry is staging a large-scale campaign to protest against the step, having collected signatures from about 6 million persons who sympathize since October. According to Japan Tobacco, payments of the tobacco tax total 2.3 trillion yen at the current rate, already contributing to the national finances significantly enough. (November 28, the Nihon Keizai Shimbun)

The Liberal Democratic Party's Tax System Commission is reviewing widening the tax exemptions for gifts used to finance home purchases to about 30 million yen. The idea arose as part of a broader fiscal 2003 reform of inheritance and gift taxation. Currently, there is a 1.1 million yen a year exclusion in the gift tax and a special one-time exemption from gift taxation of 5.5 million yen if a person with less than 12 million yen in annual income receives money from his or her parents or grandparents to finance home purchases. The LDP is studying widening the latter provision. For fiscal 2003 tax reform, the Finance Ministry aims to integrate gift and inheritance taxes in cases in which parents 65 and older transfer assets to children aged 20 years or older while the parents are still alive, and taxes paid would be subtracted from any inheritance taxes owed at the death of the parent. If this framework is adopted, the MOF wants to establish a large gift tax exclusion of 10 million yen or so that would not be tied to any specific use for the funds received. In exchange, the special tax exemption for gifts for home purchases would be abolished. The Finance Ministry insists that this plan would be much easier to take advantage of and would almost double the size of tax exemptions. Although the LDP's tax research commission approved the integration of the two tax systems, many panel members also called for expanding the special tax exemption for gifts given to buy homes to as much as 30 million yen. Intended to spur demand for home purchases and boost the economy, the tax exemption must be easy to understand and easy to take advantage of in order to actually stimulate the economy. Panel members believe that their idea is simpler for taxpayers than a government plan that would require tax filing. The special one-time tax exemption on gifts for home purchases can be used without a tax filing, though the provision can be used only once in a lifetime. The large-scale tax exemptions when the inheritance and gift taxes are integrated can be used over several years until the inheritance and gifts reach the upper limit. However, the tax exemption can be taken advantage of only if taxpayers report the inheritance and gifts to the tax office. It is easier to promote home purchases by leaving the special provision and expanding it. The commission's debate is now expected to center on how to deal with the tax exemption. (November 27, the Nihon Keizai Shimbun)

Tax cuts for the next fiscal year should not exceed 1.5 trillion yen considering the nation's tight fiscal conditions. Finance Minister Shiokawa said that Japan should be cautious when considering the evaluation and trust in the Japanese economy by other countries. The minister's remark came after Prime Minister Koizumi said that the government should prepare for sufficient tax cuts in fiscal 2003, suggesting increase from the more than 1 trillion yen in tax breaks. The government plans to carry out both tax cuts and tax hikes over a period of several years. Under the plan, the amount of tax cuts will exceed that of tax hikes for the first few years, but the amount of increase is to be raised later to offset a shortfall in tax revenues. (November 27, the Japan Times, Kyodo News)

The Japan Business Federation estimated that Japan would be able to halve the consumption tax rate to 10% if the country accepts 6.1 million foreign workers by 2025. The business group projects that the consumption tax could rise to 18% from the current 5% if the birthrate remains flat. The organization will include the findings in a report on the future of Japanese society to be compiled under the leadership of Chairman Hiroshi Okuda by the end of this year. The federation projects that the aging of society and the falling birthrate will reduce the working population, which shoulders tax burdens and social-security costs, by 6.1-58.8 million yen by 2025. If the birthrate stays at current levels, the government would likely have to increase the consumption tax to 18% by 2025, even though the government would have to reduce public pension benefit payouts and its contributions to the public medical insurance program. The national contribution ratio, the ratio of taxes and social-security costs to national income, could rise to 48% from the current 38%. Based on these calculations, a senior executive at the federation said that active use of immigrant workers and foreign workers who stay in Japan for a long period of time should not be regarded as taboo from the viewpoint of designing the future of Japanese society. According to a federation estimate, Japan's nominal rate of economic growth would rise by an average 0.6% if the country takes in 280,000 immigrants annually through 2025. In that case, the rate of increase in the national contribution ratio would ease to a level between 42% and less than 43% in 2025. The business group also projects that an increase in the number of immigrant workers would boost tax revenues and ease the tight condition of public finances. The federation projects that inflows of foreign workers will include more specialists, such as computer engineers. (November 26, the Nihon Keizai Shimbun)

Following Prime Minister Koizumi's directive issued last week to expand the tax cuts planned for fiscal 2003, calls are mounting within political circles for a cut in the effective corporate tax rate, rekindling debate on this politically sensitive topic. Koizumi even commented that it is better to have a lower rate than a higher one, referring to the basic corporate tax rate. The effective corporate tax rate, which combines the national and regional taxes, stands at 40.87% in Japan, a level the government's Tax Commission and the Finance Ministry claim is already as low as that of the U.S. However, the private-sector members of the Council on Economic and Fiscal Policy (CEFP) argue that the figure is still about 5 percentage points higher than corporate tax rates in Europe. They have been at odds with the government over the corporate tax rate issue since the debate began at the beginning of this year. The basic tax reform guidelines compiled in October state that the government will continue to discuss a corporate tax cut, a comment that apparently helped placate those advocating such a cut. Minister Takenaka for economics and financial services soon declared that the size of front-loaded tax cuts and a corporate tax rate cut will remain on the agenda. Takenaka implied that a net tax cut of more than 1 trillion yen might not be enough depending on macroeconomics conditions, and in that case lowering the corporate tax rate will again come up in the discussion. The scenario envisioned by Takenaka is increasingly becoming a reality, as the decision to compile a fiscal 2002 extra budget has prompted calls for a tax break for corporations. Takenaka argued that a net tax reduction should be more than 2 trillion yen. Hiromitsu Ishi, chairman of the government tax panel, also hinted that the net tax cut cannot be expanded without discussing the corporate tax rate. The net tax cut will not reach 2 trillion yen. Still, advocates of a corporate tax cut are split over whether to trim the tax rate levied by the central or local governments. In June, Koizumi directed the government to cut the effective corporate tax rate in exchange for introducing a new corporate tax based on business size that will require even money-losing firms to pay taxes. Under this tax system, the tax rate on income will be lowered, so the effective corporate tax rate will be reduced by almost 3 percentage points. If the government opts for this system, the effective tax rate will not be reduced. Fearing this possibility, the private-sector members of CEFP are demanding that the basic rate of the national corporate tax be slashed by 3 percentage points to 27%. Although the Ministry of Finance wants to keep a possible corporate tax cut an issue that will be discussed over the medium term, Takenaka apparently wants to implement a cut in fiscal 2004, if not in fiscal 2003. (November 26, the Nihon Keizai Shimbun)

The Tax commission proposed a reform plan for fiscal 2003 that would attempt to boost the economy by allowing tax cuts for corporate activity and to secure more revenue by reducing exemptions for individuals. Although the commission advocated increasing several taxes to mend the country's fiscal health, it also said that the focus in fiscal 2003 should be on tax cuts to support the economy. The report states that a political decision to implement tax cuts is acceptable though the shortfall in revenues they will cause should be offset by higher taxes in later years. For fiscal 2003, the commission is calling for reforming items ranging from the income tax to the consumption tax based on the principle of creating a sustainable economic and social system through a simple and fair tax system. By abolishing and reducing various exemptions, these reforms mainly translate into tax hikes. The panel called for abolishing exemptions granted to salaried workers with spouses and reducing the number of small businesses exempt from paying the consumption tax. As to tax cuts, the panel proposes reducing the tax burden on companies that invest in research and development as well as in equipment and facilities for information technology. The commission's report presents the basic idea for fiscal 2003 tax reform and is the first step for national tax reform over the medium and long terms, according to the finance Ministry. By presenting the report prior to full-scale tax debate by the ruling parties, the panel and the finance Ministry hope to get its contents reflected in the reforms for fiscal 2003. (November 20, the Japan Times, the Nihon Keizai Shimbun, the Nikkan Kogyo Shimbun)

The government's Tax Commission efficiently wound up its discussions on tax code revisions for fiscal 2003 and is ready to propose a mix of measures that would partly cut and partly increase taxes on businesses and individuals. The commission will recommend tax incentives to encourage businesses to push forward R&D and capital spending, while urging the government to discontinue income tax deductions for spouses. Hiromitsu Ishi, chairman of the panel, reported the outline of its recommendations at a session of the Council on Economic and Fiscal Policy. The advisory panel will formally decide on a set of recommendations to submit to Prime Minister Koizumi. Other measures to lighten tax burdens will include cuts in registration and acquisition taxes levied on land purchases. Among proposals for tax increases will be to trim various deductions currently allowed for households, and a review of the system that exempts small firms from submitting to the authorities the consumption tax to impose consumers as long as their annual revenues do not reach 30 million yen. In view of the current economic slump, however, the commission will clarify its position that it will not stick to the implementation of tax-increase measures next fiscal year, as the government is considering carrying out tax reductions worth over 1 trillion yen prior to tax increases. But the panel will stress the need to incorporate tax cuts and future tax increases in a package of legislation. (November 15, the Nihon Keizai Shimbun)

The Government's Fiscal System Council calls for reform of local government tax grants, thus central government should stop giving tax grants to municipal governments for allowing them to maintain the minimum administrative services. Currently, tax grants are offered to local governments for two purposes: to even out revenues among prefectures, and to enable municipalities to secure the level of the administrative services and infrastructure set by the central government. The council's proposal points out that local municipalities are excessively dependent on the national government through its tax grants, and proposes that tax grants be offered solely for filling the economic power gap between prefectures. The proposal will be submitted to the Council on Economic and Fiscal Policy, which will use it as the basis for its fiscal 2003 budget guidelines. (November 13, the Nihon Keizai Shimbun)

The Financial Services Agency (FSA) has asked the Ministry of Finance to unify tax systems on gains related to a range of stock transactions and holdings so that the rate will be limited to a uniform 10% of annual gains. The FSA requested that the ministry simplify the tax system for gains including dividends, capital gains on stock deals and yields from mutual funds as a part of tax system modifications for fiscal 2003. It also asked that the unified rate be kept in place for 10 years. The request is designed to encourage individual investors to return to the stock market by alleviating complications that would stem from the government proposed tax system on capital gains slated to go info force January 1. It came after the market took a pounding partly on investor jitters over the government's plan to replace the current 1.05% withholding tax on the value of any stock deal with a new 20% capital gains tax. (November 7, the Japan Times, the Nihon Keizai Shimbun)