Tax

October 2001

Finance Minister Shiokawa indicated that he will consider a proposal by the New Komeito Party to reduce the amount of inheritance tax levied when small and midsize companies are passed on to the owners' heirs.  However, it is not clear whether the idea will be implemented, due to the bleak outlook for government tax revenue.  New Komeito has made two tax reform proposals: to reduce the inheritance tax for small and midsize firms, and to abolish the tax imposed on the internal reserves of family corporations.  Under the proposal, inheritors of small and midsize companies will pay only 50% of the tax on company assets, such as land, buildings and machinery, if they continue the business for five years.  New Komeito also wants to abolish the tax imposed on reserves held by family companies capitalized at less than \100 million. Under the current system, a tax of 10-20% is imposed on internal reserves, funds remaining after family corporations pay dividends and corporate tax, after a certain amount is deducted.  The party says that imposing inheritance taxes on business assets prevents small and midsize firms from being transferred to the next generation.  METI said, "The continuation and development of small and midsize firms is crucial to revitalizing the Japanese economy." In its tax reform request for next fiscal year, the ministry has incorporated a proposal to cut inheritance taxes for small firms similar to the New Komeito proposal.  The Finance Ministry, however, said that inheritance taxes should be imposed equally on all people after evaluating inherited assets at market value, and opposes setting exceptions for specific assets in specific industries." (October 23, Nihon Keizai Shimbun) 

Concerned about covering lost tax revenues, the LDP's influential tax research panel is leaning toward proposing a temporary surtax on top of the tax bill paid by companies adopting consolidated taxation.  However, the nation's business community is already lining up against the idea, arguing that the added tax burden would defeat the basic purpose of introducing consolidated taxation, which is to raise the competitiveness of Japanese companies, particularly in the areas of group management and operations.  The consolidated taxation system is designed to ease the tax burden of corporate groups by permitting them to come up with a combined figure for taxable income that offsets profits and losses at subsidiaries.  Although the offsetting of profits and losses will be limited to wholly owned subsidiaries, the Ministry of Finance estimates that consolidated taxation will result in an 800 billion yen loss of corporate tax revenue in fiscal 2002 alone.  If the Koizumi cabinet keeps to its commitment to limit annual issuance of new government bonds to no more than \30 trillion, the government is faced with the difficult choice of somehow covering the lost tax revenue or cutting expenditures by the same amount.  The LDP's tax panel is working to fill the shortfall by temporarily adding several percentage points on top of the standard corporate tax rate of 30% for companies with consolidated taxation. The FOF is considering a figure of 2-3 percentage points.  Tax policy-makers in the LDP stress that the surtax would only be a stopgap measure until the fiscal situation improves.  However, business leaders in many industries are strongly opposed to the idea of imposing a surtax on consolidated taxation to pump up government tax receipts.  The Japan Federation of Economic Organizations (Keidanren) and the Ministry of Economy, Trade and Industry (METI) also have questioned the underlying assumptions in the MOF's calculations. They contend that the actual loss of tax revenue would be closer to \600 billion.  (October 5, Nihon Keizai Shimbun)  

The tax reform blueprint endorsed by the ruling coalition adds new layers of complexity for individual investors despite its core aim of encouraging individuals to put more money into the stock market.  Drawn up by an influential LDP’s tax panel, the revision of the securities tax code was backed by the LDP's coalition allies, New Komeito and the New Conservative Party, without modifications. The coalition expects to submit a securities tax reform bill along with a supplemental budget for the current fiscal year in early November, hoping to implement the revisions as soon as the legislation is passed.  The centerpiece of the reform blueprint is the elimination of a withholding tax option that is favorable to many investors with large capital gains. The scrapping of the withholding tax will force investors to declare capital gains on their tax forms, though the rate of taxation will be reduced.  Although the coalition plan focuses on creating incentives for individual investors to hold shares for the long term, a number of the provisions are temporary, thus creating a system that is ultimately more complicated for investors.  Under the current tax code, investors have the option of paying a 1.05% withholding tax on stock sales pegged to the size of the transaction or filing to pay a 26% rate on capital gains. Slightly more than 70% of all investors in the Japanese stock market now opt for the withholding tax on stock sales, as the system is quick and convenient, and it provides anonymity.  Plans called for the withholding tax option to be dropped in April 2003. The coalition plan, however, has brought forward the elimination date to January 2003, providing instead a set of tax breaks to encourage stock market investment.  The standard rate of capital gains taxation will be lowered to 20% on listed shares. Loss carryforwards will be introduced, allowing investors with capital losses to offset gains for up to three years.  As a temporary break for three years, investors with capital gains on listed shares held for more than a year will pay a reduced rate of 10%.  One of the principal incentives is also the most complicated. Investors that purchase shares from the date of the implementation of the new legislation through the end of next year will be given an exemption on capital gains taxation on purchases of up to 10 million yen if the shares are sold from 2005-2007.  To take advantage of these incentives, investors will be required to fill out new forms however, when they file their taxes. The extra layer of documentation, coming on top of the elimination of the popular withholding tax option, will make the paperwork associated with investing by individuals more onerous.  (October 3, Nihon Keizai Shimbun)