Tax

October 2006

Yosano Exit Dims Hope For Extended Tax Break On Capital Gains
The resignation on Tuesday of Kaoru Yosano as chief of the ruling Liberal Democratic Party's tax panel dealt a blow to the securities industry, which had been hoping that his presence would support the industry's campaign for an extension of tax breaks on capital gains and dividends.
Before serving as chairman of the Research Commission on the Tax System, Yosano was minister of economic and fiscal policy in the previous cabinet. While in that post, he had pushed for an extension of the investment tax breaks. Securities taxation is one of the major issues in the tax reform plan, which will be compiled by the end of the year. The tax rate on capital gains from listed shares and mutual funds has been temporarily reduced to 10% from 20%. With such measures set to expire at the end of fiscal 2007, the Japan Securities Dealers Association, along with the Financial Services Agency, have been calling for an extension. The Finance Ministry, however, insists that the tax rate should be raised back to 20% because the tax breaks, introduced in 2003 to boost slumping stock prices, have already fulfilled their purpose. Masaaki Honma, a professor at Osaka University and chairman of the government's Tax Commission, agrees that the tax break should be abolished because "a tax system needs to be neutral." The securities industry had been hoping for a last-minute turnaround by the LDP tax panel, but such a scenario is highly unlikely now that Yosano has left. Indeed, Yosano's successor, Yuji Tsushima, tends to favor of Finance Ministry policies. Headed by the former Finance Ministry bureaucrat, the panel may lean even further towards abolishing the tax breaks, forcing the industry to rethink its tax strategy. (The Nikkei Financial Daily, November 08, 2006)

Govt Eyes Shorter Depreciation Periods To Spur Corp Investment
In an effort to lighten the corporate tax burden, the government is considering shortening depreciation periods for manufacturing equipment and plants, The Nihon Keizai Shimbun learned Monday. By allowing businesses -- especially technology firms -- to write off more each year, the government aims to encourage them to make fresh investments and upgrade facilities more frequently. The government may also allow firms to write off the full amounts of their capital investments. These measures will be positioned as a pillar of government tax reform aimed at revitalizing the economy and will be part of Prime Minister Shinzo Abe's growth program. The government is considering overhauling the depreciation system in fiscal 2007, with the new measures likely to be applied first to new investments in LCDs and other high-tech fields. The Japanese tax code establishes different depreciation periods according to the type of machinery involved, allowing firms to book portions of the assets' value as losses as time goes by. If the depreciation period is long, the amount that can be written off each year diminishes, imposing a bigger tax burden on firms. Japan has made few changes to this system since the 1960s, and LCD and semiconductor fabrication equipment, for example, has depreciation periods of eight to 10 years -- long by international standards. So the Ministry of Finance, the Ministry of Economy, Trade and Industry and others will join forces as early as next month to draft new depreciation rules. The focus of the review will be the high-tech sector, where speeding up technological innovation and frequently upgrading facilities is crucial. "We must replace equipment roughly every five years due to short product cycles and the breakneck speed of technological advances," says an official at a major LCD panel manufacturer. In the U.S., Europe and Asia, companies can write off the full value of their equipment. This proportion is a maximum of 95% in Japan, and the government will consider raising it to 100%. （Nihon Keizai Shimbun, October 24, 2006）

Govt Picks 15 Possible Sites For Supercomputer Project
The government has selected 15 candidate sites for a project that aims to create the world's fastest next-generation supercomputer, aiming to make a final choice by the end of March, it has been learned. Most of the locations in Sapporo, Yokohama, Kobe and elsewhere are near a research institute or industrial park. The government will consider, among others, each site's susceptibility to earthquakes and general accessibility as well as the potential for forming partnerships with local companies and universities. Riken, the government-affiliated research institute that heads the project, will conduct hearings with local governments and other entities on Wednesday and Thursday. Localities bidding for the project expect the cutting-edge facility to boost their name recognition and the regional economy by bringing in related business. The government plans to spend a total of 115.4 billion yen on the project in fiscal 2006-2011. The next-generation supercomputer, targeted to be operational in fiscal 2011, is expected to be capable of performing 10 quadrillion calculations a second, compared to the 36 trillion of Japan's fastest current supercomputer, the Earth Simulator, which has been used to forecast climate change and for other purposes since it was built in 2002. (The Nihon Keizai Shimbun, October 24, 2006)

New Govt Tax Chief Vows To Tackle Corp Tax Reform
Masaaki Honma, who is set to become the next chairman of the government Tax Commission, said Friday that Japan lags behind the global trend of corporate tax reform, and he plans to push for debate on the matter as the panel chief. "The time is right to pursue discussions (on corporate tax reform)," Honma told reporters at the Ministry of Finance. Honma, an economics professor at Osaka University and former member of the government Council on Economic and Fiscal Policy (CEFP), will be formally appointed as chief of the Tax Commission on Nov. 7.　Known for his academic research examining the impact of tax codes on the real economy, Honma has repeatedly argued that the nation's corporate tax rates are too high compared with those of other countries. He has warned the government that the nation's high corporate tax rates are impeding Japan's global competitiveness. Although he did not give any specific details regarding how he plans to pursue tax reforms, Honma is believed to be considering a review of the method used to calculate depreciation charges as well as a reduction in effective tax rates. Currently, firms are allowed to book 95% of their capital spending as depreciation charges. The business community has called for changes to allow companies to book the entire amount. Honma also indicated that he plans to work closely with the CEFP in discussing tax reform. By drawing on his past participation in Tax Commission discussions, he acknowledged that the panel needs to work toward holding open debates. "Because of (the tax panel's) excessive emphasis on independence, overall coordination among different government entities did not go smoothly," he said. Honma clashed with the government Tax Commission in 2002, when he advocated corporate tax cuts as a CEFP member. "It's important to compile comprehensive policy proposals," he said, noting that the tax panel should not be allowed to operate outside the government's policy-making procedures. Meanwhile, Honma avoided commenting on a possible consumption tax hike. Prime Minister Shinzo Abe's government is expected to begin deliberating the issue in fall 2007. "The Abe cabinet has a clear focus on growth, so our discussions will be in line with that policy goal," Honma said. (The Nihon Keizai Shimbun, October 21, 2006)

Tax Panel Shuffle Hints At Abe's Involvement In Policy Debate
The appointment of a new chairman and members of the government's Tax Commission indicates that the panel will now serve as a task force to help the government achieve its economic policies, rather than being heavily influenced by bureaucrats seeking to increase tax revenues. It also suggests that tax deliberations will now be led by the office of Prime Minister Shinzo Abe, and that their focus will likely shift away from tax hikes. A key indicator of this shift is that Masaaki Honma, an Osaka University professor who has been pegged as the commission's new chairman, is an advocate of lowering corporate tax rates. To back the Abe cabinet's drive to stimulate the economy, the panel will likely concentrate on reviewing how assets are depreciated, a turnabout from the previous focus on tax increases. The process of changing the nation's tax code is expected to be altered as well. Formerly, the Tax Commission discussed blueprints drawn up by the Finance and Internal Affairs ministries, and debate was used by the ruling Liberal Democratic Party's Research Commission on the Tax System to hammer out details. With this framework, it was impossible for even a prime minister to have a say, according to a former Finance vice minister. However, the Tax Commission is now expected to function as a task force led by Prime Minister Abe's office. With such veteran LDP lawmakers as Hakuo Yanagisawa and Bunmei Ibuki in the new cabinet, the party's tax research commission can no longer afford to ignore the interests of the prime minister's office and top LDP leaders. (The Nihon Keizai Shimbun, October 20, 2006)
Govt To Consider Reducing Corporate Tax Burden To Spur Growth
Prime Minister Shinzo Abe indicated Wednesday that the government will consider lowering the tax burden of firms in an effort to boost their global competitiveness. "It's important to foster growth by seeking to recover the nation's financial health and stimulate the economy at the same time," Abe said in a Q&A period at an upper house plenary session. "The issue of business taxes will be handled in this context." Japan's effective tax rate for companies is about 40%. This rate is generally in the 30s in the U.S. and Europe and in the 20s in many Asian nations. "As part of tax reforms, we will determine whether the tax burden has become a handicap for Japanese firms to compete amid the globalizing economy," Abe said. In this regard, the government is expected to consider such steps as overhauling accounting rules on capital investment depreciation. (The Nihon Keizai Shimbun, October 05, 2006)