Tax

September 2001

A consolidated taxation plan for companies, which is to be introduced in April, will push down national tax revenue by 800 billion Yen, according to the Finance Ministry. Depending on economic conditions, the size of the revenue shortage may become bigger. Prime Minister Koizumi's pledge to limit fresh government bond issues at 30 trillion Yen for fiscal 2002 is giving the ministry difficulties in addressing the expected reduction in tax revenue. The framework of corporate income tax on consolidated earnings results of group companies was fixed in July at a meeting of a corporate tax subcommittee of the government's tax Commission. The ministry plans to review special taxation measures, or tax breaks for specific policy goals, to fill the anticipated revenue shortage in the coming year. However, such tax breaks related to companies totaled only 490 billion Yen for fiscal 2001. This means that even their total abolition would only partially offset the expected revenue shortage. (September 25, the Japan Times, the Nihon Keizai Shimbun, September 26, the Nikkan Kogyo Shimbun)

Senior members of a Liberal Democratic Party tax panel failed to agree to proposals aimed at reforming capital gains taxes paid by individual stock investors, postponing further consideration until early October. Sohei Miyashita, head of an LDP Research Commission on the Tax System subcommittee, was among members urging that the abolition date of a current withholding tax option on capital gains should be brought forward to January 2002 from April 2003, leaving self-assessment as the only tax choice. They argued that the current 26% rate on self-assessed gains reported in individual income tax returns should be lowered provided that the withholding option is abolished. The three coalition parties, including New Komeito and the New Conservative Party, agreed to the reforms. However, Hideyuki Aizawa, head of the LDP tax panel, and other panel members said that the changes would discourage investors and deal a further blow to the staggering stock market. Aizawa told reporters that "the brokerage industry would not be ready for abolition (of the withholding tax option) in January."　(September 25, the Nihon Keizai Shimbun)

The Ministry of Finance plans extra levy for firms with a consolidated tax system. The Ministry of Finance is considering imposing an extra 2-3% corporate levy on companies that pay taxes under the consolidated taxation system in the fiscal year 2002. The proposed measure is intended to make up for an estimated 800 billion Yen decline in tax revenue expected to result from the group taxation system. It has already drawn strong criticism from the Japan Federation of Economic Organizations (Keidanren) and other business lobbies. The ministry is now negotiating the planned move with the business community and the Ministry of Economy, Trade and Industry and is expected to discuss the matter with the corporate tax subcommittee of the government tax commission. Under the consolidated taxation system, profits at group firms are offset by losses at other affiliates, thereby helping reduce the overall tax burden on a corporate group. The Ministry of Finance considers that the new tax is necessary to live up to Prime Minister Koizumi's pledge to cap new government bond issuance at 30 trillion Yen a year.　　(September 23, the Nihon Keizai Shimbun)

To stimulate private-sector demand and support the economy, the government has drawn up a list of priority reform measures that focus on the cleanup of bad loans and helping firms restructure. Included among the proposed reforms are strict inspections of financial institutions by the Financial Services Agency (FSA), in addition to the creation of a special fund by the Resolution and Collection Corp. (RCC) to support the restructuring of ailing companies. The Koizumi Cabinet concluded that the bad-loan problem must be resolved for Japan's economy to prosper. The Council on Economic and Fiscal Policy will compile an agenda of priority reforms. The FSA intends to bolster its examinations of financial institutions by inspecting major banks every year, instead of the current practice (once every two years). In addition, the agency plans to conduct semiannual inspections of major banks with loans to companies that experience a sharp decline in share prices or credit ratings. Also, the FSA will ask banks to provide accurate and swift assessments of their assets and encourage them to set aside adequate loan loss reserves. To encourage restructuring in the industrial sector, the RCC plans to team up with the Development Bank of Japan and private-sector investors to establish a new fund that will buy bad loans from banks over a three-year period. These loan receivables will then be transformed into stock of the ailing borrowers, thus easing the debt burden of borrowers, while giving management rights to the fund. The firms would then rebuild operations under the watchful eye of experts who would provide advice. Profits earned on investments in companies that successfully rebuild their operations will be paid out to the investors. The government plans to designate the next two to three years as the time frame to focus on reform, while carrying out bad-loan disposals and rebuilding industry. To cope with unemployment and increased deflationary pressure, the government intends to hammer out employment measures and implement deregulation. (September 21, the Nihon Keizai Shimbun)

The planned introduction of consolidated tax filing next fiscal year could reduce tax receipts from corporate Japan by up to 800 billion Yen, according to an estimate by the Ministry of Finance. Consolidated tax filing will allow corporations to report taxable income on a group basis, deducting losses at money-losing firms from profits at successful enterprises, resulting in a lighter tax bill than if each firm were taxed separately. In addition, the struggling economy has caused the number of money-losing firms to increase, raising the cost of introducing consolidated tax filing. Even without the change, corporate tax receipts would likely come in below expectations, according to the estimate.. Since the government aims to cap new bond issues at less than 30 trillion Yen, the reduction in corporate tax revenue will have to be made up otherwise, such as by scrapping corporate tax breaks, according to analysts. The Ministry of Finance based its estimate of corporate tax revenue on a survey of 4,500 companies conducted since August. (September 20, the Nihon Keizai Shimbun)

The government's Tax Commission drafted a basic position paper on securities tax reform, including a plan to abolish the withholding tax option on capital gains. The report is intended to clarify its basic position on securities tax reform before an extraordinary Diet session convenes. The tax panel primarily focused on moving the abolition of the withholding tax option forward, and it is scheduled for abolition in March 2003. In the current two-tier capital gains tax system, taxes on stock trades are paid either as a 1.05% withholding tax on individual sales of shares, whether sold for a profit or a loss, or optionally as a 26% tax on total gains for the year. The report says that after the withholding tax option is scrapped, steps should be taken to lower the capital gains tax rate to 20%. This is to let stock investors carry over trading losses and to abolish the current tax exemption for capital gains of up to 1 million Yen. (September 19, the Nihon Keizai Shimbun, the Japan Times)

The tax panel of the Liberal Democratic Party informed the government that its tax system reforms for fiscal 2002 should not result in an overall decrease in tax revenues. Senior officers of the Tax System Research Commission agree that securities tax reform, to likely hit tax revenues needs to be offset by measures to reduce various exemptions, which would increase revenues. Regarding securities tax reforms, some officials believe that it is necessary to maintain a withholding tax option, while others are seeking an expansion in tax exemption measures following its abolition. Although the withholding tax option was originally to be abolished March 31, it was extended for another two years even though some lawmakers in the ruling coalition parties were concerned that its abolition would discourage individuals from investing in stocks. Currently, investors can pay either a 1.05% withholding tax on the value of share sales, regardless of whether they have made any gains, or a 26% tax on the annual total of their capital gains. (September 14, the Japan Times, the Nihon Keizai Shimbun)

As a part of his plan to revamp the uses of road-related tax revenues, the Prime Minister intends to allow vehicle-weight tax revenues to be used for projects other than road construction, repairs and maintenance starting next fiscal year. Koizumi expressed his intention to the Ministers for Land and Infrastructure and Finance Minister during a meeting. Total revenues set aside specifically for road construction, repairs and maintenance total some 6 trillion Yen at the national and local levels. Of that amount, vehicle weight taxes assessed during the mandatory motor vehicle inspections are the second-largest source of revenue after gasoline taxes. Unlike gasoline tax revenues, however, vehicle weight tax revenues are not legally required for road construction and repairs. Since its establishment, 80% of such revenues going to the national government have been traditionally earmarked for road construction. Koizumi appears to believe that these revenues can be better allocated for the general budgetary account than other sources of revenue. The next question is whether contingency tax rates will be returned to normal levels, if and when vehicle weight taxes are used for the general budget. (September 12, the Nihon Keizai Shimbun)

To promote the final disposal of bad debts in the banking sector, a panel of business and banking leaders plans to request the government to make debt waivers granted by financial institutions tax-deductible. The panel, which counts among its members the Japanese Bankers Association (Zenginkyo) and the Japan Federation of Economic Organizations (Keidanren), is currently working out guidelines for the disposal of bad loans by financial institutions. The panel plans to finalize its guidelines by the end of the month. The panel hopes that zero tax burdens will help encourage banks to remove bad debts from their balance sheets. The National Tax Administration (NTA) is expected to agree to the request. Although the panel's guidelines will not be legally binding, financial institutions are likely to adhere to them when they forgive debts. Currently, when financial institutions write off debts to failed companies that are restructuring under a legal framework, such as proceedings stipulated in the Corporate Reorganization Law, the related costs are treated as a loss as the loans are deemed irrecoverable. However, a debt waiver is considered a part of private restructuring procedures that do not go through the court process. As a result, the waiver is deemed a gift; in principle, it cannot be deducted as a loss. The guidelines will help increase the transparency of debt-waiver proceedings, so the public will be less likely to be critical of the government's decision to make debt waivers tax-deductible. (September 7, the Nihon Keizai Shimbun)

Prompted by sharp stock price declines, the Liberal Democratic Party's tax research panel agreed to speed up their deliberations on proposed revisions in the securities tax code.　　"Securities taxes will be one of the first things to be placed under consideration as interest among the markets is very high," said Hideyuki Aizawa, chairman of the LDP Research Commission on the Tax System. The panel plans to discuss tax code revisions, along with potential legislative revisions to establish a proposed stock entity that will acquire bank-held shares. Currently, investors can choose between paying a 26% capital gains tax, when they file taxes at the end of the year or paying a 1.05% withholding tax on a stock transaction, which does not factor in the amount of gain or loss. Consequently, the latter is favorable to investors with large capital gains. The hot topic within the LDP tax panel is whether to continue the 1.05% withholding tax option, which is due to be abolished at the end of March 2003. Senior officials are divided over whether to do away with the option as planned, or to postpone the abolition. The Financial Services Agency advocates postponing the abolition of the withholding tax, while at the same time lowering the capital gains tax from 26% to 10%. Meanwhile, the government's tax research panel, an advisory council to Prime Minister Koizumi, plans to compile its own proposals this month.　　(September 6, the Nihon Keizai Shimbun)

The ruling Liberal Democratic Party's tax committee discussed stock tax breaks, but nothing specific was decided. According to Hideyuki Aizawa, the panel discussed tax measures to stimulate stock trade, such as capital gains tax cuts, and a schedule for implementation on the tax reforms. Mere tax breaks would be enough to bolster the sagging stock market, as there were other concerns weighing on market sentiment, including the sluggish economic outlook and the downturn in U.S. equities. He added that the tax panel would meet to discuss tax breaks for the government-sponsored stock buying fund. Sohei Miyashita, the head of the panel's main policy-making subcommittee, also said that he didn't view further capital gains tax breaks as a measure that would bolster the equities market. (September 5, Dow Jones)

With the government's Tax Commission to introduce tax carry forwards of stock market losses, the next focus for debate will be abolishing the withholding taxation system on capital gains. Both the Tax Commission and Finance Ministry still hold the position that taxation on securities capital gains should be unified under a self-filing taxation system. In view of the slumping stock prices, however, there is strong opposition among the securities industry and ruling coalition against abolishing the withholding tax in May 2003. Proposed revisions that would allow losses on securities sales to be carried forward can be applied to the self-filing taxation system. The withholding tax has won recognition as a simple and transparent system that allows taxes to be deducted directly from stock sale procedures. There are concerns within the ruling Liberal Democratic Party that the stock market will become less attractive if this system is abolished. (September 5, the Nihon Keizai Shimbun)

A key government panel on fiscal and economic policy will issue a draft version of Prime Minister Koizumi's reform schedule, according to Minister Takenaka. The long-awaited reform schedule, originally scheduled for release at the end of August, will determine the ways and orders of specific policy steps. The final version of the schedule will be compiled around the end of September after working out details with related government ministries. During a panel meeting, members discussed the current state of economy, including the Yen's recent rise against the dollar, deflation, labor market conditions and the slump in the IT sector. (September 5, the Japan Times)

The Tax Commission and the Fiscal System Council hammered out a consensus that any tax reforms should target a long-term revitalization of the stock market, instead of a quick fix to prop up share prices in the short term. They also announced that they will review eliminating various tax incentives, which favor savings over investment in the stock market. Lowering the capital gains tax rate is among the key items on the reform agenda, but how to handle a withholding tax that investors can now opt to pay instead of filing for capital gains taxes remains an open question. Pegged to the Yen value of a stock sale regardless of a capital gain's size, the withholding tax option is favorable to many investors with large capital gains. The Tax Commission Chairman, Hiromitsu Ishi, said that his panel will consider capital gains rate cuts only if the withholding tax option is eliminated. "Although opinion is divided in the Liberal Democratic Party's Research Commission on the Tax System, our panel has decided to eliminate the withholding tax option," Ishi said. (September 3, the Nihon Keizai Shimbun)

The government's Tax Commission resumed talks on securities tax reforms and aimed to devise a basic outline on securities tax reforms at the end of September. The commission's subcommittee on financial issues had earlier planned to draft a basic outline in November. However, it decided to move the date as the government and ruling parties are trying to speed up securities tax reforms in the face of falling share prices. The Financial Services Agency and the Japan Securities Dealers Association submitted their requests for tax reforms such as lowering the capital gains tax rate from 26% to 10%. They also sought the continuation of an alternative withholding tax system, which is to be abolished at the end of March 2003. Some subcommittee members opposed this request, citing that the abolishment has been delayed twice already. (September 1, the Nihon Keizai Shimbun)