Tax

September 2002

The Ministry of Finance (MOF) and the Ministry of Public Management, Home Affairs, Posts and Telecommunications are taking a cautious stance toward revising land-related taxation. Even if the ministries go ahead with tax cuts, they are likely to focus on relatively small cuts and not touch areas such as the property tax or the registration and license tax that would lead to large revenue drops. According to the MOF, the components of land taxation that were reinforced to check a run-up in land prices during the bubble economy of the late 1980s have already been eliminated or eased. The land value tax and the heavy taxes levied on sales of land owned by companies for only short periods have been temporarily suspended. And special exemptions have been adopted to lighten the burden of the registration and license tax. Moreover, the MOF argues that it is unlikely that a land-related tax cut would have much of an impact in boosting land prices. Although Finance Minister Shiokawa often refers to his personal preference for a land tax overhaul, the administrators in both the MOF and the Home Affairs Ministry are not anxious to touch the sources of precious tax revenue. The MOF is cool to the idea of lowering the registration and license tax, which brings in 600 billion Yen of revenue a year. The Home Affairs Ministry is against cutting the property tax, which accounts for 45% of all municipal tax revenues. If the tax overhaul is conducted at the pace set by the two ministries, the process could end up producing only minor revisions, even if the ruling coalition jumps on the bandwagon for reform. More comprehensive overhaul of land-related policies will be put on the discussion agenda. (September 26, the Nihon Keizai Shimbun)

Minister Takenaka for economic and fiscal policy vowed to push deregulation with structural reform zones with the details of a plan to designate special regions where deregulation will be heavily promoted. He hopes to submit related bills to the next extraordinary Diet session. At a business symposium of The Nihon Keizai Shimbun, Takenaka said that aggressive and ambitious reforms are necessary. He emphasized the importance of deregulation, claiming that a web of small regulations is impeding corporate activity," the disposal of bad loans must be accelerated to activate the economy. Takenaka added that tax reforms should be designed to invigorate the economy, and the government wants to enable private companies to take better advantage of tax reductions. The minister also showed his desire to reduce Japan's effective corporate tax rate by 5 to 10 percentage points to a level at par with the rates in Europe. (September 25, the Nihon Keizai Shimbun)

The Ministry of Finance will review the controversial securities tax system slated for implementation next January in two stages, putting "simplification" at the center of the reform, to spur investment. It will revise notices and ministry ordinances to make it easier for individual investors to use special securities accounts introduced by brokerages to assist individuals pay capital gains taxes. Simultaneously, the ministry will thoroughly re-examine existing financial and securities tax codes ahead of fiscal 2003 tax reforms. Through the moves, the ministry hopes to steer the flow of personal assets toward investment and away from savings. (September 24, the Nihon Keizai Shimbun)

The Ministry of Finance (MOF) will review tax breaks on R&D spending permanent from fiscal 2003. The move is designed to deflect criticism mainly from private-sector members of the government's Council on Economic and Fiscal Policy that a permanent tax hike, coupled with temporary tax breaks aimed at encouraging R&D spending, would translate into a tax increase. The ministry still opposes the idea of lowering corporate tax rates, but it hopes to revitalize the economy by making tax breaks on corporate R&D investments permanent. The MOF's Tax Bureau chief Kenichiro Otake floated the idea, saying "Personally, I do not think (tax breaks on R&D) should be temporary." As unlike ordinary capital investments, it takes time before the economic benefits of R&D spending become evident, the MOF believes the government needs to promote corporate activities in the private sector in the long run through tax incentives on R&D. The ministry also intends to make temporary tax cuts for encouraging capital investments in some targeted areas, such as the information technology sector. (September 14, the Nihon Keizai Shimbun)
The Japan Association of Corporate Executives (Keizai Doyukai) submitted to Prime Minister Koizumi an emergency proposal seeking more than 2 trillion Yen in tax cuts. The proposal covered four main areas: the government budget, tax reform, regulatory reform, and the financial system. It called for cutting public works projects by more than 10% under the fiscal 2003 budget as well as slashing taxes by more than 2 trillion Yen by lowering the effective corporate tax rate. It also insisted on introducing tax breaks that encourage investors to place their funds in capital markets. The document also proposes setting up a new Financial Function Early Strengthening Law at this fall's extraordinary Diet session and reinjecting public funds into banks. (September 14, the Nihon Keizai Shimbun)

The government should abolish corporate taxation as part of tax reform aimed at revitalizing the economy, private think tank 21st Century Public Policy Institute argued in its proposal. Instead, the institute calls for the creation of a system in which the majority of corporate net income is passed on as dividends to shareholders. The introduction of a taxpayer identification number system is a prerequisite for the establishment of such a system; the government knows the exact amount of each person's income. To provide a foundation for its steps to boost the economy, the government "must devise measures that strengthen companies and others on the supply side," the institution said, urging the government to abolish corporate taxes. Under the current system, corporate income is taxed and so are the dividends received by shareholders, which are tapped from corporate net income. This is causing "double taxation," the think tank points out. (September 14, the Nihon Keizai Shimbun)

The government will facilitate early-stage tax cuts. The move toward pushing the tax-cut schedule forward is being spurred by the stock market downturn and the growing view that Japan must devise an anti-deflation package before a meeting of Group of Seven central bankers and finance ministers scheduled at the end of the month. The possibility of an early implementation of tax cuts to encourage corporate R&D, as well as an overhaul of the property and securities tax codes, is expected to be at the top of the discussion agenda. However, the dominant Liberal Democratic Party's tax research commission is already voicing opposition to the idea of acting early. The work of hammering out the details of the more than 1 trillion Yen in front-loaded tax cuts sought by Prime Minister Koizumi has bogged down, impeded by a wide gulf between the government's Tax Commission and the influential Council on Economic and Fiscal Policy. Finance Minister Shiokawa made an attempt to jump-start the process under his own leadership by declaring his intention to present a plan of workable tax cuts this month. Spurred by the fact that the revitalization of Japan came up as a topic in discussions between Koizumi and U.S. President Bush, Shiokawa tried to prepare a rough blueprint of tax cuts for the G-7 meeting. The ruling coalition is already calling for early implementation of tax cuts as a centerpiece of anti-deflation policy. It is pressuring the government to finalize the details of several key proposals, tax cuts designed to encourage R&D and capital spending by companies, as well as a reduction in gift taxes aimed at encouraging lifetime transfers of wealth from the elderly, in time to submit legislative revisions to an extraordinary Diet session this fall. The government envisions submitting the required amendments for R&D tax relief and a gift tax cut to the regular Diet session early next year and implementing the measures retroactively to Jan. 1. The possibility is also growing that the revised securities tax code slated to take effect in January will be amended during the extraordinary Diet session. The new rules are so complicated that concerns are emerging that investors will end up shunning the stock market. The real roadblock to accelerating the tax cuts and revisions is that a majority inside the LDP's powerful Research Commission on the Tax System are strongly opposed to altering the discussion timetable. The commission wants to stick to the normal schedule for starting full-scale discussions in November and producing a package in mid-December. (September 14, the Nihon Keizai Shimbun)

Finance Minister Shiokawa said that his ministry "intends to formulate a package of (tax-cut) measures by the end of this month." Prime Minister Koizumi has instructed the ministry to work out concrete tax cut measures to be implemented ahead of other tax reforms to stimulate the Japanese economy. Shiokawa said that the ministry would expedite its work on the package because ", as some people fear the economy will deteriorate further on a sharp drop in stock prices." His remarks suggest that the package is likely to focus on policy-oriented tax breaks, such as those designed to encourage investment in research and development. With regard to a reduction of corporate income tax rates, the minister he said, "It is doubtful whether such a step will really help revitalize the economy, as those who are urging the need for such a move are (the heads of) businesses making big profits." (September 13, the Nihon Keizai Shimbun)

Prime Minister Koizumi instructed the Finance Ministry to examine the possibility of wider tax cuts in response to a proposal by private-sector members of the Council on Economic and Fiscal Policy for tax cuts worth more than 2.5 trillion Yen at an early date. The council's four members from the private sector, including Ushio Inc. Chairman Jiro Ushio, proposed tax cuts worth more than 2.5 trillion Yen as a part of anti-deflationary measures to deal with sliding stock prices. A top economic policy-setting panel asked Finance Minister Shiokawa to exert this leadership in this matter. Koizumi is expected to unveil basic policies on his much-touted structural reforms on Sept. 20. It was also agreed that the council will compile a new package of anti-deflationary measures in October. The ruling coalition parties proposed the purchase of exchange-traded funds (ETFs) with public money and by the Bank of Japan as one of six measures to combat deflation. The ruling parties also called for the disposal of nonperforming loans by reinforcing the bad loan buyback function of the Resolution and Collection Corporation. Koizumi indicated that measures to stabilize the financial sector and tax system reform will be integral to a package of anti-deflationary measures. Proposals made by the private-sector members of the Council include: 1. tax cuts of more than 0.5% of the nation's gross domestic product, or about 2.5 trillion Yen. These would be brought about lowering the corporate tax rate and tax cuts through policy measures. 2. Temporarily nationalizing banks in bad financial shape, injecting public funds into them or taking other actions to turn them around. Concerning tax cuts at an early date, Koizumi is willing to carry out tax cuts worth more than 1 trillion Yen during the next fiscal year, but the Finance Ministry objected to further tax cuts, proposing that cuts be made up for by tax increases over several years. The council's private-sector members also urged the Bank of Japan to further relax its monetary policy. However, Bank of Japan governor Hayami stopped short of giving a clear answer saying that the Bank of Japan will consider anti-deflationary measures within the frame of the Bank of Japan Law. (September 10, the Daily Yomiuri, the Japan Times, the Yomiuri Shimbun, the Nihon Keizai Shimbun)