Tax

September 2003

The Financial Services Agency (FSA) will push revisions in securities tax code and start negotiations with the Ministry of Finance to review the securities tax code as part of fiscal 2004 tax reform. As a way to encourage more individuals to invest in stocks and revitalize the stock market, the FSA aims to introduce new tax breaks, and create an inheritance and gift tax exemption, among other measures. With the stock market turning upward, the MOF is not receptive to the FSA's proposals. FSA aims to make capital gains and dividends tax-free for a certain amount of investment in stocks. This idea is similar to the existing tax exemption on interest income for the elderly and is modeled on the personal equity plan (PEP), which was introduced in the U.K. in 1987 by then-Prime Minister Margaret Thatcher. The PEP succeeded in attracting many individual investors into the stock market. Personal financial assets are held in large proportion in deposits and savings in Japan. Therefore, introducing the tax exemption for stock investment will likely encourage people to put their money in stocks rather than savings accounts, according to the FSA. Some securities companies are worried that they are not equipped with computer systems capable of dealing with such a tax system change; managing customers' accounts opened at several brokerages is considered difficult. As part of fiscal 2003 tax reform, the government introduced a system designed to integrate inheritance and gift taxation, allowing individuals to deduct the gift tax that they paid upon receiving wealth from their parents prior to their death from the inheritance tax that the individuals have to pay upon the death of their parents. This system gives individuals a tax exemption of Y25 million, but the figure increases by Y10 million if the individuals who received wealth from their parents use the money for buying and renovating homes. Similarly, these individuals should be given an additional tax exemption of several million yen if they use the money for investing in stocks, according to a proposal that the FSA will present to the MOF. The FSA's proposal is expected to encourage transfers of wealth from the elderly to younger generations and leave people with more money for stock investments. But analysts point out that the proposal could draw criticism from those who consider it an unfair measure limited to stock investment. The FSA will also ask the MOF to simplify taxation on stock investment trusts. It hopes to allow investors to offset losses and profits from trading stock investment trusts and offset stock capital gains with losses from trading stock investment trusts. The agency will not be able to propose drastic measures to the MOF this year. Since large-scale tax reform was implemented in fiscal 2003, many government officials are reluctant about calling for further drastic changes. The MOF is also cautious about overhauling the securities tax code again, and is concerned that doing so every year "could only confuse investors. Revising the securities tax code further is essential to nurture capital markets. Securities tax reform could come into focus again depending on stock price movements and political developments in this fall and beyond. (September 12, the Nihon Keizai Shimbun)

The government is reviewing to slim down the size of its influential Tax Commission in an effort to enhance the quality of the debate on complex tax issues. The commission's current three-year term runs out soon, giving the government an opportunity to reduce the number of its members from 29 to about 20. The government seeks a smaller, more expert group in order to stimulate a probing debate on tax reform. At this point, the current chairman of the commission, Hiromitsu Ishi, the president of Hitotsubashi University, is likely to assume the chairmanship of the newly formed body. The decision will be made by an internal vote. Takashi Imai, the honorary chairman of Nippon Steel Corp., and Yoichi Morishita, the chairman of Matsushita Electric Industrial Co., will step down. Meanwhile, discussions are taking place to name Nippon Steel Chairman Akira Chihaya to the new commission. The prime minister will appoint the new members of the commission following the election for the presidency of the Liberal Democratic Party on Sept. 20. The big tax reform issues facing the new commission will be overhauling the various deductions and exemptions in individual income taxation as well as a hike of the nation's consumption tax.　(September 10, the Nihon Keizai Shimbun)