Japan Lines Up Tax Break For Securities Losses

by Mary Swire, Tax-News.com, Hong Kong

25 March 2009

The Japanese government is expected to clarify rules on tax deductions to allow more companies to deduct losses on securities holdings.

According to a report by the business daily Nikkei, the tax break could form part of a larger package due to be announced by the government in the coming days aimed at stabilizing the financial markets.

Presently, Japanese companies are allowed to include securities valuation losses as a deductible expense in their tax filings, but only in limited circumstances. Usually, this means that the tax office will only accept such deductions if the security has declined substantially in value and has little chance of recovering, but the rules are not clear, and such claims are often rejected. It is expected that the forthcoming change will clarify the rules to the benefit of companies nursing heavy losses in their securities holdings.

The proposal comes as the Japanese leadership considers plans for a third fiscal stimulus package following the release of a bleak economic forecast by the International Monetary Fund, which foresees the Japanese economy contracting by 5.8% in 2009. Finance Minister Kaoru Yosano said at the weekend that expenditure of at least JPY20 trillion (USD208bn) will have to be injected into the economy with this third stimulus, which looks likely to consist mainly of new spending rather than tax measures.

In January, Japan's Ministry of Finance unveiled several key tax reforms which are due to be put in place during fiscal year 2009 as part of ongoing efforts to stimulate the economy. According to the MoF, the 2009 tax reforms "will take appropriate measures regarding taxation of housing and land, taxation of corporations, taxation of SMEs, inheritance taxation, taxation of financial and securities transactions, international taxation, and motor vehicle taxation."

These reforms will, among other measures, extend the application of the current reduced tax rate of 7% for dividends and capital gains on listed shares by 3 years, lower the reduced corporate tax rate for SMEs from 22 to 18% for 2 years and introduce several new tax breaks for homeowners.

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