Japan To Press Ahead With Tax On Foreign Funds

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

08 February 2005

The Japanese government intends to forge ahead with a proposal that will impose a new tax on foreign private equity funds, despite strong protests from the industry that the move could reduce foreign investment into Japan.

According to the Financial Times, Japan’s tax bureau has stated that it will introduce an amendment into parliament later this month that, if approved, will result in a 20% withholding tax being imposed on foreign funds.

Officials hope that the tax could then be in place by April.

It is thought that the tax bureau's plans have come in response to profits made by US private equity firm Ripplewood from the listing of Shinsei Bank. Ripplewood did not pay capital gains tax on the transaction in Japan, contributing to public discontent over alleged abuse of the domestic tax system by foreign firms.

The FT reported last month that a group of domestic and international companies, which includes Carlyle Group and JP Morgan Partners, have issued a “strongly worded letter” to the Japanese government advising against the proposals and warning that the tax “will risk reducing foreign investors’ appetite to invest in Japan”.

One member of the group predicted that the tax proposals could reduce returns on investment in Japan by 5% per year and would make other private equity markets in the region, such as China, India and Korea, more attractive markets for FDI.

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