Japanese FSA Proposes CGT Cut For Stock Transactions

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

30 August 2001

The Japanese Financial Services Agency has requested a 16% cut in the capital gains tax on stock transactions in order to entice retail investors to the floundering stockmarket, it was revealed recently.

The measure was outlined when the agency presented its budget requests for fiscal 2002 to the ruling coalition parties. The FSA also proposed that individual investors be allowed to deduct stock market losses from their taxable income for up to five years, and called for tax incentives on stock related investment trusts and exchange traded funds.

The proposals are aimed at implementing the structural reforms called for by Prime Minister Junichiro Koizumi, who advocated a move away from bank deposits to the stock market in order to stimulate the notoriously unstable Japanese economy.

At present, the country has a two tier capital gains tax system whereby the tax on stock transactions is paid either as a 1.05% withholding tax on individual sales of shares, or as a 26% tax on total gains on an annual basis. Although the withholding option is set to be abolished in 2003, the FSA has recommended its extension beyond that period, reasoning that over 70% of investors currently choose that option.

As a compromise, the regulatory body suggested that the withholding option could be renewable on a yearly basis, and that the rate could be raised to 2%. 'If the option is abolished, it could cause a disturbing situation in the market,' an FSA official was quoted as saying shortly after the proposals were announced. However, the agency pointed out that those investors who chose the reduced yearly rate after the 2003 deadline would not be permitted to return to the withholding option.

The FSA also announced that it is seeking to expand and make permanent tax advantages for 'buy and hold' individual investors.

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