Japanese Tax Reform Package Takes Shape

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

09 January 2002

Through the swirling mists of the Japanese policy formation process, the outlines of 2002's long-discussed tax reform package is gradually beginning to take shape.

The introduction of a system of consolidated taxation for groups now seems highly probable, having been sanctioned by Japan's ruling coalition, while the Ministry of Finance yesterday announced plans to reduce taxes imposed on the retained earnings of family-run businesses.

Proposals for the new group taxation system involve a 2 percentage point surtax for firms who adopt the system for two years on top of the current 30% group corporate tax rate. The package also contains plans to introduce a system in which securities companies will be obliged to file tax returns on behalf of individual stock investors when the current withholding tax system on stock sales is withdrawn in January 2003.

For small and midsize firms with less than 100 million yen (US$752,779) in capital, the ministry aims to cut by 5% taxes on taxable retained earnings and for certain small firms and start-ups, it will extend by two years a tax break that was initially scheduled to end in March. Currently, all companies pay a 10-20% progressive tax on retained earnings.

There is no consensus however on the Government's proposed changes. The Japanese Kiedanren (employers' association) almost immediately called for the government to drop the additional business tax designed to coincide with the introduction of consolidated group taxation, saying it feared that this additional tax will discourage businesses from adopting the consolidated tax system.

Further changes are still being discussed, and won't necessarily be in the direction of reduced taxes. The head of Japanese Tax Commission, Hiromitsu Ishi, has announced that he is in favour of broadening the country's tax base rather than cutting taxes in order to stimulate Japan's ailing economy, accusing taxpayers of using exemptions and deductions to 'hollow out' the tax system. He wants entry levels to tax bands reduced for individuals and companies.

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