Private Equity Firms Warn Japan Against New Tax Proposals

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

27 January 2005

According to a report in the Financial Times, a group of ten private equity firms have joined forces to lobby the Japanese Ministry of Finance on new tax rules that they say will threaten Japan’s standing in the international capital markets.

The FT reported that a “strongly worded letter” issued to the Japanese government by the firms, which include Carlyle Group and JP Morgan Partners as well as local companies, warns that new proposals increasing capital gains tax for private equity companies “will risk reducing foreign investors’ appetite to invest in Japan”.

The firms went on to add that the tax measures are a direct contradiction of Prime Minister Junichiro Koizumi’s pledge to increase foreign direct investment as a proportion of GDP to 2.4% by 2008.

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.

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.

According to the Wall Street Journal, total private equity and venture capital investment in Japan tripled in 2003 to $7.2 billion, and 2004 is also expected to have been a strong year for investment in the sector.

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