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Japan's Ruling Coalition Presents 2007 Tax Reform Plan

by Mary Swire,, Hong Kong

18 December 2006

Japan's ruling coalition has agreed a package of tax reforms for the 2007/8 fiscal year which will result in about 1 trillion yen (US$8.5 billion) in tax cuts, mainly for businesses, to help support the economic recovery, although lawmakers avoided the issue of corporate and consumption taxes.

As expected, the ruling Liberal Democrats ignored the advice of Prime Minister Shinzo Abe's tax commission and have proposed to extend tax breaks for individual investors in the stock market for an additional year. This means that investors will continue to pay 10% on capital gains until the end of 2008, and 10% on dividends until the end of 2009. The ruling bloc also aims to introduce new measures that would enable investors to use stock trading losses to offset profits from other financial products in the fiscal year 2009/10.

However, the bulk of the measures concerned business taxation, and perhaps the most significant of them was the decision to increase the depreciation limit to 100% of the cost of equipment investment, up from the current level of 95%. Companies will also be able accelerate the depreciation period for purchases of certain items to five years instead of the current 8 to 10 years. This will save businesses an estimated 600 billion yen.

The plan also calls for modifications to the triangular merger tax rules by allowing tax deferrals on capital gains where a merging company only uses its parent company's shares to buy a Japanese target firm, as long as the parent company wholly owns the merging company in Japan. This will allow tax to be deferred when the Japanese subsidiary of a foreign parent uses the parent's shares to buy a Japanese firm.

However, restrictions apply to paper companies attempting to buy into Japanese firms, or parent companies which are established in tax havens. Non-resident investors in Japanese firms which receive shares in the foreign parent company will also be subject to tax.

There are also tax breaks for start-up and small family-owned businesses. Investors in start-ups will qualify for temporary preferential tax treatment, halving the amount of tax paid on share sales until the end of March 2009. Meanwhile, small family businesses with a capitalisation of less than 100 million yen will be exempt from tax.

However, hopes by business for a cut in the rate of corporate tax were dashed, while a decision on the contentious issue of a future rise in the rate of consumption tax was deferred until 2007.

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