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TAX

Net Taxation On Financial Income

The net taxation on financial income is designed to aggregate profits on stocks and investment trusts, dividends, and other gains and losses arising from various financial transactions and tax them -- if taxpayers are left with profits on a net basis -- accordingly. Individuals are currently allowed to offset profits with losses stemming from trading stocks and stock investment trusts but not for dividends and interest. The government has allowed individuals to aggregate profit and losses on only a limited range of financial products because the method of taxation differs from product to product. For example, income from interest on deposits is subject to a withholding tax, while taxpayers must, in principle, report stock capital gains to tax authorities by themselves.

Permanent Tax Cut

A measure, introduced in 1999 as part of an economic stimulus package under the Obuchi cabinet, that sharply lowered the tax burden on individuals and companies. For income taxes, it lowered the maximum tax rate, introduced the flat-rate tax reduction, and increased the exemption for dependents. The annual tax savings from the flat-rate reduction was capped at 250,000 yen for the national income tax and 40,000 yen for the regional residence tax. While it was a temporary measure put in place until the tax system could be overhauled, the cut was called "permanent" in order to boost the impact of the rate reductions. The economic recovery, pension reform, and the shifting of taxation authority from the central to regional governments under the so-called trinity reform are among the reasons the permanent tax cut is being reviewed.

Property Tax

In Japan, property tax is assessed annually by municipal, town or village authorities on land, housing and other fixed properties and paid by the owners listed in local property registers the previous January 1. The tax constitutes a major source of revenue for local bodies and is relatively free from year-to-year fluctuation.Valuations, which form the basis of property tax assessments, are reviewed every three years. The standard property tax rate is currently 1.4%, but local authorities are free to set rates at any level up to 2.1%. There are special exceptions, such as the appraisal of small-lot residential land at one-sixth the normal assessed value. Property tax is usually paid in four installments, in accordance with tax notices issued by the assessing authorities.

Ruling Coalition Outline for Tax Reform

The three ruling coalition parties - the Liberal Democratic Party, New Komeito and New Conservative Party - will draw up an outline for fiscal 2002 tax reform by mid-December. The tax reform package, which is expected to include introducing a consolidated corporate taxation system and abolishing/reducing special tax privileges, will be reflected in legislation to be submitted to the Diet in January by the Ministry of Finance. In the past, an outline prepared by the LDP's Research Commission on the Tax System determined tax reform for the following fiscal year. The situation remained unchanged even after the formation of a coalition government by the LDP, the Social Democratic Party and New Party Sakigake in 1994. In late 2000, at New Komeito's insistence, the three parties decided to jointly map out a fiscal 2001 tax reform package, though the LDP also separately prepared its own proposals.

Ruling Parties' Tax-System Conference

The tax system conference of the Liberal Democratic Party, New Komeito and New Conservative Party is an annual event where the ruling parties make tax reform policy decisions. Panel members discuss and coordinate opinions and recommendations based on a draft report written around November every year by the LDP's Research Commission on the Tax System for the following fiscal year. The panel tends to convene almost simultaneously when subcommittees of the LDP's panel meet to discuss specific issues, with the aim of reflecting opinions by the two coalition partners. Japan's tax system reforms are now separately discussed by three entities -- the Council on Economic and Fiscal Policy and the Tax Commission, both under the auspices of the government, and the LDP's panel. The LDP's panel, however, has been the ultimate decision-making body. Even this year, with Prime Minister Junichiro Koizumi expressing his resolve to implement drastic tax system reforms, the LDP panel has eventually taken the lead. The government will present its tax system reform outline on Dec. 19 after the tax system reform outline of the three ruling parties is announced on Dec. 13.

Simpler Method Of Calculating Consumption Tax

Small businesses are allowed to use a simplified method to calculate the amount of consumption tax that is to be paid to the government. Calls are growing, however, for a revision to this system since it often enables the businesses involved to pocket part of the consumption tax paid by shoppers on most purchases. The amount of consumption tax paid by businesses to the state is calculated by subtracting the value of the tax a company paid when procuring products from the tax they receive when selling products to consumers. Large companies are required to use their total procurement costs to make the calculation. Firms with annual sales of less than 200 million yen are, however, permitted to assume 50-90% of their sales as procurement costs and calculate their tax payments to the government based on this figure, with actual purchase costs often less than assumed costs.

Tax Allocation to Local Governments

The central government provides grants to local authorities to make up the difference between their revenue and expenditure and ensure a certain level of administrative service throughout Japan. A set percentage of five national taxes is automatically allocated as grants to local governments: 32% for personal income and liquor taxes, 35.8% for corporate tax, 29.5% for the consumption tax and 25% for the tobacco tax. Under the current system, national taxes account for some 60% of total tax revenues, while local levies contribute the remaining 40%. Local government expenditures, however, exceed tax revenue provided by the central government, so Tokyo offsets the revenue-expenditure gap through additional tax and other grants, which local authorities can spend only for specific purposes. But critics say these payments allow Tokyo to exercise significant power over local governments, hindering their autonomy.

Tax Breaks To Prompt Bad Loan Disposals

The Japanese government and the ruling coalition parties are considering introducing measures to ease the tax burdens of banks to help them speed up the disposal of nonperforming loans. The Financial Services Agency and ruling parties are seeking to allow banks to carry over their losses and deduct the loss-carryforwards from their profits for a longer period than the current five years. They are also eyeing reinstituting the tax system that enables corporate taxes to be refunded when companies post losses, a policy that has been suspended since fiscal 1992. However, a senior official at the Liberal Democratic Party's tax panel said, "Such tax breaks for financial institutions are just a different form of public fund injections." From the late 1970s through the early 1990s, the U.S. made it possible for taxes paid in the past 10 years to be eligible for a refund, compared with the present two years. However, the tax incentive only covered financial institutions. The U.S. currently allows companies to carry over losses for 20 years, while U.K. and German companies are allowed to carry forward losses for an unlimited time period.

Tax Conventions

Tax conventions are aimed at helping businesses and investors avoid double taxation and addressing other taxation matters involving two countries. As of November, Japan had signed 45 such treaties involving 55 nations. They cover more than 80% of foreign direct investment. The government believes that tax conventions serve to encourage investment and promote economic growth in the form of business expansion and job creation. These days, the central issue in revising tax accords is lowering tax rates applied to dividends, interest and other income from investment. Meanwhile, Japan is calling on developing nations to abolish tax-sparing credits, which allow Japanese companies to reduce tax payments at home by taking advantage of tax incentives granted to subsidiaries operating overseas.

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