Round up of Ministry Proposals for 2011 tax reform

September 7, 2010  |  News, Policy

Government policy

Japanese Government Ministries have completed submissions outlining their hoped for changes in 2011 tax legislation. These are collated on the Japanese Cabinet Office website (links in Japanese).

As reported earlier the Ministry of Economics, Trade and Industry supports a reduction in the overall corporate effective tax rate and a continuation of reduced taxation for Japanese small and medium sized businesses.

The Ministry of Finance (‘MOF’) (link in Japanese – MOF tax system homepage) favors the introduction of measures specifically to facilitate Islamic Finance.  These measures could include the set up of special purpose trusts which would issue beneficiary certificates that would have bond like returns compliant with relevant Islamic law where dividends on the beneficiary certificates received by foreign investors could be free of Japanese tax.

The MOF also proposed a more fundamental reform of Japanese international tax principles relating to the taxation of Japanese branches of foreign companies, moving from taxing foreign branches on all of their Japan source income to taxing them only income attributable to their Japanese branch.  Such a measure would most likely be of benefit to a non-treaty protected foreign investor (most treaties already adopt the proposed attribution principle) who has a Japanese branch but who also invests through their head office or other non-Japanese branches in other assets that give rise to Japan source income.  At the present time Hong Kong companies with a Japanese branch would typically fall within this category of foreign investor, although the Hong Kong and Japanese authorities are in the process of negotiating a tax treaty which would might also address this issue if the final version of the treaty also adopted an attribution principle.  Various 2011 MOF proposals can be found here (link in Japanese).

The Ministries for the Environment and for Agriculture, Forestry and Fisheries both hoped to see the realization of steps to counter global climate change in 2011 through the extension of taxes across the full range of fossil fuels – gasoline, light oils, heavy oils, aero plane fuel, natural gas, LPG and coal.  The Environment Ministry also hopes to see the establishment of a system of tax preferred green investment.

The Japanese Cabinet Office has been examining reform to the tax system to allow donations to certain recognized public support organizations (‘NPOs’) to be tax deductible and had issued a preliminary report on this topic (link in Japanese – 市民公益税制PT中間報告書).  One requirement of the proposed system is for an NPO to pass a public support test, where, in concept, at least one fifth of its total income was from donations or government grants (with the remainder potentially being from business activities of the NPO).

The Education Ministry proposes the establishment of a Japanese ‘Planned Giving Trust’ which would allowed tax preferred donation through a trust established to benefit defined non profit seeking groups.  The Ministry also hopes to see tax deduction for charitable donations being permitted through the year end tax adjustment process, which would allow the more immediate tax relief at source for such donations.

The Ministry for Welfare and Labor proposes the expansion of the tax credit system for experimental and research costs.  The same Ministry also proposes measures to allow the extension of time for payment of inheritance or gift taxes arising on the succession of certain medical businesses.

Finally the Land and Transport Ministry hopes for the establishment of a tax system that would support the revitalization of large cities, an extension of tax deduction for property renovation and reductions on stamp duty on contracts for the sale of real estate or works contracts.

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