On the 9th of December 2010, the Nikkei Keizai Shimbun reported on a meeting held the previous day of all members of the Japanese Tax Commission (the ‘JTC’). The timing of the meeting reflects the approaching end of year deadline to finalize plans for 2011 tax reform.
The JTC discussed the different approaches that had being proposed to cover the shortfall in tax revenues that had been identified if the Japanese corporation tax rate was lowered by 5 percentage points. Such a reduction in the corporation tax rate was a key proposal in the economic recovery plans of the Japanese ruling party.
Regrettably however, measures identified to date to close the above shortfall in tax revenue (discussed below) would account for only an estimated one third or so of the amount required.
The Nikkei reported that discussions around 2011 tax reform where reaching a finale, and that views were being expressed by the different Ministries around appropriate proposals to reduce the shortfall with increasing force.
The Nikkei article included a table of proposed revisions to the tax law to help cover the cost of the 5 percentage point reduction in the corporate tax rate. The two leading proposals were:
Reform to the rates of accelerated tax depreciation. Rates of depreciation on the purchase of plant and equipment would be revised from being the “fastest in the world” to rates comparable with the UK or the US.
Restrictions on the use of carry forward tax losses. Only 80 per cent of the taxable income of a year in which the carry forward loss was used could be offset by such losses, with corporation tax being payable on the remaining 20 per cent of taxable income. This measure would apply only to large companies.
The following additional proposals had been made:
Limit the offset of carry forward tax losses to 50 per cent of the taxable profits of a future year (rather than the 80 per cent figure of the main proposal).
A reduction in the tax credit available for research and development expenses.
Bad debt reserves: Limit the tax deductibility of prescribed tax deductible bad debt reserves (limit not applicable to financial companies).
Limitations on tax deferral related to real estate used for certain business purposes: The system that allowed deferral of taxation of gains arising from the sale of real estate when the proceeds of sale are reinvested in new real estate would be revised.
The Nikkei article went on to discuss the views of the Japanese Ministry for Economics Trade and Industry (‘METI’) and Finance Ministries. The article reported that, in contrast to METI, which wanted an overall tax cut, the Finance Ministry wanted to ensure that at least 80 per cent of the remaining tax shortfall arising from a 5 percentage point reduction in corporation tax rates was borne by enterprises.
The article gave more details about the METI proposals. 2007 reform of the tax depreciation system allowed 25 per cent of the cost of plant and equipment to be written of for tax purposes in the year of acquisition whereas the 2011 proposal will limit such write off to 20 per cent. METI’s view was that accelerated to depreciation encouraged technical development and quick response to innovation. These measures where of most relevance to chemical, electrical generation and equipment manufacturing companies.
Although proposals would limit the deductibility of carry forward tax losses to either 80 per cent or 50 per cent of following period of taxable profits, the time limit on the period that such losses could be carried forward would be extended from the current seven year period. This would be an important concession for the financial sector.
Changes to the credit for research and development expense systems would reduce the limit of the amount of credit from 30 per cent of corporation taxes to 20 per cent.
Measures aimed at the non business sector to preserve tax revenues also remain an issue. Proposals here included and increase in inheritance tax rates and the ending of preferential tax treatment applied to securities investment for individuals.
The article noted that proposals to preserve overall tax revenues had caused a great deal of debate within the government, with the outcome still unclear.