• R&D tax credit and IT investment incentives to improve competitiveness of the Japanese Industry,
• Measures to 'integrate' inheritance and gift taxes from the viewpoint of facilitating the transfer of assets from the older generation (i.e. parents) to the younger generation (i.e. children), and tax rate cuts,
• Reduction and simplification of taxation of financial transactions and stocks for promoting the shift 'from deposits to investment',
• Tax rate cut of Registration and licence taxes (transaction tax) for promoting utilization of lands,
• Abolish 'special allowance' for spouse (exceeding the amount of 'allowance for spouse') from the viewpoint of integrating numerous personal deductions,
• Reducing the tax exempt threshold (¥30 mil) and the eligible vendors for the simplified regime (¥200 million) of consumption tax in order to improve trust and transparency of the system,.
• Review liquor and tobacco taxes, and
• Other relevant measures.

These measures will result in tax reduction amounting to about 1.5 trillion yen* in fiscal 2003, and achieve revenue-neutral tax reforms over several years.

Note: The permanent tax reductions (national and local) for individuals and corporations, which substantially exceed 6 trillion yen (introduced in fiscal 1999) will continue in FY2003.

R&D Tax Credit (proportional)

A new proportional R&D tax credit shall be introduced as an alternative to the existing incremental R&D tax credit.

• For R&D activities conducted by corporations, a proportional R&D tax credit of 8% plus 2% (applicable only for FY 2003 to FY2005) of the amount of R&D expenditure shall be introduced.
  • For corporations with a higher proportion of R&D expenses, up to 2% of additional tax credit shall be applied.
• For R&D activities conducted by SMEs, a proportional tax credit of 12% plus 3% (applicable only for FY 2003 to FY 2005) shall be introduced.
• For R&D activities conducted jointly by academic, business and government circles, or R&D commissioned by the government, in order to promote basic studies or innovative studies, a proportional tax credit of 12% plus 3% (applicable only for FY 2003 to 2005) shall be introduced.
• The scope of qualified R&D expenses shall include such expenses as labor, non-personnel expenses and depreciation for machinery and buildings and expenses of R&D activities conducted overseas.
• The amount of the R&D tax credit shall not exceed 20% of the amount of corporation tax.
• The amount of the R&D tax credit exceeding the ceiling may be carried-over for one year under certain conditions.

Investment Incentives (IT)

 Since IT investment would create immediate demand and promote improved industry competitiveness in the mid to long term, the investment incentives outlined below shall be applied for FY2003 to FY2005

• Scope of qualified IT investment to include both hardware and software
• Certain expenses for leasing may be eligible
• Corporations may elect tax credit (10%) or special allowance for accelerated depreciation (50%)
• The amount of tax credit shall not exceed 20% of the amount of corporation tax.
• Tax credit exceeding the ceiling may be carried-over for one year under certain conditions.

Accelerated depreciation for R&D investment

• In addition to the R&D tax credit (above), a special allowance (50%) shall be applied for R&D investment in FY2003 to FY2005.

• Special additional tax measures to promote a shift from deposits to investment (stocks) will be taken:
  • Dividends of stocks and distribution from publicly traded stock investment funds will be taxed at the reduced rate of 10% by withholding for five years²⁾ (see below).³⁾
  • Capital gains of listed stocks will be taxed at the rate of 10% for five years⁴⁾.
• From the viewpoint of creating simplified taxation of financial assets to ensure neutrality among them, taxation of stocks and publicly traded stock investment funds shall be streamlined and the usability of the “special account” for stocks shall be improved on a permanent basis.
  • Dividends of listed stocks will be taxed (by election) at the rate of 20% by withholding (after the running of five yeas mentioned above).
  • Loss arising from publicly traded stock investment funds can be aggregated with capital gain, if any, of stocks.
  • A new type of special account system will be introduced under which tax will be paid by withholding and no filing of returns will be required.
• Exemption from withholding tax on interest of qualified public bonds and corporate bonds (e.g. public bonds traded through the 'furiketsu' clearing system) received by corporations with capital of Y100million or over.  (Applicable for interest of qualified bonds arising from the period of interest calculation starting on or after 1 April 2003).

• Higher rate (12% plus 3%) of R&D tax credit (mentioned above)
• Application of an additional tax on retained earnings of family corporations (i.e. closely held corporations) shall be suspended for SMEs with low levels of equity capital for FY2003 to FY2005.
• The scope for immediate write-offs for small amount depreciation assets purchased by SMEs shall be broadened from Y100, 000 to Y300,000 for FY2003 to FY2005
• Investment in qualified 'ventures' may be deducted from the capital gain of stocks of the same taxable year.

• A new system to calculate gift and inheritance taxes at the time of inheritance (applied by election) shall be introduced by deducting the amount of previously paid gift tax from the total tax amount calculated on the total amount of gifts and inheritance property.

  -	Qualified gifts: The new system will be applied for gifts from parents of age 65 and older to children of age 20 and older
  -	Exemption threshold at the time of receiving gifts: Gifts not exceeding Y25 million (in total) will be exempt from the tax objected property.
  -	Tax rate at the time of receiving gifts: Prepayment of gift tax will be charged at the rate of 20% on the amount exceeding the exemption threshold.  The amount of gift tax will be treated as prepayment of tax against inheritance tax at the time of inheritance (refundable).

Additional exemption for residential housing

• A tax exemption threshold of Y35 million will be applied for gifts from parents (no age qualification applies) to children (20 years and over) for the purpose of purchasing residential housing until CY2005.

Tax rate cuts

• The top rates of inheritance tax (currently 70%) and gift tax (70% also) will be both reduced (to 50%)⁵⁾.
• The number of inheritance tax brackets (currently nine brackets) and gift tax brackets (thirteen brackets) will be both reduced (to six)⁴⁾.

• Petroleum tax on LPG and LNG will be increased, and shall be imposed on coal.  Promotion of power-resources development tax (PPRDT) shall be reduced.

• Among allowances applicable for spouses, the additional amount (maximum of Y380,000) shall be abolished from CY2004.

• Diminish the exemption for small vendors to the level one-third of the current level:  Reduce the tax exemption threshold for eligible small vendors from Y30 million (current level) to Y10 million.
• Scale down the simplified tax scheme (i.e. the use of the deemed ratio for a purchase): Restrict eligibility for the application of the simplified tax scheme by lowering the ceiling from traders with annual sales of Y200 million or less to those with annual sales of Y50 million or less.
• Obligation to show net price: Vendors shall be obliged to show the net price (cost plus tax) of goods and services

• Difference in tax rates on similar types of liquors shall be reduced through adjusting tax rates on low-malt beer ('happoshu') wine, and others.

• Taxpayers: corporations with capital of Y100million and over.
• Tax base: Changing the tax base from the profits of corporations to a mix of profits and capital and other value added items such as wages, interest and rentals.  Special measures to reduce tax burden for corporations with high proportion of wages in their value added and those with significant amount of capital shall be taken.
• Tax rates:  income (7.2%), value added (0.48%), capital (0.2%)
• Applicable for taxable year beginning after FY2004.

FY2003 Tax Reform (Initial Year)
Tentative estimation of revenue changes made by the reform
(Inland Revenue, National)