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FY2003 Tax Reform(Main Points)

FY2003 Tax Reform (MainPoints) 1)

Ministry of Finance
19 December 2002

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In order to establish a desirable tax system toachieve sustainable invigoration of the economy and society, while taking intoaccount the current economic and fiscal environment, the FY2003 tax reform willtake the following measures outlined below:
  • R&D tax credit and IT investment incentives to improve competitivenessof the Japanese Industry,
  • Measures to 'integrate' inheritance and gift taxes from the viewpoint offacilitating the transfer of assets from the older generation (i.e. parents) tothe younger generation (i.e. children), and tax rate cuts,
  • Reduction and simplification of taxation of financial transactions andstocks for promoting the shift 'from deposits to investment',
  • Tax rate cut of Registration and licence taxes (transaction tax) forpromoting utilization of lands,
  • Abolish 'special allowance' for spouse (exceeding the amount of 'allowancefor spouse') from the viewpoint of integrating numerous personal deductions,
  • Reducing the tax exempt threshold (¥30 mil) and the eligible vendors forthe simplified regime (¥200 million) of consumption tax in order to improvetrust 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 trillionyen* in fiscal 2003, and achieve revenue-neutral tax reforms over several years.

Note: The permanent tax reductions (national and local) for individuals andcorporations, which substantially exceed 6 trillion yen (introduced in fiscal1999) will continue in FY2003.

* About 1.8 trillion yen including local taxes
 
R&D Tax Credit / Investment TaxIncentives

From the viewpoints of strengthening the global competitiveness of Japanesebusinesses, a new framework for R&D tax credit and focused investmentincentives shall be introduced.

R&D Tax Credit (proportional)

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

  • For R&D activities conducted by corporations, a proportional R&D taxcredit of 8% plus 2% (applicable only for FY 2003 to FY2005) of the amount ofR&D expenditure shall be introduced.
    • For corporations with a higher proportion of R&D expenses, up to 2% ofadditional 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 andgovernment circles, or R&D commissioned by the government, in order topromote 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 aslabor, non-personnel expenses and depreciation for machinery and buildings andexpenses of R&D activities conducted overseas.
  • The amount of the R&D tax credit shall not exceed 20% of the amount ofcorporation tax.
  • The amount of the R&D tax credit exceeding the ceiling may becarried-over for one year under certain conditions.

Investment Incentives (IT)

 Since IT investment would create immediate demand and promoteimproved industry competitiveness in the mid to long term, the investmentincentives 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 accelerateddepreciation (50%)
  • The amount of tax credit shall not exceed 20% of the amount of corporationtax.
  • Tax credit exceeding the ceiling may be carried-over for one year undercertain 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.
 
Taxation of financial assets andstocks
 
  • Special additional tax measures to promote a shift from deposits toinvestment (stocks) will be taken:
    • Dividends of stocks and distribution from publicly traded stock investmentfunds will be taxed at the reduced rate of 10% by withholding for five years2) (seebelow).3)
    • Capital gains of listed stocks will be taxed at the rate of 10% for fiveyears4).
  • From the viewpoint of creating simplified taxation of financial assets toensure neutrality among them, taxation of stocks and publicly traded stockinvestment funds shall be streamlined and the usability of the "specialaccount" for stocks shall be improved on a permanent basis.
    • Dividends of listed stocks will be taxed (by election) at the rate of 20% bywithholding (after the running of five yeas mentioned above).
    • Loss arising from publicly traded stock investment funds can be aggregatedwith capital gain, if any, of stocks.
    • A new type of special account system will be introduced under which tax willbe paid by withholding and no filing of returns will be required.
  • Exemption from withholding tax on interest of qualified public bonds andcorporate bonds (e.g. public bonds traded through the 'furiketsu' clearingsystem) received by corporations with capital of Y100million or over. (Applicable for interest of qualified bonds arising from the period of interestcalculation starting on or after 1 April 2003).
 
Taxation of land

In order to promote utilization of lands, the tax rates of registration andlicense taxes (transaction tax) shall be reduced.
 

(Example)
Tax Rates Transfer by sales
Current 5%
FY2003 to FY2005 1%
After FY2006 2%
Note: The existing special tax measure applicable toland transfer only shall be abolished.
 
SMEs

Given the current severe economic environment surrounding SMEs, the followingmeasures shall be applied.
  • 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 ofequity capital for FY2003 to FY2005.
  • The scope for immediate write-offs for small amount depreciation assetspurchased by SMEs shall be broadened from Y100, 000 to Y300,000 for FY2003 toFY2005
  • Investment in qualified 'ventures' may be deducted from the capital gain ofstocks of the same taxable year.
 
Inheritance and gift taxes

Introduction of a new system for adjusting gift tax at the time of inheritancefrom the viewpoint of promoting the transfer of assets held by the oldergeneration (i.e. parents) to the younger generation (i.e. children).
  • A new system to calculate gift and inheritance taxes at the time ofinheritance (applied by election) shall be introduced by deducting the amount ofpreviously paid gift tax from the total tax amount calculated on the totalamount of gifts and inheritance property.
    - Qualified gifts: The new system will be appliedfor gifts from parents of age 65 and older to children of age 20 and older
    - Exemption threshold at the time of receivinggifts: Gifts not exceeding Y25 million (in total) will be exempt from the taxobjected property.
    - Tax rate at the time of receiving gifts:Prepayment of gift tax will be charged at the rate of 20% on the amountexceeding the exemption threshold.  The amount of gift tax will be treatedas 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 fromparents (no age qualification applies) to children (20 years and over) for thepurpose 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 ninebrackets) and gift tax brackets (thirteen brackets) will be both reduced (tosix)4).
 
Energy
 
  • Petroleum tax on LPG and LNG will be increased, and shall be imposed oncoal.  Promotion of power-resources development tax (PPRDT) shall bereduced.
Petroleum
tax
Current Oct. 2003-
Mar. 2005
Apr. 2005
to Mar. 2007
Apr. 2007-
on LPG 670/ton 800/ton 940/ton 1,080/ton
on LNG 720/ton 840/ton 960/ton 1,080/ton
on Coal n/a. 230/ton 460/ton 700/ton
PPRDT 0.445/kwh 0.425/kwh 0.4/kwh 0.375/kwh
 
Individual Income Tax

From the viewpoint of broadening the tax base, abolish special allowance forspouse
  • Among allowances applicable for spouses, the additional amount (maximum ofY380,000) shall be abolished from CY2004.
 
Consumption Tax

From the viewpoint of improving the transparency of the consumption tax, specialtreatments for small vendors will be revised.
  • Diminish the exemption for small vendors to the level one-third of thecurrent level:  Reduce the tax exemption threshold for eligible smallvendors from Y30 million (current level) to Y10 million.
  • Scale down the simplified tax scheme (i.e. the use of the deemed ratio for apurchase): Restrict eligibility for the application of the simplified tax schemeby lowering the ceiling from traders with annual sales of Y200 million or lessto 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
 
Liquor
 
  • Difference in tax rates on similar types of liquors shall be reduced throughadjusting tax rates on low-malt beer ('happoshu') wine, and others.
  Proposed change Reference (tax rate for similar type of liquor)
Low-malt beer (Happoshu, Maltproportion~25%) (per KL)
Increased to 134,250 yen from 105,000 yen (current level)
(Beer)
222,000yen
Wine (per KL)
Increased to 70,472 yen from 56,500 yen (current level)
(Sake, Alcohol 12%)
112,390 yen
Sake compound (Alcohol 15%) (per KL)
Increased to 94,600 yen from 79,300 yen (current level)
(Sake, Alcohol 15%)
140,500 yen
Sweet wine (Alcohol 12%) (per KL)
Increased to 103,722 yen from 98,600 yen (current level)
(Liquor)
119,088 yen
 
Taxation of Corporations by theSize of Their Businesses (local tax)

From the viewpoints of sharing the tax burden more broadly and thinly andclarifying the relationship between the burden and benefits in the localcommunity, taxation of corporation by the size of their businesses shall beintroduced:
  • Taxpayers: corporations with capital of Y100million and over.
  • Tax base: Changing the tax base from the profits of corporations to a mix ofprofits and capital and other value added items such as wages, interest andrentals.  Special measures to reduce tax burden for corporations with highproportion of wages in their value added and those with significant amount ofcapital shall be taken.
  • Tax rates:  income (7.2%), value added (0.48%), capital (0.2%)
  • Applicable for taxable year beginning after FY2004.
 


1)

The Japanese Fiscal Year begins in April and ends in March.  The taxableyear for corporations is the businesses year and for individuals it is acalendar year.
2) Dividend of stocks: Apr 2003-Mar2008, Distribution from publicly traded Stock Investment Funds: Jan 2004-Mar2008
3) No obligation to file returnsapplies for dividends and distributions taxed by 10% withholding.
4) Jan 2003-Dec 2007
5) The tax bracket structure including50% of the top tax rate for gift tax will be applicable where the abovementioned new system for calculating gift and inheritance taxes is not elected.

(Reference)

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

   
(Y100 Million)

1 Taxation of Corporations
  - 13,040
  (1) R&D (excluding (3) below) -5,470  
  (2) Investment incentives (ditto) -5,270  
  (3) SMEs -2,300  

2 Inheritance and gift taxes
  -1,030

3 Taxation of financial transactions and stocks
  -960

4 Taxation of land
  -2,100
   
Total of 1-4
-17,130

5 Income tax (individual)   n.a.

6 Consumption tax
  n.a.

7 Liquor and tobacco taxes
  +1,630

8 Others
  +60
   
Total of 5-8
+1,690


    Net of 1-8 above -15,440

9 Petroleum tax   +140

10 Motor vehicle tonnage tax
  -930

Total: General Account Revenue -16,230

11 Promotion of power-resourcesdevelopment tax -83

12 Motor vehicle tonnage tax*
+930

Grand Total -15,383

*Earmarked for construction andimprovement of local roads