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FY2005 Tax Reform (Main Points)

FY2005 Tax Reform (Main Points)

Ministry of Finance
20 December 2004

With a view to establishing a 'desirable tax system' that will contribute to sustainable invigoration of the economy and society, while taking into account the current economic and fiscal environment and having a vision for anticipated review of individual income taxation at national and local levels in the FY2006 tax reform, the FY2005 tax reform will reduce the benefits of the proportional across-the-board tax credit and take measures in taxation of housing, financial assets and stocks, international transactions and SMEs.
Individual income taxation (national and local)
 dot FY2005 reform: Based on directions given in the Outline of FY2004 Tax Reform of the ruling coalition (Dec 2003), half of the benefits of the across-the-board tax credit will be reduced
(Income Tax) Applicable from 2006
  > The rate of tax credit will be reduced from 20% to 10%
  > The ceiling on the tax credit will be reduced from ¥250,000 to ¥125,000
  (Local Inhabitants Tax) Applicable from 2006
  > The rate of tax credit will be reduced from 15% to 7.5%
  > The ceiling on the tax credit will be reduced from ¥40,000 to ¥20,000
 dot The scope of old houses qualifying for special tax treatments (such as tax credit for residential mortgages) will be expanded to include certain old houses that satisfy anti-earthquake safety standards, irrespective of the limitation on the number of years from construction (ie. 20 years for non-fire proof housing and 25 years for fire-proof housing).
Taxation of financial assets and stocks
 dot Stocks held outside of security corporations may be deposited in a new type of special account system by election (applicable for stocks the actual purchase price of which is available).
 dot A new measure will be introduced to treat the book value of stocks deposited in the new type of special account system as capital loss where the economic value of such stocks becomes nil.
International Taxation
 dot Deductible period for dividends from foreign subsidiaries whose retained earnings were taxed under the anti-deferral rules for controlled foreign corporations (CFC rules) will be extended from 5 years to 10 years. Overseas companies, which mainly operate in a resident country and are effectively managed there, will be allowed to deduct 10% of their direct personnel expenses from the taxable retained earnings under the CFC rules.
 dot Procedural requirement for interest tax exemption for non-resident holders of the Japanese Government Bond (JGB) will be streamlined.
 dot Capital gains derived from the sale of stocks or other comparable rights in a company which derives at least 50% of its value directly or indirectly from real property in Japan will be taxed in Japan.
 dot Capital gains derived by a partnership from the sale of stocks or other comparable rights in a company will be taxed in Japan, if that partnership holds 25% or more of the entire share capital of the company and if it alienates 5% or more of the entire share capital during the year.
 dot Allocable income to a non-resident partner, which is earned through partnership activities in Japan, will be withheld at 20% tax rate on a net profit every year.
 dot As part of the 'three-part-reform' (reforms of subsidies, local allocation tax and transfer of tax revenue sources from national to local governments), the carry out full-fledged transfer of tax revenue sources from Income Tax (national) to Local Inhabitance Tax.
 dot As a temporary measure, transfer ¥1,115.9 billion as local transfer of income tax to local governments. (3/5 shall belong to prefectural governments and 2/5 shall belong to townships and villages. Each local government shall receive the transfer in accordance with its population).
SMEs and Entrepreneurships
 dot Application of special tax treatment (tax on capital gain will be reduced by half) for qualified sale of stocks of qualified 'ventures' will be extended until FY2006 ('Angel' taxation).
(Promoting activities of non-profit making organizations)
 dot The scope for qualified NPOs will be relaxed
  > Apply 'public support' through the averaging of donations/subsidies received in the past two years (currently the condition must be met in each taxable year).
  > Simplify documentation for applying the status as qualified NPOs and information reporting obligations.
 dot Increase the limitation of deductions for donation under income tax (25% of taxable income to 30% of the same).

(Restructuring of corporations)
 dot When liquidation of a corporation under the Civil Rehabilitation Law or certain private arrangements are conducted, the following special treatments will be given to the debtor corporation: (i) appraisal gain/loss of the corporation shall be taxed/deducted and (ii) carry-over of loss of the corporation arising from taxable years prior to the past 7 taxable years (i.e. limitation for carry forward of loss) may be deducted against the taxable gains of the corporation from forgiveness of debts by its creditors.

(Human Investment tax credit)
 dot A new tax credit (25% of the increased amount of expenditure of corporations for training employees) will be introduced. For small corporations, larger benefits will be given.

(Deduction for social insurance premiums)
 dot For the purpose of applying deductions for social insurance premiums, it will be made obligatory to attach a copy of national pension premium receipts when filing tax returns.


FY2005 Tax Reform
Tentative estimation of revenue changes implemented by the reform in FY 2005

(Billion Yen)
Reduction of the 'across-the-board' tax credit   + 185
Housing    - 3
Other discretionary measures    
  - Corporations   - 10
  - Individuals and others   - 1

Subtotal   +171

Local Transfer of income tax   - 691


- 520
   * Rounded figures and provisional estimation.