UNCLAS TOKYO 003029

SENSITIVE
SIPDIS

STATE FOR EAP/J

E.O. 12958: N/A
TAGS: EFIN ECON PREL EAID JA
SUBJECT: NEW TAX EXEMPTION RULES FOR NON-PROFIT ORGANIZATIONS

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY.


1. (SBU) Summary: Japan passed a new tax exemption law in 2006 and
is finalizing implemention now. The new law, effective December 1,
is expected to make the process of getting tax exempt status more
transparent and more in line with policies elsewhere in the world.
Opinions on the new regulation are divided. A retired Japanese
official noted the new regulation has provoked opposition from a
cadre of retired Japanese bureaucrats who have grown accustomed to
tax exemption loopholes. The new regulations will break the
stranglehold of the old boys' network, opined a Temple University
law professor. End summary.

MAKING ROOM FOR INTERNATIONAL PUBLIC ORGANIZATIONS
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2. (SBU) GOJ's new tax exemption law goes into effect December 1
and may break the long-held image of Japan as being hostile to
foreign NGOs, a Temple University law professor told EconOff October

21. Under Japan's previous tax-exemption law, only four foreign
entities qualified. About 17,000 organizations had tax exempt
status in Japan under the previous law, compared with 1.5 million
registered 501(c)(3) organization in the U.S.


3. (SBU) The law, passed in 2006, commissioned an independent
board in April 2007 under the cabinet -- the Public Interest
Corporation Commission (PICC). The PICC will determine which
organizations, domestic or foreign, qualify for tax exempt status
under the revised rules. One consideration is whether foreign
organizations enjoy tax exempt status in their home countries.
Under Japan's previous law, organizations like UNICEF would not be
guaranteed tax exempt status, the law professor explained. The
previous system was capricious and little more than an "old boys'
network," said the law professor.

BRINGING DOWN THE STATUS QUO
--------------


4. (SBU) While the new legislation improves the likelihood
international organizations will receive tax exempt status, it
likely also will exclude some Japanese organizations that qualify
under the previous law, a retired GOJ official and current
not-for-profit director said. Previously, organizations were given
the tax exempt status based on who they knew and not on the basis of
their institutional functions, according to the law professor. The
new rules, however, according to the professor, require tax exempt
organizations to report to the GOJ annually, much the same way NGOs
in the U.S. do. This additional level of scrutiny also has the "old
boys" up in arms, according to the retired GOJ official.

PHASED-IN IMPLEMENTATION
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5. (SBU) As Japan begins implementing the the new rules,
officially known as Act No. 49 on Authorization of Public Interest
Incorporated Associations and Public Interest Incorporated
Foundations, local non-profit organizations will have up to three
years to formally declare non-profit status and to adapt their
internal operations and accounting procedures accordingly. The PICC
has been charged with reviewing reporting by public interest
organizations and will conduct periodic on-site inspections to
ensure compliance with the revised rules.

SCHIEFFER