JAPAN'S FY2009 TAX REFORM PROPOSALS

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 003430 SIPDIS TREASURY IA FOR FOSTER E.O. 12958: DECL: 12/16/2018 TAGS: PGOV EFIN ECON JA SUBJECT: JAPAN'S FY2009 TAX REFORM PROPOSALS TOKYO 00003430 001.2 OF 002 Classified By: Ambassador J. Thomas Schieffer; reasons 1.4 (b/d) ¶1. (C) Summary. Japan's ruling coalition parties announced December 12 a package of tax reform proposals featuring a series of tax cuts for households and businesses. Their proposals called for exempting in-substance dividends paid by overseas subsidiaries to their Japan headquarters, lowering the corporate tax rate for small firms, and introducing an investment tax credit on designated energy-saving equipment. The coalition parties also proposed to expand the housing tax credit and allow employees to make tax-deductible contributions to corporate-type defined contribution pension plans. Regarding the timing of a consumption tax hike from the present 5%, the coalition parties vaguely indicated that "drastic tax reforms including the consumption tax" would be implemented immediately after an upturn in the economy to create a sustainable fiscal structure by the mid-2010s. The proposed tax changes are estimated to result in a net tax cut of approximately 1.1 trillion yen ($12.2 billion) in combined national and local tax revenues once the tax measures are fully in place. End summary. ¶2. (SBU) The Cabinet is set to approve the outline of legislation to implement the coalition's proposed FY2009 tax changes around December 19. Because the opposition camp has a majority in the Upper House of the Diet, it is uncertain whether government-proposed tax bills will become law in a timely manner. As with tax reform bills for FY2008, if the opposition-controlled Upper House does not approve FY2009 tax proposals following Lower House passage, the Aso administration would be forced to resubmit the tax bills to the Lower House for a two-thirds majority over-ride of the Upper House decision to gain passage. In such a case, it is unlikely that the bills could become law before the new fiscal year begins in April 2009. ¶3. (SBU) The following is a brief description of major tax change proposals made by the ruling coalition parties December 12. Corporate Tax Changes -------------- ¶4. (SBU) In order to facilitate repatriation of overseas retained earnings, Japanese companies' repatriation of 95% of dividends paid by overseas subsidiaries to their home offices will be exempt from the corporate income tax from the business year starting in or after April 2009. Presently, if Japanese companies repatriate overseas retained earnings in the form of dividends, they are required to pay the difference between Japanese and overseas tax rates. Japan's effective corporate tax rate (about 40%) is markedly higher than that of Asian and European countries (for example, 18% in Singapore, and 28% in the UK). According to a METI survey, the amount of earnings Japanese companies' retained at their overseas subsidiaries totaled 17.2 trillion yen ($191 billion) at the end of March 2007. ¶5. (SBU) Small firms capitalized at less than 100 million yen ($1.1 million) would see the corporate income tax rate for taxable income of up to 8 million yen ($89,000) will be reduced from the current 22% to 18% in the two year period from the business year starting in or after April 2009. ¶6. (SBU) Furthermore, carry-back of net losses will be permitted for small firms, effective the business year ending in or after February 2009. Currently, only small companies established with the last five years are eligible for this benefit. ¶7. (SBU) Companies will also be permitted to fully deduct the acquisition costs of designated energy saving equipment as expenses from the two year period from FY2009. Personal Income and Residential Tax Changes -------------- ¶8. (SBU) For individuals taking out mortgage loans from financial institutions to purchase and occupy homes, the existing housing tax credit for personal income taxes will be expanded from the present ceiling of 1.6 million yen($17,800) to 6 million yen ($66,700) in the three year period starting from 2009. The amount of tax credit is calculated according to the size of outstanding mortgage loans at the end of the year; a tax credit equivalent to 1.2% of the outstanding TOKYO 00003430 002.2 OF 002 amount of the mortgage loan not exceeding 50 million yen ($560,000) may be deducted from income tax payments for ten years. Financial Market Tax Changes -------------- ¶9. (C) Employees will finally be allowed to make tax-deductible contributions to corporate defined contribution (DC) pension plans in addition to what employers contribute. Also, tax-deductible monthly contribution limits on both corporate and private DC pension plans will be raised by 2,000 yen to 5,000 yen. (Note: These measures mirror elements of DC Pension reform recommendations the USG has advocated for a number of years. End Note.) ¶10. (SBU) For individual investors, the present temporary cuts in the tax rate on both capital gains from listed share sales and on dividend income from 20% to 10% will be extended by three years each. They are now scheduled for repeal at the end of December 2008. ¶11. (SBU) For corporations and individuals, a new tax-exempt measure will be introduced for long-term capital gains of up to 10 million yen ($110,000) from land purchased in the next two years from 2009 and sold after holding over five years. Green Tax Changes -------------- ¶12. (SBU) To encourage motorists to purchase new environmentally-friendly cars, both the automobile acquisition tax and the automobile tonnage tax will be lowered for three years from April 2009. The size of tax breaks (50%, 75%, and 100%) will be determined in accordance with standards based on fuel performance and harmful emissions. SCHIEFFER