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IdentifierCreatedClassificationOrigin
08TOKYO3430 2008-12-17 03:16:00 CONFIDENTIAL Embassy Tokyo
Cable title:  

JAPAN'S FY2009 TAX REFORM PROPOSALS

Tags:   PGOV EFIN ECON JA 
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P 170316Z DEC 08
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RUEHFK/AMCONSUL FUKUOKA PRIORITY 1480
RUEHNH/AMCONSUL NAHA PRIORITY 3837
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
					  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