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According to the instruction by Prime
Minister Junichiro Koizumi in January, the Tax Commission studied comprehensive
tax reform from the medium to long-term viewpoint and published ‘Policy
Guidance on the Establishment of a Desirable Tax System’ (Policy Guidance)
in June. From March to October, the Commission held ‘town tax meetings’ at
twelve venues throughout Japan in order to solicit the views of the general
public.
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The Prime Minister instructed the
Commission to study some specific items to be incorporated in the fiscal 2003
(Heisei 15) tax reform. Among the items in the ‘Policy Guidance’, the
Commission conducted its deliberation on items to make up the fiscal 2003 tax
reform, with a focus on the items instructed by the Prime Minister, and released
this report.
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| (Reference) |
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In the course of deliberations, the
commission published the Interim Report in September, taking into account the
results of the exchanges of views at the town tax meetings. |
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In October, remarks by chairman Ishi
on the framework of tax incentives for R&D and investments in plants and
equipment were released.
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I. Basic Thinking
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| (1) |
Steps toward establishment of a desirable tax
system
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Five viewpoints for establishment of a
desirable tax system outlined in the ‘Policy Guidance’ in June 2002 |
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Taxation should not distort free economic
activities |
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Tax treatments that cause distortion and a sense
of inequity in the tax system should be rationalized |
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Tax system should be simple and easily
understandable for taxpayers |
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Tax system should provide stable revenue structure |
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Local taxation should meet needs of enhanced local
autonomy
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Main items for each tax in FY2003 Tax
Reform. |
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Individual income tax: As a first step towards
streamlining of exemptions, special exemption for spouse and special exemption
for dependants should be drastically simplified (including possible
abolishment). |
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Corporation tax: Tax incentives for R&D and
focused investment incentives should be enhanced. |
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Consumption tax: As prerequisites to strengthening
its role in the future tax system, the tax-exempt threshold (Y30 million) should
be drastically reduced and the simplified regime (Y200 million) should be
abolished in order to reduce the sense of unfairness. |
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Gift tax and inheritance tax: In addition to
existing gift taxation on an annual basis, gift taxation on a cumulative
gift/inheritance basis at the time of paying inheritance tax (i.e. integration
of gift and inheritance taxes) should be introduced from the viewpoint of
facilitating the transfer of assets from the older generation (i.e. parents) to
the younger generation (i.e. children). The top rate of inheritance tax should
be cut and the tax base should be broadened. Current annual basis gift tax
should be reviewed accordingly. |
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Taxation of corporations by the size of their
businesses (local tax) should be introduced. |
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Property tax (local tax): The level of tax burden
on each type of property should be adjusted in a homogeneous and appropriate
way. |
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Land taxation: Registration and licence tax as
well as land acquisition tax should be reduced in order to promote efficient use
of land, such as urban renewal. |
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Taxation of financial assets and stocks: The tax
system should be changed to be more simple and neutral in its treatment of
different financial products.
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| (2) |
Basic thinking in FY2003 tax reform
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The Prime Minister stated as follows
in his policy speech at the beginning of the 155th Session of the Diet (Oct.
2002): “With regard to taxation, we will conduct sweeping tax reform with a
view to establishing a desirable tax system that will bring about a sustainable
revitalization of the economy and society. Taking into account the current
economic environment, we will initiate a tax reduction, exceeding one trillion
yen by as much as possible. Under the framework of a multiple-year,
revenue-neutral tax reform, we will further conduct examination to formulate and
submit a package of tax reform bill(s) to the next general session of the Diet
with a view to establishing a tax system that is fair, simple and easy to
understand.”
The Tax Commission considers that the above-mentioned items of the proposed tax
reform should be carried out, in principle, in fiscal 2003.
However, given the current economic situation, the timing of
implementation of each item may be adjusted to frontload tax reduction measures.
It is important to present to the general public a clear picture of
the sustainability of public finance so that the tax reduction can achieve the
desirable effects of stimulating consumption and investment. Therefore, the tax
reform should be revenue-neutral over a certain period of time and all the
reforms should be made into one bill. This policy does not bind further tax
reform after FY2004.
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II. Discussion on the Elements in FY2003 Tax
Reform
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| (1) |
Individual income tax: |
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Special exemption for spouse should be in
principle abolished. Special exemption for dependents (Age 16-22) should be
reduced or abolished. A further cut in tax rates would be inappropriate.
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| (2) |
Corporation tax |
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Given the effectiveness of the current incremental
R&D tax credit, proportional R&D tax credit should be introduced on a
permanent basis. Focused investment tax incentive should be introduced on a
temporary basis. Taxation for SMEs should be reviewed to improve their vitality.
The criteria for eligible non profit-making corporations should be reviewed.
Taxation of corporations in the public interest should be comprehensively
reviewed together with taxation of donations, taking account of the ongoing
regulatory reforms for those corporations. Taxation of corporations by the size
of their businesses (local tax) should be introduced at an early stage. Existing
special taxation measures should be reviewed and integrated drastically.
Taxation to promote reduction of non-performing loans should be examined as a
part of overall policy, taking into account various elements.
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| (3) |
Consumption tax (VAT) |
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The level of tax-exempt threshold (Y30 million)
should be drastically reduced. Corporations should basically be excluded from
having tax-exempt vendor status. The simplified regime (Y200 million) should in
principle be abolished.
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| (4) |
Taxation of property |
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Gift tax and inheritance tax: As the society is
aging, transfers of assets from parents to the next generations take place at
the later stage of people’s lives. Efficient use of the assets of elder people
could contribute to the vitalization of the economy and society. Against such
backgrounds, measures to integrate inheritance and gift taxes should be
introduced in the fiscal 2003 tax reform.
The tax base of inheritance tax should be broadened through
measures such as reduction of basic exemption. The highest tax rate (currently
70%)--which is significantly higher than the top rate for individual income tax
(50% including local tax) and those in other countries--should be cut while
keeping the overall redistribution function of the inheritance tax. The tax rate
structure of the current annual basis gift tax shall be reviewed in accordance
with the changes made in inheritance tax rates. |
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Property tax (local tax): The level of tax burden
on each type of property should be adjusted in a more homogeneous and
appropriate manner.
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Taxation of land |
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Given the current trend in which market prices of
land are increasingly dependent on the use and profitability of the individual
land, the tax burden of registration and licence tax as well as land acquisition
tax should be reduced in order to promote efficient use of land, such as urban
renewal.
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Taxation of financial assets/stocks |
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Simple and stable tax treatment of financial
assets and stocks is desired under the current ‘from deposits to investments’
policy needs. Taxation of financial assets and stocks should be changed to
ensure a neutral effect on different types of assets and so that unified tax
treatment is applied as much as possible.
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| (7) |
Other taxes |
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Liquor tax: The tax categories for liquor should
be simplified and the inequity of burdens between the tax categories for liquor
should be reduced. |
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Tobacco tax: The appropriateness of a tax rate
increase should be examined. |
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Earmarked tax and energy taxes: Earmarking of
energy taxes should be reviewed. Temporary surtax on gasoline should be
maintained. |
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Taxation and the environment: Examination of
introducing environmental tax should be continued based on the Polluters Pay
Principle. |
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International taxation: Access by the tax
authorities to information on cross-border transactions should be enhanced.
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| (8) |
Tax compliance |
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e-Filing: A new system for filing tax returns and
paying tax over the Internet should be introduced. |
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Publication of large taxpayers should be reviewed
from the viewpoint of privacy including its possible abolishment.
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