Newsletter 2005 Top page

International Financial Reporting
Standards Update

Selected Topics
from the 2005 Tax Reform Act

Selected Topics
from the Commercial Code Amendment

Limited Liability Partnership

Childcare

O&C New Business Introduction
of Staffing Services

OKAMOTO & COMPANY
International Accounting Office
/ Hanato Tax Accountant Office
Hirakawacho Daiichi Seimei Building 1F,
1-2-10 Hirakawacho, Chiyoda-ku Tokyo Japan 102-0093
TEL +81-3-5276-0900
FAX +81-3-5276-0950
E-mail:info@okamoto-co.com

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With a view to establish a "desirable tax system" that will contribute to a sustained invigoration of the economy and society, and from an expected substantial overhaul of individual income taxation in 2006, the 2005 Tax Reform Act was prepared and approved by the Diet. The following summary does not cover all aspects of the Act, but includes the topics which we felt would be of the most interest to our clients.

Special Tax Reduction
The special tax reduction system was amended to reduce individual taxpayers' burden; and the following proposals will be enforced starting on 2006:

Suspension of the NOL Carry-Back Provision
As a general rule, NOL carry-back benefit will be suspended by March 31, 2006. According to the new Act, one of the three exceptions for this suspension, loss on disposal under the Structural Reform/Economic Revitalization Law, will be extended for an additional two years (until March 31, 2007.)
Therefore, the following exceptions are applicable for NOL carry-back benefits:

Reserve for Bad Debt
A special ruling which increased the deductible reserve limit by 16% for Public Interest Corporations and Cooperatives has been extended for two years (tax year until March 31, 2007.)

Non-resident Taxation Reform
1. Transfer of Real Estate Stocks
The transfer of stocks, which the assets are mainly in the form of real estate, by non-residents or foreign corporations is not taxed if the location immediately before the transfer is not in Japan. On the other hand, an income generated from the sale of an estate located in Japan is taxed, even for non-residents and foreign corporations. To amend this imbalance, a tax will be charged as a domestic source income if the non-resident or foreign corporation transfers estate stocks that holds more than 50% of their assets within the country or if a benefit right of a special trust which 50% of the estate in trust is within the country, is transferred.
2. Taxation on Enterprise Transferal Resemblance
The transfer of stocks through a kumiai by non-residents or foreign corporations is taxed, even if the transfer took place overseas, if the kumiai members hold more than 25% of the domestic corporation’s stock and if more than 5% of those stocks are transferred. The purpose of this amendment is to prevent tax evasions by the transferal of domestic assets in the form of stocks.
3. Withholding
Distributions of profit from business activities by non-resident and foreign corporations that are a kumiai member will need 20% of withholdings. However, on the occasion of possession of permanent establishments not affiliated with a kumiai, the withholding may be exempted under certain circumstance. This amendment’s purpose is to enforce report submissions by the kumiai.

"Foreign Related Person" for transfer pricing purposes and Tax Schedule 17-3
Effective April 2005, the scope of who is deemed a foreign related person has been expanded. In the past, a foreign person/entity who directly or indirectly owned 50% or more of the shares issued was considered a related person/entity. However, under the new Act, which the determination as to whether foreign related person is considered reportable or not, will now also include whether or not the foreign person/entity has substantial influence on the Japanese corporation.
The Act requires taxpayers to identify the transfer pricing methodology used to determine the transfer price on Schedule 17-3 on their corporate tax returns. Considering these recent changes, corporations who have frequent international transactions must be even more careful in their transfer pricing methodology and/or percentages. Companies who have had business model changes, and/or have not had their intercompany agreement reviewed for several years, should work with the Parent to ensure the agreement is still valid.

Human Investment tax credit (3 years-temporary tax law)
A new tax credit was introduced to promote training of employees. If corporations incur qualified training expenses for employees and such expenditure increase is more than the average expense from the prior two fiscal years, corporations can take a 25% tax credit for the increased amount (up to 10% of corporation income tax). For medium to small sized corporations, additional benefits are provided.