Financial Services Tax News 2011 Tax Reform Proposal

Financial Services Tax News
Special Edition: December 2010
PwC Japan Tax Newsletter
The Tax Practice of PricewaterhouseCoopers
Japan (Zeirishi-Hojin PricewaterhouseCoopers)
is one of the largest professional tax
corporations in Japan with about 560 people.
Within this practice, our Financial Services Tax
Group is comprised of approximately 100
professionals, dedicated specifically to advising
the financial services industry. In addition to
tax compliance services our tax professionals
are experienced in providing tax consulting
advice in all aspects of domestic/international
taxation including financial and real estate,
transfer pricing, M&A, group reorganization,
global tax planning, and the consolidated tax
system to clients in various industries.
The firms of the PricewaterhouseCoopers
global
network
(www.pwc.com)
provide
industry-focused assurance, tax and advisory
services to build public trust and enhance value
for clients and their stakeholders. More than
161,000 people in 154 countries across our
network share their thinking, experience and
solutions to develop fresh perspectives and
practical advice.
This Tax News is provided for general guidance
only, and does not constitute the provision of
advice or professional consulting of any kind.
Before making any decision or taking any
action, you should consult your usual PwC
contact with all the pertinent facts relevant to
your particular situation.
2011 Tax Reform Proposal
Impact on the Financial Services Industry
The 2011 tax reform proposals submitted by the Cabinet Office’s
Tax Commission, known as Taiko, (“2011 Tax Reform Proposal”)
were released on December 16, 2010, when it was approved by
the Cabinet. These proposals will now be submitted to the
lower house of Parliament (Diet) for consideration and review.
The 2011 Tax Reform Proposal is not law and may change upon
public and parliamentary review and discussion.
Highlights of the 2011 Tax Reform Proposal for corporate
taxpayers in particular include:
-
Reduction in corporate effective tax rates by
approximately 5% from a headline rate of 40% to 35%;
-
Limitation of the use of net operating loss carry-forwards
to 80% of taxable income; and
-
Increase in the current seven (7) years loss expiry
period to nine (9) years.
The reduction in corporate tax rates and limitation of the use of
net operating loss carry-forwards are applicable for the fiscal
years beginning on or after April 1, 2011.
Amongst the changes brought in by the 2011 Tax Reform
Proposal, this Newsletter provides a summary of the proposed
changes specifically affecting Japan’s financial services industry.
A broader summary of the 2011 Tax Reform Proposal is
published in our accompanying and complementary Japan Tax
Update.
http://www.pwc.com/jp/en/taxnews/pdf/Proposed_2011_Tax_Reform_E.pdf
Zeirishi-Hojin PricewaterhouseCoopers
Financial Services
Kasumigaseki Bldg., 15F
2-5 Kasumigaseki 3-chome
Chiyoda-ku, Tokyo 100-6015
Telephone: 81-3-5251-2400
http://www.pwc.com/jp/tax
© 2010 Zeirishi-Hojin PricewaterhouseCoopers.
All rights reserved. “PricewaterhouseCoopers” refers
to Zeirishi-Hojin PricewaterhouseCoopers or, as the
context requires, the PricewaterhouseCoopers global
network or other member firms of the network, each of
which is a separate and independent legal entity.
Financial Services Tax News
Special Edition: December 2010
Taxation of securities
The current concessionary tax rates (i.e., 10% for Japanese resident individuals and 7% for Japanese
corporations and non-residents) for dividends on listed stocks and capital gains arising from the sale of listed
stocks (10% for Japanese resident individuals) are extended two (2) years until December 31, 2013.
Expansion of tax exemption for interest received by foreign financial institutions entering
into Saiken-Gensaki (Japanese Repo) transactions
1)
Interest on cash collateral and lending fees in relation to securities lending transactions (collaterized by
cash or securities) received by foreign financial institutions will be exempt from corporate and withholding
tax within qualifying conditions (e.g., trading term is six (6) months or less, etc).
2)
The following securities will be added as “assets” (in addition to the current scope covering JGBs, foreign
government bonds, etc.) subject to this exemption:

Book-entry local government bonds;

Book-entry corporate bonds;

Book-entry bond type beneficiary interest issued by Special Purpose Trusts (without entitlement to
voting rights on ancillary matters); and

Listed stocks (when used in stock lending transactions).
These amendments will be applicable to interest and lending fees in relation to transactions commencing on
or after April 1, 2011.
Islamic Finance
Specific taxation measures for Islamic Finance will be introduced to attract international investors seeking
opportunities to invest in Sharia compliant instruments issued in Japan. The proposed scheme of
arrangement will approximate an Ijarah sukuk and involve a bond type beneficiary interest (i.e., a beneficiary
where the amount of cash dividends during the trust period is predetermined) issued by a Special Purpose
Trust ("SPT"). A summary of the main features is as follows:
1)
The dividend deductibility test for SPT will be amended (including that the bond type beneficiary interest
will not have to be primarily offered in Japan and the condition that the SPT must not be classified as a
family corporation will be amended);
2)
Profit distribution and redemption gain derived from book-entry bond type beneficiary interest (without
entitlement to voting rights on ancillary matters) received by foreign investors will be exempt from
Japanese withholding and corporate tax in the same manner as book-entry JGBs and corporate bonds;
3)
Profit distribution derived from book-entry bond type beneficiary interests (without entitlement to voting
rights on ancillary matters) received by certain financial institutions will be exempt from withholding tax;
4)
Capital gain arising from the disposal of bond type beneficiary interests (without entitlement to voting
rights on ancillary matters) by foreign corporations will not be subject to non-resident capital gain rules
(i.e., generally referred to as the 25/5 rule and real estate holding company rule); and
5)
Exemption will apply from registration tax and real property acquisition tax when an originator
repurchases the trust assets.
PricewaterhouseCoopers
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Financial Services Tax News
Special Edition: December 2010
Real Estate Investment Trust (“J-REIT”) and Tokutei Mokuteki Kaisha (“TMK”)
1)
Dividend deductibility test – 50% domestic offering rule
In order for a J-REIT or TMK to deduct dividends paid, specific qualifying conditions must be satisfied,
including that the J-REIT’s shares or the TMK’s common and preferred shares are offered primarily in Japan
(“50% domestic offering rule”).
The 50% domestic offering rule for J-REITs is currently judged based on each offering basis; however, the
2011 Tax Reform Proposal requires this to be judged based on a total offering basis. Under the 2011 Tax
Reform Proposal, the 50% domestic offering rule for TMK and SPT is clarified to be judged on each share
class offering basis.
2)
Scope of Qualified Institutional Investor (“QII”)
In accordance with expansion of the scope of QII under the Financial Instruments Exchange Law, foreign
pension funds whose net assets are JPY10 billion or more at the time of submission may apply for QII status
for tax purposes.
Clarification of tax exemption rule for book-entry JGBs and corporate bonds for
non-resident investors
1)
A foreign pension fund formed as a trust based on a foreign jurisdiction’s law and treated as a pass
through trust for Japanese tax purposes will be eligible to apply for the tax exemption rule on interest on
book-entry JGBs and corporate bonds.
2)
A non-resident or a foreign corporation investing in book-entry JGBs or corporate bonds through a
Japanese partnership (nin-i kumiai) or similar foreign vehicle will be eligible to apply for the tax exemption
rule on interest and redemption gains on book-entry JGBs and corporate bonds by following certain
procedures.
The effective date is interest on book-entry bonds where the interest calculation period begins on or after April
1, 2011.
Individual income taxation on derivatives
Income arising from over-the-counter derivative transactions earned by Japanese resident individuals
(including foreign exchange and contracts for differences) will be treated at the same rate as derivative
transactions listed on Japanese stock exchanges, and subject to separate taxation, at the rate of 20%. The
current treatment is for progressive rates of taxation up to 50% classified as miscellaneous income.
Moreover, losses arising from these transactions can be carried forward for three (3) years.
The amendment will be applicable to transactions made on or after January 1, 2012.
PricewaterhouseCoopers
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Financial Services Tax News
Special Edition: December 2010
For more detailed information, please do not hesitate to contact your financial tax services
representative or any of the following members:
Zeirishi-Hojin PricewaterhouseCoopers
Financial Services
Kasumigaseki Bldg. 15F
2-5 Kasumigaseki 3-chome
Chiyoda-ku, Tokyo 100-6015
Telephone: 81-3-5251-2400
http://www.pwc.com/jp/tax
Partner
Senior Manager
Manager
PricewaterhouseCoopers
Sachihiko Fujimoto
81-3-5251-2423
[email protected]
Katsuyo Oishi
81-3-5251-2565
[email protected]
Yuka Matsuda
81-3-5251-2556
[email protected]
Tetsuo Iimura
81-3-5251-2834
[email protected]
Akemi Kitou
81-3-5251-2461
[email protected]
Hiroshi Takagi
81-3-5251-2788
[email protected]
Yoko Kawasaki
81-3-5251-2450
[email protected]
Raymond Kahn
81-3-5251-2909
[email protected]
Stuart Porter
81-3-5251-2944
[email protected]
Marc Lim
81-3-5251-2867
[email protected]
Kenji Nakamura
81-3-5251-2589
[email protected]
Nobuyuki Saiki
81-3-5251-2570
[email protected]
Akiko Hakoda
81-3-5251-2486
[email protected]
Kyoko Imamura
81-3-5251-2855
[email protected]
Satoshi Matsunaga
81-3-5251-2586
[email protected]
Soichi Toyama
81-3-5251-6212
[email protected]
Daniel Lutz
81-3-5251-6640
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Mami Sasaki
81-3-5251-2471
[email protected]
Takashi Nonaka
81-3-5251-2417
[email protected]
Hiroko Suzuki
81-3-5251-2156
[email protected]
Nobuyoshi Hiruma
81-3-5251-2871
[email protected]
Miyuki Kajiwara
81-3-5251-2520
[email protected]
Naoko Makihira
81-3-5251-2223
[email protected]
Seigo Sugiyama
81-3-5251-2539
[email protected]
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