www.pwc.com/jp/tax Financial Services Tax News 2013 Tax Reform Proposal for the financial services industry in Japan January 2013 The 2013 tax reform proposals were released on January 24, 2013. This newsletter reviews the principal effects the 2013 tax reform proposal will have for the financial services and real estate industries in Japan. The 2013 tax reform proposals (known as Taiko) submitted by the Government s Ruling Party s Tax Commission ( 2013 Tax Reform Proposal ) were released on January 24, 2013, and approved by the Cabinet on January 29, 2013. These proposals will now be submitted to the lower house of Parliament (Diet) for consideration and review. The 2013 Tax Reform Proposal is not law and may change upon public and parliamentary review and discussion. Amongst the changes brought in by the 2013 Tax Reform Proposal, this newsletter provides a summary of the proposed changes specifically affecting Japan s financial services and real estate industries. A broader summary of the 2013 Tax Reform Proposal is published in our accompanying and complementary Japan Tax Update.
Tax Reform Proposal for the financial services industry 1. Taxation of bonds With the intention of proceeding towards the unification of financial income taxation for individuals, taxation of bonds, etc., will be changed significantly from January 1, 2016. Given the substantial nature of the proposed changes to bond taxation, the lead in time to commencement has been deferred until January 1, 2016 providing nearly three years for the changes to be implemented (for example, by allowing time for systems change, etc.). (a) Taxation of bonds Currently, capital gains arising from sale of bonds by Japanese resident individuals are exempt from taxation. However, they will now be subject to tax together with many other changes affecting the taxation of bonds, principally for individuals but also for corporations and foreign investors. A summary of the taxation of bonds pre and post the scheduled effective date of this tax reform for individual taxation is as follows: Summary of Tax Treatment of Bonds for Japanese Resident Individuals Current After the Tax Reform (i.e., with effect from January 1, 2016) Specified Bonds 1 General Bonds 2 Interest Capital gain arising from sale of bonds Redemption gain Loss offset / loss carry forward Special account (tokutei koza) 15.315% & inhabitants tax 5%) withholding tax as a final tax. Exempt (with specific exceptions). Generally taxed as miscellaneous income (at progressive tax rates). Generally 15.315% & inhabitants tax 5%) separate taxation by filing 3. 15.315% & inhabitants tax 5%) separate taxation by filing. Same as immediately above 5. 15.315% & inhabitants tax 5%) withholding tax as a final tax 4. 15.315% & inhabitants tax 5%) separate taxation by filing. Same as immediately above 4, 5. Capital loss can be offset against interest on Specified Bond, dividends on listed shares and capital gains arising from the sale of listed shares. Capital loss can be carried forward for subsequent three years. May be maintained in this account. The above tax rates include restoration surtax imposed on national income tax at the rate of 2.1%. Notes: (1) Specified Bonds: Specified Government and Corporate Bonds (*), publicly offered bond investment trusts, publicly offered investment trusts (other than securities investment trusts) and publicly offered bond type beneficial certificates of special purpose trusts. * Specified Government and Corporate Bonds include Japanese Government Bonds, Foreign Government Bonds, publicly offered bonds, listed bonds, bonds issued by corporations with filed Securities Report, and also includes bonds issued on or before December 31, 2015. (2) General Bonds: bonds other than Specified Bonds, privately offered bond investment trusts, privately offered investment trusts (other than securities investment trusts) and privately offered bond type beneficial certificates of special purpose trusts. (3) If interest is subject to withholding tax, filing is not required (i.e., withholding tax as a final tax). (4) There are specific exceptions for family corporations. (5) In general, redemption proceeds are deemed as sales proceeds. PwC 2
(b) Taxation of Discount Bonds Redemption gain on discount bonds will be treated as capital gains, subject to 20.315% separate taxation for Japanese resident individuals. They will also be subject to 20.315% withholding tax at the time of redemption by multiplying the deemed discount rate to redemption proceeds. (The current 18.378% withholding tax at issuance will be abolished.) (c) Income category of capital gain Capital gains arising from the sale of listed shares and Specified Bonds will be classified within the same income category, whereas capital gains arising from the sale of nonlisted shares and General Bonds will be classified together in another income category; for individual tax purposes. (d) Rules with respect to withholding tax exemption for qualified entities With respect to the withholding tax exemption on interest on bonds applicable for qualified entities (such as financial institutions), the whole amount of interest will be exempt from withholding tax where paid to a qualified entity, irrespective of the holding period by the qualified entity. (e) Changes for corporations Inhabitants withholding tax at the rate of 5% will not be imposed on interest received by corporations. National withholding tax imposed on interest on bonds, etc., will be fully creditable against corporate tax liabilities (and no longer adjusted in accordance with the holding period). (f) JBIEM (as a permanent measure) The 2010 Tax Reforms introduced JBIEM (Japanese Bond Income Tax Exemption Scheme), i.e., if a foreign investor without a permanent establishment ( PE ) in Japan invests in certain bookentry Japanese corporate bonds (Tokutei Furikae Shasai) and receives interest / profit from redemption on such bonds, the foreign investor can be exempt from Japanese income tax. Under the 2013 Tax Reform Proposal, this exemption will be made permanent (albeit with specific exceptions). Following the amendment of bond taxation, corresponding amendments will be made for JBEIM taxation. 2. Expiration of concessionary tax rates for dividends and capital gains on listed shares Under the 2013 Tax Reform Proposal, the concessionary withholding tax rates (i.e., national tax of 7.147% and inhabitants tax of 3% for Japanese resident individuals, national tax of 7.147% for Japanese corporations and nonresidents) for dividends on listed shares due to expire on December 31, 2013 will not be extended as in past tax reforms. They will increase to 15.315% and inhabitant tax 5%) for Japanese resident individuals and to 15.315% (national tax only) for Japanese corporations and nonresidents on or after January 1, 2014. The tax rate of 20.315% (from the current aggregated rate of 10.147%) will also apply from January 1, 2014 for capital gains arising from the sale of listed shares for Japanese resident individuals. 3. Simplification of treaty application procedures The 2013 Tax Reform Proposal will simplify the tax treaty application procedure for dividends on listed shares. If a nonresident individual or a foreign corporation claims the benefit of a lower or exempt tax treaty relief on dividends on listed shares paid through payment handling agents on or after January 1, 2014, they will be able to submit special application forms not requiring as much detailed information compared with existing forms. 4. Expansion of tax exemption rule for listed shares managed in an Exempt Account (i.e., the Japanese ISA, tax free individual savings accounts) Under the 2013 Tax Reform Proposal, the tax exemption rule for dividend income and capital gains arising from listed shares held in an Exempt Account will be expanded as follows: The period for opening an Exempt Account will be from January 1, 2014 to December 31, 2023. Where the acquisition cost is JPY1 million or less per year in total, the tax exempt period will be 5 years, i.e., total acquisition cost is capped of JPY5 million. PwC 3
Tax Reform Proposal on the real estate industry 1. Extension of preferential treatment of registration tax / real estate acquisition tax for real estate securitization The 2013 Tax Reform Proposal will extend the following preferential treatment of registration tax and real estate acquisition tax for a further two (2) years through March 31, 2015: Registration tax on ownership of land: 1.5% (standard rate: 2.0%), in case of entrustment: 0.3% (standard rate: 0.4%). Registration tax on the acquisition of specific real properties by JREITs/TMKs (Tokutei Mokuteki Kaisha): 1.3% (standard rate: 2.0%). Real estate acquisition tax on the acquisition of specific real properties acquired by JREITs/TMKs: Exclusion of 60% of real estate price from the tax basis. 2. Specific measures for JREITs The 2013 Tax Reform Proposal will revise the terms of the dividend deductibility test such that JREITs can apply for special measures, i.e., rollover relief in respect of replacement of business assets, under certain conditions. Subject to the revision of the Law concerning Investment Trust and Investment Corporation, where a JREIT holds 50% or more of the shares in foreign SPCs holding real estate located outside of Japan, the 2013 Tax Reform Proposal will revise the terms of the dividend deductibility test. PwC 4
For more detailed information, please do not hesitate to contact your financial tax services representative or any of the following members: ZeirishiHojin PricewaterhouseCoopers Kasumigaseki Bldg. 15F, 25, Kasumigaseki 3chome, Chiyodaku, Tokyo 1006015 Telephone: 81352512400, http://www.pwc.com/jp/tax Financial Services Partner Sachihiko Fujimoto Katsuyo Oishi Yuka Matsuda Akemi Kito Hiroshi Takagi Raymond Kahn Stuart Porter Director Kenji Nakamura Nobuyuki Saiki Akiko Hakoda Kyoko Imamura Senior Manager Satoshi Matsunaga Manager Takashi Nonaka Hiroko Suzuki Kotaro Fujino Nobuyoshi Hiruma Kohei Kobayashi Transfer Pricing Consulting Group Partner Teruyuki Takahashi Ryann Thomas Director Naoki Hayakawa 81352512423 81352512565 81352512556 81352512461 81352512788 81352512909 81352512944 81352512589 81352512570 81352512486 81352512855 81352512586 818035926104 818035926100 818041045364 818035926099 818041045446 81352512873 81352512356 81352516714 sachihiko.fujimoto@jp.pwc.com katsuyo.oishi@jp.pwc.com yuka.matsuda@jp.pwc.com akemi.kitou@jp.pwc.com hiroshi.takagi@jp.pwc.com raymond.a.kahn@jp.pwc.com stuart.porter@jp.pwc.com kenji.nakamura@jp.pwc.com nobuyuki.saiki@jp.pwc.com akiko.hakoda@jp.pwc.com kyoko.imamura@jp.pwc.com satoshi.y.matsunaga@jp.pwc.com takashi.nonaka@jp.pwc.com hiroko.x.suzuki@jp.pwc.com kotaro.a.fujino@jp.pwc.com nobuyoshi.hiruma@jp.pwc.com kohei.kobayashi@jp.pwc.com teruyuki.takahashi@jp.pwc.com ryann.thomas@jp.pwc.com naoki.hayakawa@jp.pwc.com PwC Japan Tax (ZeirishiHojin PricewaterhouseCoopers), a PwC member firm, is one of the largest professional tax corporations in Japan with about 470 people. Within this practice, our Financial Services Tax Group is comprised of approximately 70 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 reorganisation, global tax planning, and the consolidated tax system to clients in various industries. PwC firms help organisations and individuals create the value they re looking for. We re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 2013 ZeirishiHojin PricewaterhouseCoopers. All rights reserved. PwC refers to ZeirishiHojin PricewaterhouseCoopers, a member firm in Japan, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. PwC 5