MW-90 -- One Step Forward, Two Steps Back

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J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
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Issue No. 90
Monday, August 30, 2004
Tokyo

CONTENTS
@@ VIEWPOINT: One Step Forward, Two Steps Back

========================= EA Event ====================================
Entrepreneur Association of Tokyo: September Seminar

This September, Tokyo entrepreneur Mark Devlin -- CEO and Publisher of
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Date/Time: Tuesday, September 7th 7:00 pm
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@@ VIEWPOINT: One Step Forward, Two Steps Back

Last week we mentioned the delays in the Trust Business Law. This
week we read about another proposal for changes to the law that would
significantly simplify and improve Japan's tax laws. J-TaD (a
publication from TP Publishing -- http://www.transpacific.jp/
publishing/index.html) reports in its September edition that proposals
for a Japanese version of the limited liability company are moving
ahead, which would result in a corporate form that is fiscally
transparent.

One of the greatest disincentives for investors and entrepreneurs
in Japan is the double taxation inherent in the system for taxing
corporate profits. Profits of a corporation are taxed at the
corporation at 42 percent, and then distributions of the after tax
profits are taxed in the hands of individual recipients at up to 50
percent. Fortunately this hasn't deterred a lot of intelligent and
enthusiastic people starting businesses in Japan, but it diverts a
lot of time and attention from growing their business into often
fruitless attempts to manage their tax situation.

This new proposal (actually, we understand the proposal has been
around for a while, but it is now receiving some serious support and
attention) is expected to create a corporate form that preserves the
advantage of limited liability, but allows for taxation like a
partnership, i.e. each shareholder's share of income and expense is
included, for tax purposes, in the income and expense of the
shareholder. This would eliminate the double taxation described
above.

So if double taxation is removed, what can you do to reduce the
effective rate of taxation on your income? The best way we know of
is the tried and true method of secondhand wooden housing.
Unfortunately, J-TaD had some bad news for us on this score:

A recent ruling by the Nagoya National Tax Tribunal disallowed a
deduction against income for losses incurred in a partnership for
investing in shipping leases. The tribunal didn't disallow the
deduction on the merits of the facts and the relevant law: it
disallowed the loss on the basis that the transaction was tax
evasion. We have two problems with this: unlike other countries,
Japan's tax law does not contain an explicit anti-abuse provision
that allows the revenue authorities to recast a transaction
because its primary purpose is to avoid tax; although we don't
know all of the facts and circumstances, it is likely that the
investors faced real economic risks and possibility of returns,
and we have trouble with tax authorities disregarding genuine
economic transactions just because they have a particular outcome
in terms of tax.

We will keep looking in to this to see how the case progresses,
and how similar it is to the wooden building transactions that we
have seen. But as we've complained before, there is not a lot of
purpose in improving the tax laws if the revenue authorities and
courts reinterpret them without regard for the economic realities
of a transaction -- and to the detriment of investors.

-- John Charles-Decourcy

================ JOURNALISM INTERNSHIPS ===============================

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======================== Setting up a Company ==========================
Entrepreneur's Handbook Seminar

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Time/date: 10:30am, Saturday, September 11, 2004
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STAFF
Written by John Charles-Decourcy (jcd@japaninc.com)

Edited by J@pan Inc staff (editors@japaninc.com)

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