TT-524 -- Tax Tumble, ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, July 5, 2009 Issue No. 524


- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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Last week the Ministry of Finance (MoF) released data which
shows that the global recession is having a marked impact
on the taxes that Japanese companies pay to the government.
According to the data, the corporate tax-take took a 30%
tumble to JPY10.01trn (US$103bn), the largest year-on-year
fall since records for this source of tax were first
compiled in 1947.

Overall, the tax take fell 13.2%, or some JPY6.75trn
(US$69.6bn), leaving the MoF with some egg on its face.
While the Ministry probably couldn't have predicted the
true impact of the Lehman implosion when they reduced the
overall tax forecast from JPY53.6trn down to JPY46.42trn in
December, nonetheless, they were looking less than smart
after the actual tax income came in at just JPY44.26trn

This shortfall is cause for serious concern, since the
government seems to want to stick its head in the sand by
saying that the economy will still grow by a healthy amount
in 2010. As a result, they have have not cut their budget
-- indeed it is blowing out.

We're not quite sure why they can't figure out that if last
year the very negative figures in fact included 6 healthy
months of income prior to the Lehman collapse, then what
will the tax take be if every month of income will be as
bad as it has been recently? It's apparent to us at least
that the nation's tax take will probably sink below
JPY40trn, and thus all the "by the skin of our teeth"
calculations made by the government regarding meeting
increased social security payments are pretty much out the

[Continued below...]

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While the global stock markets may be temporarily up,
we think the recovery in stocks is both illusory and
superficial, and is not going to last very long. Indeed,
our take is that Japan will follow an inevitable slide in the
U.S. markets, following what will probably be a significant
bout of inflation due to printing more than 100% more dollars
in that economy over the last 9 months. This will cause
further disruption to the global economy and thus sideswipe
any rosy recovery of domestic tax revenues next year.

As a reminder, last week's U.S. jobs report of 9.5%
unemployment shows that U.S. companies don't think things
are getting better. Instead, they're hunkering down for a
lot worse to come.

The fall in tax revenues couldn't come at a worse time for
the government, as it has committed to some huge fiscal
stimulus spending, as well as having to pick up the
additional costs of more unemployed, more pension claims
from the baby boomer retirement surge that started in 2007,
and more special assistance for creditors hurt by
increasing bankruptcies. Last week Teikoku Databank,
Japan's equivalent of Moody's, said that a near-record 18
listed companies went under in the first 6 months of this
calendar year, leaving behind liabilities of more than
JPY1trn (US$10bn) in debts. Their investors and vendors
would be having to turn to the banks for loans to cover
these losses.

On July 1st, the government endorsed a plan for its highest
budget ever (need a dose of reality anyone?), of
JPY52.67trn for fiscal 2010, saying that stimulus is more
important than financial discipline. One wonders just how
the government thinks it will meet its social security
costs in particular, which will increase by JPY1.09trn in
2010, to JPY25.1trn -- about half of the overall proposed
budget. Mention has been made that the extra costs will be
met by corresponding cost cutting in defense, eduction, and
medical outlays, but with a JPY10trn shortfall in tax,
North Korea's missile posturing, and increasing negative
publicity about the failing medical system, it is difficult
to see how this would be possible.

Perhaps the government feels it can issue a lot more new
bonds, and this is a possibility, especially if the U.S.
dollar takes a bad tumble and global investors seek a
relatively "safe haven" currency such as the yen. Currently
bond proceeds as a portion of General Account income are
down 8.2% over last year, but by arm twisting of the big
institutional funds, as well as directly and indirectly
raiding the Japan Post Bank, which probably won't be
privatized after all, the government probably still has
another 1-2 years of fudging they can do before finally
having to pull the pin on the "tax grenade" -- being the
raising of national consumption tax to 10% or 12.5%.

This perfect storm in government debt control is no doubt
creating some strong pressures on the Tax Office to try to
rake in some more income until the consumption tax jackpot
of 2011 or 2012. We already know that they are set to
implement some aggressive corporate tax reclamation
strategies. One of these is transfer pricing taxes, which
is an area open to interpretation and some juicy claims.
It doesn't help that the law was changed so that not only
overseas subsidiaries of multinationals but now also their
branches as well, will be subject to Japanese tax. This
bodes badly for some foreign firms who have tried to
structure their holdings in Japan to avoid having to pay
tax in two jurisdictions.

One recent application of the new transfer pricing tax law
and its interpretation is to be found in the Tax Office's
current spat with The Asahi Shimbun reported
today that the Tokyo Regional Tax Bureau has told Amazon
that it owes them JPY11.9trn (US$123m) in taxes for
unreported income in Japan over a three-year period to
2005, since the company operated as if its branch office
was a permanent operation in Japan and thus is taxable
domestically. is apparently saying that the tax claim is
inappropriate because it is already paying taxes for Japan
sales under the bilateral tax treaty between the U.S. and
Japan, to the IRS of the U.S.

Our take is that the Tokyo Regional Tax Bureau is using
this as a test case to see if it can lock in some of the
multinational revenues into the Japanese side of the
equation. But this could be a risky undertaking, because
there are no doubt a lot more Japanese firms operating in
the USA who could similarly be hit with IRS demands if this
claim was to go through.

Not just Amazon and other foreign firms, the new transfer
pricing policies will hurt Japanese multinationals as well.
Despite various tax holiday offers, Japanese companies know
full well that domestic corporate tax rates are
significantly higher than in other industrialized nations,
and thus having to repatriate more profits home would
seriously damage their international competitiveness.

We think that instead of going after more taxes from
companies, who in any case are pretty much shielding the
government from the real costs of the recession by keeping
most permanent employees employed, the government should
simply consider cutting back the social security
entitlements. The easiest way to do this would be to raise
the retirement age to 70 or 75. We're expecting this will
happen anyway, so why not get it over and done with?


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+++ NEWS

- DeNA consolidates Chinese SNS business
- Foreign kids and returnees need more language support
- Bonuses down JPY100,000
- NikkoCiti Trust to go to Nomura
- Japanese tourists scalped in Rome restaurant

-> DeNA consolidates Chinese SNS business

Internet SNS company DeNA has announced that it will buy
the British-owned Chinese SNS company Waptx, and merge it
with the company's China operations. Waptx has 9m users and
is China's largest mobile SNS. DeNA has apparently been
struggling with its own efforts in China, and has just
200,000 or so subscribers. No word at present on how much
DeNA is paying for its acquisition. (Source: TT commentary
from, Jul 4, 2009)

-> Foreign kids and returnees need more language support

According to the Education Ministry, about 30,000 children
of foreign families and returnee kids around the country
are struggling with their Japanese-only public school
classes, and need supplementary language training. The
Ministry got the number after surveying schools around the
country, and found that kids with special language needs
had risen 13% from a year earlier. By ethnicity, 40% of the
kids come from Portuguese-speaking families, 20% from
Chinese families, and 13% from Spanish ones. (Source: TT
commentary from, Jul 3, 2009)

-> Bonuses down JPY100,000

According to a survey of 500 housewives, conducted by Sompo
Japan DIY Life Insurance, the average annual bonus brought
home by wage earners fell by about JPY98,000 to JPY655,000.
81.6% of those with incomes of JPY6m said that their lives
were more difficult as a result. **Ed: Actually, about
53.6% of those surveyed actually registered decreased
bonuses, so it seems that the polarization of worker
salaries in different industries is starting to increase.**
(Source: TT commentary from, Jul 4, 2009)

-> NikkoCiti Trust to go to Nomura

Nomura Trust and Banking has announced that it will buy the
NikkoCiti Trust and Banking business from Citigroup Japan
for JPY19bn (US$196m) and hopes to close the deal by
October. Media reports originally had Citi in discussions
with MUFG, but it appears that Japan's largest bank decided
to break off the negotiations. The deal is part of four
major assets being sold, the other three being the Nikko
Cordial brokerage, which was sold to Sumitomo Mitsui
Financial Group for US$5.9bn, and call center company Bell
Systems 24 and the Nikko Asset Management business, both of
which are expected to fetch around JPY100bn. (Source: TT
commentary from, Jul 1, 2009)

-> Japanese tourists scalped in Rome restaurant

Not that it's really news that Japanese tourists get ripped
off when abroad, but one Rome restaurant went over the top
when they charged a Japanese young couple Eu695 (JPY95,000)
for lunch. The couple accepted a recommendation from the
waiter to let him recommend the food -- which included a
JPY13,000 bottle of wine (not so bad) and several pasta
dishes for JPY25,000 (over the top). In addition to the
profitable pasta, the restaurant also overcharged for the
oysters, lobster, sea bass, and porcini mushrooms -- all of
which the police checked on the bill and found to be
significantly higher than the menu prices. (Source: TT
commentary from, Jul 2, 2009)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

=> In TT522, concerning our article on English school sales
falling in the wake of Nova, a reader points out:

*** Reader feedback:
Hi -- think you've slipped a decimal in the currency
exchange calculation on Gaba sales. While you state that
sales in FY2008, ending December, were JPY9bn (US$9.3m) and
the net profit was JPY278m (US$2.86m), in fact, the JPY9bn
in sales should be worth around US$90.3m, correct...?

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