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TOKYO: Japan's tax authorities are determined to press ahead with closing what they say is a loophole in the taxation of private equity funds, in spite of the funds' bitter complaints that the move could cripple foreign investment in Japan.
The tax bureau said it would introduce an amendment in parliament this month that would impose a 20 per cent withholding tax on foreign funds. It hopes the new rule will come into effect from April 01.
The ministry's determination to impose a tax will anger private equity companies, including Carlyle Group and JPMorgan Partners, which sent a stern letter to the tax bureau last month saying the change would undermine Japan's stated goal of increasing foreign investment.
For 40 years Japan's domestic tax code has distinguished between equity transactions and business investments. If an investor holds more than 25 per cent equity in a company and sells more than 5.0 per cent of that stake, the transaction is taxed as a business sale.
Private equity funds have worked around this rule, because each investor in a pooled investment partnership has been regarded as a discrete taxable unit. The proposed amendment would treat the entire investment fund as a single taxable unit.
Yoshiki Takeuchi, director at the finance ministry's international tax bureau, said: "We had the principle and the intent of taxing those kind of buyout funds, but we have come to realise that there's a big loophole in the process." He said his ministry had no intention of dropping its plan to "close the loophole" after what he said was fierce lobbying.
Executives have suggested the change is arbitrary and fuelled by revenge directed at foreign private equity funds, particularly Ripple-wood, which made a huge profit from the flotation of Shinsei Bank without paying capital gains tax in Japan.
Takeuchi said: "It is not revenge, but the Ripple-wood case did give us a good lesson." The change was designed to put foreign equity funds on the same footing as Japanese investors, he said. "We are not closing the door to foreign investment."
He acknowledged there was widespread resentment in Japan at foreign funds, often described in the press as "vultures", which were perceived to have run roughshod over the country's tax regulations. "We have a difficult fiscal situation right now and we are asking our own people to pay a greater tax burden. We might be accused of negligence if they know there are foreign investors making big money and that we are not doing anything."
The tax bureau said that if foreign funds paid tax in their own domicile, any tax in Japan would be counted as a credit at home. Thus the global tax burden would not change, unless the fund was domiciled in a tax haven.
Japan would not be able to levy withholding tax on funds domiciled in certain countries, including the US, with which Japan had signed tax treaties waiving its right to tax large equity transactions as business sales, the bureau said.
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