ICI Urges Japan to Provide Equal Tax Treatment of Foreign, Domestic Investments

Washington, DC, March 25, 2003 - The Institute supports the goal of tax reforms proposed by Japanese regulators-to ensure uniform treatment of equities and equity investment trusts-and urges regulators to implement the reforms in a manner that does not discriminate against foreign investment trusts.

In a recent letter to Japan's Ministry of Finance (MOF) and Financial Service Agency (FSA), the Institute notes that the MOF has been considering tax reforms that would have the result of taxing the sale of foreign funds at a 26 percent rate, while imposing a temporary 10 percent rate on the sale of domestic funds. The 10 percent rate on domestic funds would be replaced by a 20 percent rate after April 1, 2008.

The Institute believes that similar financial instruments should be treated the same for tax purposes, and urged regulators to provide that foreign equity-type investment trusts be subject to the same tax rate as domestic equity-type investment trusts.

In addition, the MOF is considering changing the withholding tax rules in a manner that would also disadvantage U.S.-domiciled funds, because Japanese investors would no longer receive a full credit for U.S. withholding taxes.

The Institute urged regulators to retain the current "balance collection" method of calculating withholding tax on foreign investment trusts, under which investors receive a full credit for foreign withholding taxes imposed on distributions.

The Institute has long advocated equal tax treatment of domestic and foreign investments. Consistent with Institute recommendations, the German Parliament recently rejected tax legislation that would have levied a tax on capital gains in such a way that significantly favored investments in German funds over investments in non-German funds.