Recommendationsof theEU-Japan Business Round Table
to the Leaders of the European Union and Japan
Rome, 28 & 29 April 2011

Working Party D
Financial Services, Accounting and Tax Issues

Working Party Leaders:
Mr Denis DUVERNE
Deputy Chief
Executive Officer
AXA

Mr Kazutoshi INANO
Chairman of the Board of Directors
Nomura Asset Management
Co., Ltd

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List of Abbreviations
Abbreviation Meaning

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Recommendations to the EU and Japan< Financial Services >WP-D / #01 / EJ to EJ
financial crisis

Progress in the financial market reform since the・ In response to the global financial crisis, the G20 countries have agreed to thecommon principles for financial market reform, which are: (1) strengthening
transparency and accountability, (2) enhancing sound regulation, (3) promoting
integrity in financial markets, (4) reinforcing international cooperation, and (5)reforming international financial institutions. The G20 countries are now taking
actions for their implementation. Since the G20 summit in November 2010 inSeoul, the process for these regulatory reforms has moved from the phase of theconsideration to implementation.
・ Specifically, under the G20 framework, the Basel Committee of Banking
Supervision (BCBS) published the rule book for Basel III in December 2010,
which stipulates the details for the banking regulation and which is to be
implemented internationally. Each country shall carry out procedures in preparing
its domestic rules as the next phase for application of Basel III starting fromJanuary 2013.
・ Regarding Systemically Important Financial Institutions (SIFIs), the concrete
regulations for SIFIs are now being built at the global level following the adoptionof the proposal by the Financial Stability Board (FSB) at the G20 summit in Seoul.
Global SIFIs (G-SIFIs) will be specified in 2011. In consideration that G-SIFIs are
not only large in scale but also considered to be important in the markets and tohave significant impact on society and the economy as a whole, G-SIFIs will be
required to have higher capacity for loss absorptions than other institutions, andthe framework for those orderly resolutions will be built.
We agree in general that these financial reforms will stabilize the financial systemand enhance the transparency and accountability of financial institutions, financial
markets, and financial products, while ensuring their fairness and integrity. The
stabilization of financial markets and the financial system is important for market
users including companies that raise capital.
・ However, given that measuring systemic risks is very difficult and the acquisitionof consistent data across countries and industries would be difficult as well, thecriteria (or benchmarks) to measure the “SIFIness” should be cautiously set
out. In addition, when the FSB specifies SIFIs it would need to mitigate moral
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Page 3 of 12hazard and to avoid an excessively politicized process. Considerations offinancial reforms with systemic risks should be delivered through theframework of comprehensive and macro-prudential supervision.

WP-D / # 02 / EJ to EJ Issues to be mindful of when proceeding with reform・ We shall, at the same time, point out that there are several issues we should bear in mind
as we proceed with regulatory reform. Innovation and appropriate risk appetite areimportant and necessary for financial actors to perform their role of financing economic
growth. A careful balance must be struck between innovativeness, risk appetite andregulation. Also we should bear in mind that strengthening the regulation on large
financial institutions could result in distorting the conditions for a level playing field andcould end up creating “too-big-to-fail” institutions.
・ One must not give in to the temptation of a “one size fits all” solution. The new
regulatory framework should take into account the circumstances that are specific toeach country and/or the variety of financial players, and respect their business models
and their time horizons. The different economics of financial activities should beappropriately reflected in the new regulatory regimes. Failing to do so would lead to herd
behaviour and heightened volatility rather than to stability and transparency.

・ We also have to recognize that maintaining liquidity in the secondary market isimportant. One of the most serious problems in the financial crisis was the lack ofliquidity in the secondary market. Although regulatory reform should move forward
in order to prevent the next financial crisis, we also have to be mindful of
preventing a lack of liquidity in the secondary market. Asian countries are
expected to be the driver of economic growth after the financial crisis. In thesecountries, the role of capital markets is still limited and their financial system is stillbased on the traditional banking system. If low liquidity in the secondary market
and credit restraint due to the capital requirements for banks should happen insuch countries, corporate finance could face constraints from both the capital
market and the banking system, and this could result in a negative impact on
economic activities and growth.
・ Even though the financial industry is one of the most globalized industries, weshould still bear in mind that regulation and practices vary greatly fromcountry to country, particularly for small and mid-sized financial institutions.
・ According to “Basel III”, investments in the capital instruments of banking,financial and insurance entities would be deducted. However, for countries wherereciprocal cross holdings in the capital between financial institutions are prevalent,sensitive handling such as giving an adequate transition period would benecessary. And regulatory capital instruments such as contingent capital or
debt instruments with bail-in clauses designed by financial regulatory
authorities need to be introduced with sufficient consideration for market
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capacity. Furthermore tightening regulation on shadow banking, led by the FSB,
needs to fully consider the role of the shadow banks to the real economy and to
take measures not to disturb bona fide business activities.
・ When regulation is discussed in the global context, the characteristics ofeach country and region should be fully considered. We believe that weshould build harmonized regulations through multilateral discussions on a global
basis. Among other things, we should take fully into account the impact on theeconomy and the outcome of the combined impact of several individual
regulations when they are concurrently implemented.

<Accounting>
WP-D / # 03 / EJ to EJ

Accounting Issues in EU and Japan・ Working Party D (previously Working Party 2) has recommended enhancement of
the governance of the accounting standard setting bodies and the convergence ofaccounting standards. The Financial Stability Board (FSB) is going to undertake astrategic review of the policy development work of international standard setting
bodies, and the IASB has established an external Monitoring Board, members ofwhich include the International Organization of Securities Commissions (IOSCO),
the European Commission, the US Securities and Exchange Commission, andJapan’s Financial Services Agency. In addition, IASB and FASB have established
the Financial Crisis Advisory Group (FCAG), which is comprised of senior leaderswith broad international experience in financial markets. FCAG will advise the
IASB and FASB on the standard-setting implications of the global financial crisisand on potential changes to the global regulatory environment. Since its inception,
FCAG has announced a wide-ranged report on the activities of the AccountingStandard Board. We support these trends and look forward to further
developments. We also support the progress towards the introduction of IFRS in
Japan and look forward to further discussions on convergence.
・ While the purpose of financial accounting is to provide financial information to acompany’s outside stakeholders such as shareholders and creditors, we strongly
point out that the view of a company’s management is also important whensetting standards. Changes in accounting standards have impact on corporate
activities and thus on the economy. We believe that net income with a recycling
arrangement is useful as accounting information. Accounting costs affect the
behaviour of enterprises. If items not recycled such as actuarial gains and losses
in pension accounting are expanded, and thus profit and loss not reflected in net
income are expanded too, we are concerned that underlying business activities
such as cost management and selling price formation could be disrupted.

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・ IASB is in the process of revising its financial instrument accounting standard andwe support the approach to recognize the net unrealized gain on available-forsale securities as other comprehensive income (OCI). However, it is also
proposed that if the net unrealized gain is recognized as OCI, the dividend
is recognized as net income but the realized gain is recognized as OCI, notas net income. We cannot agree with this approach.
・ Net realized income has been described by some as a kind of income
manipulation. We believe, however, that management is able to send out its
message by the sale of the securities. Thus, recognizing the net realized income
as net income gives more useful accounting information. For example, on themeasurement of assets and liability in insurance companies which IASB calls oneof its priority projects, assets held by insurers are managed consistently with theasset liability management and the risk management of the company in order toback insurance liabilities and to meet insurers’ commitments toward policyholders
and not in the interest only of the shareholders (and so not for “managing
earnings” over time). Furthermore, the removing of the available for sale (AFS)
category is inconsistent with the business model approach on which IFRS 9 isbased: the long term business model of insurance should be recognized throughthe AFS.
・ As part of the process to strengthen immediate recognition in the accounting
standards of employee benefits, the actuarial gains and losses may berecognized immediately upon accrual as OCI. The immediate recognition of
actuarial gains or losses coming from short term financial market fluctuations
could cause pension plans, which are long term promises between employers
and participants, to give excessive fluctuation to net income. We support theapproach to recognize actuarial gains and losses as OCI and not as net
income. On the other hand, we believe actuarial gains and losses should berecycled for the above-mentioned reason.
・ We ask IASB to discuss revenue recognition criteria with carefulconsideration of the actual business practices in countries around theworld. It is necessary to recognize the possibility that changing the accounting
standards would affect business practices. We believe that already-establishedaccounting practices should not be overruled unless the accounting standard
reform is truly necessary, such as when concrete problems that may hinder
investor’s decision-making already exist.
・ The IASB and the FASB published the exposure draft (ED) in August 2010 inwhich they proposed drastic revisions. The exposure draft proposes a single
model for operating and finance leases by eliminating separate treatments.
However, we point out that this rule that treat operating and finance leases
together has quite a few challenges since there is plenty of room forarbitrariness in that it is necessary to carry operating leases on the balance sheet
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Page 6 of 12and to revaluate the estimate of the leasing period or variable lease fees regularly.
We call for an application that adequately reflects business practices.
Moreover, if the leasing accounting standard is applied to the entire contracts inthe case in which the contracts of leases and services are not separable, evenelements other than utilization rights of an underlying asset, such as "services
offered to help an original asset work appropriately” or " added value offeredthrough the transaction concerned” would need to be recorded on the balance
sheet. These elements might not only be corresponding to the definition of thelease, but also could lead to the transformation of the concept of the asset andthe liability of financial statements of such an element. We request accounting
treatment that reflects the business realities appropriately.
・ With regards to the IASB’ s financial statement presentation project, in addition to
OCI issues and the removing of the two separate statements (income statement
and statement of comprehensive income), we are concerned about therequirement for the use of direct method in cash flow statement. Users offinancial statements are able to acquire sufficient useful information fromdisclosures with the indirect method. Based on the fact that companies will incurlarge amounts of costs, we do not see any overriding benefit coming from therequirement of direct method.

<Tax >
WP-D / #04 / EJ to EJ Tax Issues in the EU and Japan・ The governments of Japan and Europe should ensure that dividend paymentsfrom subsidiaries to parent companies and royalty and interest payments between
related parties are, to the greatest possible extent, exempted from withholding
taxes in the source country. While there have been some improvements withrespect to the dividend taxation between Japan and some EU member countries,
we believe that the removal of double taxation is still an important issue, and wehope that all the EU Member States and Japan will conclude tax treaties. In orderto reduce the risk of economic double taxation, furthermore, it is important toensure an arena for wide-ranging dialogues between the tax authorities. In
particular, as seen in the recently revised Japan‐Holland Tax Treaty, theyshould introduce clauses that will enable corresponding adjustments andarbitration in tax treaties. In addition, they should harmonise and simplify
documentary requirements in transfer pricing taxation and promote andfacilitate the conclusion of bilateral and multilateral APAs.
・ With the progress of convergence of Accounting Standards, new deviations
arise between corporate accounting and tax practice. We ask that theGovernments of Japan and Europe respond flexibly to the deviations.

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・ When companies conduct their businesses on a global basis, transparent and fairtaxation in countries are extremely important. If the taxation on some specificindustry or sector is introduced, it could distort resource allocation and damage
the sound growth of companies and economies. We hope that transparent andfair tax reform and implementation are continued.
・ Participation exemption, by which dividends and capital gains received frombusiness investment are exempted from further corporate taxation, is one
measure to encourage mutual direct investment. The authorities of the EU andJapan should consider introducing participation exemption and exempt
dividends and capital gains received from business investment from further
corporate taxation.

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Recommendations only to Japan<Financial Services>
WP-D / # 05 / EJ to J Financial Service Issues in Japan・ The Japanese Government changed its Postal privatization policy and announced apolicy that would allow its entry into new business areas under special, privileged
regulation, while the government share ownership is maintained, and financial institutions
in EU and Japan have expressed strong concerns. We believe that new productdevelopment and business expansion, as well as the lifting or abolishment of thelimit on both postal savings amounts and insurance, should not be implemented
until a level playing field is established. In addition, it is necessary to establish
procedures with transparency and to involve a constructive discussion through the reform
process.
・ FSA has deregulated insurance sales through banks, and consumer convenience isimproving. However, there are still some regulations to avoid banks’ “pressure sales”. For
example, small- to medium-sized corporate clients who have a loan or even larger
corporations borrowing from a regional bank cannot purchase insurance products
through their lender bank. The regulation will be reviewed this year, and the regulatory
reform should be discussed for further enhancement of consumer convenience,
while paying attention to the protection of consumers’ interests.
・ We believe that a rapid recovery from Great East Japan Earthquake is and should be a
top priority. The Government of Japan has shown unprecedented coordination amongagencies in dealing with foreign businesses in a flexible way during this emergency andwe hope that will continue. At the same time, due consideration should be given tosoundness of fair market competition while the Japanese government provides support toenterprises that were seriously hit by the disaster. Furthermore, the stability of thesecondary market for bonds or restraint of inflation should be cautiously considered when
the Japanese government raises funds for revival, such as through the issuance ofgovernment bonds.
<Accounting>
WP-D / # 06 / EJ to J Accounting Issues in Japan・ Under IFRS, compensated absences are recognized as a liability. However, since thereserve for compensated absences has never been recorded in Japan and suchrequirement could have a relatively heavy impact, we believe prudent discussion
should be held.
・ Under IFRS, income is classified into “net income” and “other comprehensive income.”
We request organizing the concept of a profit and the range of recycling in the earlystage. In particular, “net income” is regarded as the basis of performance indicators in
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Japan and compatibility between the Companies Act and the Tax Code is secured.
Therefore, the conventional treatment for recycling should be maintained even after
the convergence of Japanese standards to IFRS advances.
<Tax>
WP-D / #07 / EJ to J Tax Issues in Japan・ In order for companies to carry out international business expansion smoothly, we ask
the tax administration of Japan to review its transfer-price taxation based on aninternational common model such as the OECD model, and to secure furthertransparency in its implementation.
・ We request the Japanese government to consider further reducing corporation tax rates.
We support the proposal of the government stated in Proposed 2011 Tax Reform ofDecember 2010 to reduce effective corporation tax rate by 5%-point from the current
40%, which is the highest level throughout the world. However, while many countries areaccelerating the reduction of effective corporation tax rates, Japan should lower its
corporation tax rate even further to the international equivalent of around 30% in
order to ensure Japanese companies’ international competitiveness and also to stimulate
investments from home and abroad.
・・ As Japanese society ages, Japanese individuals in the workforce will need to invest andaccumulate more assets for retirement. The role of private sector insurance will be more
important in such fields as medical (hospital), long term care and pension insurance. We
ask the Japanese tax authority to continue to expand tax breaks to encourage thedevelopment of individual preparation for retirement.

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Recommendations only to the EU<Financial Services>
WP-D / #08 / EJ to E Solvency margin regulation
・ Under the prudential regulation for insurers in the EU, the Solvency II to be introduced in
January 2013, EIOPA (European Insurance and Occupational Pensions Authority) is now
engaging in equivalence assessments between third-country regulatory and supervisory
regimes and the Solvency II Directive． As Japan is included in the first wave under one
part of this process (Reinsurance – Article 172), we have been working together withJapan’s FSA, and have provided evidence and comments as requested by EIOPA.
・ We are confident that the regulatory environment for insurers and insurance groups inJapan is on a par with that in the EU. We shall therefore point out that it is of utmost
importance for Japan to receive a positive equivalence determination from EIOPA
and then not be disadvantaged by duplicative regulations, such as the pledging of assets
to cover unearned premiums and outstanding claims between the home country and thehost country. Also, we add that the whole assessment procedure which is expected totake until 2015 should be conducted in a constructive manner.
<Tax>

WP-D / #09 / EJ to E Tax Issues in the EU
・ It is extremely important to maintain a transparent and fair tax system in eachcountry when the enterprises develop their business globally. Introduction of tax
regulation focusing on specific industry or category of business, such as a Bank
Tax, would pose a distortion of resource distribution and damage the sounddevelopment of enterprises and the economy. We ask the EU and the Member
States not to introduce the tax regulation which foreseeability would lead to
distortion of economic activities in the private sector.
・ Many Japanese companies in the EU are implementing integration andrationalization of their European business organizations. Examples are thecentralization of such functions as sales support and accounting. The relation
between intra-group transactions and taxation is an important element in decision
making in a business. We ask the EU and the Member States to establish a
tax system that will enable companies conducting business in the EU toenjoy the benefit of the Single Market to its full extent. In particular,werequest to achieve the following:Working Party D
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We welcome the proposal for a Council Directive on a CCCTB (Common Consolidated
Corporate Tax Base) proposed on 16 March. In a common consolidated corporate tax
base, non-taxation of unrealised gains on goodwill within a group of companies
that form a CCCTB,non-application of the arms-length principle within a group ofcompanies that form a CCCTB and the off-setting of profits and losses within agroup of companies that form a CCCTB should be realised.

•

As for amendment of the Merger Directive (Directive 90/434/EEC), we request to extend
the scope to cover the transfer of real estate and other intangible assets inreorganisation and to abolish the requirements in certain Member States tomaintain the holding of shares received in exchange of contributed assets for a
specified of years.

•

Transfer Pricing;To provide sufficient incentive for compliance with the EU TPD, the EU
and the Member States should commit themselves to exemption from penalties (i.e.
penalties related to non-compliance with documentation requirements, penalties related
to transfer pricing adjustments and interest related to adjustments) if a company
submits an EU TPD acting in good faith and in a timely manner.

•

VAT:Although the VAT system is a common system in the EU, Member States havecertain discretion in it. Presently, therefore, the centralisation of VAT administration
carries a high financial risk. The EU should go further in the simplification andharmonisation of the VAT system so that companies with Europe-wide businesses
could centralise VAT accounting in a cost-effective manner.

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