Recommendationsof theEU-Japan Business Round Table
to the Leaders of the European Union and Japan
Paris, 29 & 30 April 2013

Working Party D
Financial Services, Accounting and Tax Issues

Working Party Leaders:Mr. Jean LEMIERRE
Senior Advisor to the Chairman
BNP Paribas

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

List of Abbreviations
Abbreviation Meaning
FSB
BCBS
IOSCO
EMIR
MiFID
OCI
APA
FSA
EIOPA

Financial Stability Board
Basel Committee on Banking SupervisionInternational Organization of Securities Commissions
European Market Infrastructure Regulation
Markets in Financial Instruments Directive
Other comprehensive income
Advanced Pricing Agreement
Financial Services Agency
European Insurance and Occupational Pensions
Authority
FTT Financial Transaction Tax

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Introduction

Japan and the EU are each facing the challenges of recovery in various economic
environments such as a long-term deflationary economy or financial crisis and the need torestore sustainable growth. The leaders of the G20 have agreed to implement regulatory
reforms to promote integrity, stability and transparency in the financial sector and suchglobal efforts for the reform implementation are being monitored closely by the Financial
Stability Board (FSB) to ensure international consistency. The proposed regulations andprudential measures are expected to prevent the recurrence of systemic crisis, increaseaccountability and ultimately contribute to economic recovery through support given to real
economic activities by a healthy financial sector.
It is essential that governments and global supervisory bodies take a coordinated approachto the introduction and implementation of regulations or measures, to identify their full andcumulative implications on markets which have different circumstances and practices, andto ensure consistency and efficiency. This is also applicable beyond financial regulations, totax or accounting measures for example, as the common objective is to preserve efficient
resource allocation for companies operating globally as well as level playing fields for allparticipants. Japan and the EU should unite their efforts to steer through this challenging
time and achieve recovery most effectively.
The above is reflected in our selection of priority Recommendations for this Working Party
D document. Two asterisks (**) identify top priority recommendations.

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Recommendations from both
European and Japanese industries
WP-D / #01** / EJ to EJ
market reform

Issues to be mindful of when proceeding with financial



The BRT recommends avoiding excessive ‘ring-fencing’ in each jurisdiction andduplication of regulations with effective supervision by the home country andinternational coordination, because any constraint on flow of global banking services
may eventually cause negative effects on corporate business activities including
increased cost of funding, inefficient cash and asset management and negative effects
on other cross-border transactions in various occasions.



The BRT requests that, while seeking resiliency of the wider financial system, any
financial market reform should fully address its impact on effective functioning of
relevant financial and capital market activities, particularly for liquidity in the markets.

<Recent Progress>
The Basel Committee on Banking Supervision (BCBS) and the International Organization of
Securities Commissions (IOSCO) have issued in July 2012 its first consultative paper on
margin requirements for non-centrally cleared derivatives on which comments were
submitted by end of September. Thereafter, in February 2013, BCBS and IOSCO haveissued a second consultative paper as a near-final proposal seeking further publiccomments by 15 March 2013. The FSB has published in November 2012 an initial set ofrecommendations to strengthen oversight and regulation of shadow banking and asked forcomments to be submitted in January 2013.
<Background>
For successful completion of global financial market reforms, the BRT believes thatinternationally consistent regulations should be built and implemented through multilateral
discussions on a global basis to ensure level-playing field among players and markets.
Among other things, the impact on the revitalisation of global economic growth andcumulative impacts due to regulatory reforms being implemented concurrently should betaken into account fully.
With regard to liquidity, two of the current global regulators’ proposals, namely i) margin
requirements for non-centrally cleared derivatives and ii) regulations over securities lending
Working Party D: Financial Services, Accounting and Tax Issues
EU-Japan BRT 2013 Recommendations Report
Page 4 of 12and repos in the context of shadow banking regulation (e.g. proposal of minimum haircuts
in particular), are of particular concerns. If imposed as proposed, these regulations would
cause negative impacts on financial markets, credit extensions and eventually economic
growth, which is an unintended consequence to be avoided.

WP- D / #02**/ EJ to EJ

US Regulations

The European and Japanese authorities and industries should continue to unite their efforts
to ensure internationally consistent and level-playing field implementation of US regulations
while preventing excessive extra-territorial and other prejudicial application thereof.
<Recent Progress>
The BRT appreciates the Authorities coordination in the implementation of OTC derivatives
reforms. Some results were observed. In December 2012, the US Securities and Exchange
Commission’s Office of International Affairs released a joint statement which reflects
statements of European, U.S.& other OTC derivatives regulators. The statement suggests
some potential changes from the Commodities Futures Trading Commission's cross-borderproposal.
<Background>
For the derivatives market and business, it is particularly important that regulators in bothsides of the Atlantic fully coordinate and streamline all requirements for the trading, clearing
and reporting of swap transactions as well as associated dealer registration or otherlicensing requirements, envisaged under the proposed EMIR (European Market
Infrastructure Regulation), the MiFID Review (Markets in Financial Instruments
Directive) and the US Dodd-Frank Act. There are also other areas where extraterritoriality
or inconsistent and discriminatory applications could be an issue for non-US parties, suchas the anticipated impact of the rule proposed by the Federal Reserve Board on non-USbanks.

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WP- D / #03 / EJ to EJ

Accounting Issues in EU and JapanThe BRT recommends the following:

In addition to net unrealised gain on available-for-sale securities being recognised asother comprehensive income (OCI) and dividend, as net income, realised gain should
be recognised as net income and not OCI.



Actuarial gains and losses on employee benefits should be recycled.
Operating and finance leases should be treated separately.
A disclosure framework is needed to reduce the burden of preparation.

<Recent Progress>
According to the Authorities Progress Reports, the EU and Japanese authorities aremaintaining a dialogue to ensure the appropriateness of standard-setting processes.
<Background>
The IASB and the FASB have been working on convergence projects to improve financial
reporting. They have issued a Joint Update Note on Accounting Convergence in April 2012
summarising the status of projects completed or for some, delayed. They have set a newtarget to issue final standards on items such as classification and measurement and leases
by mid-2013. In February 2013, for the G20 Finance Ministers and Central Bank Governors
meeting in Moscow, the FSB has published a joint update by IASB and FASB on the status
and timeline of their remaining projects on converging their standards. The G20 Finance
Ministers and Central Bank Governors expressed concern about the delays in theconvergence of accounting standards to date and asked the IASB and the FASB to finaliseby the end of 2013 their work on key outstanding projects for achieving a single set of highquality standards. The BRT continues to support further discussions on convergence andthe introduction of IFRS in Japan.
Generally, the volume of disclosure items has been increasing recently. An efficient
disclosure system will be needed for all stakeholders (not only those who prepare but also
the users of the information).

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WP-D / #04 / EJ to EJ

Tax Issues in the EU and JapanThe BRT recommends that EU Member States and Japan modernise the tax treaties
which were established a long time ago. Tax treaties should ensure to the greatest
possible extent that dividend, royalty and interest payments are exempted fromwithholdings taxes and provide for corresponding adjustments and arbitration.



The BRT requests the harmonisation and simplification of documentary requirements intransfer pricing taxation and the conclusion of bilateral and multilateral APAs in transfer
pricing taxation.



The BRT maintains its recommendation to introduce participation exemption andexempt dividends and capital gains received from business investment from further
corporate taxation.



The BRT recommends avoiding introducing tax regulation focusing on specific industry
or category of business, such as a Bank Tax, which could lead to distortion in the
allocation of resources and economic activities in the private sector.

<Recent Progress>
Progress has been limited.
<Background>
The removal of double taxation or simplification of documentary requirements is necessary
to ensure transparent and fair taxation for companies conducting business on a global
basis. The introduction of taxation on specific industry or sector which could distort resource
allocation and impair economic growth should be avoided.

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Recommendations
from both European and Japanese industries
to Japan
WP-D / #05 / EJ to J

Financial Services Issues in JapanThe BRT recommends establishing a level playing field before the postal financial
entities broaden their range of products.



The BRT believes that the Japanese government should clarify share sale schedules ofJapan Post Bank and Japan Post Insurance Co.

<Recent Progress>
Japan Post Holdings presented a plan for the “listing of Japan Post Holdings” at a meetingof the Postal Privatization Committee on 29October 2012.
<Background>On 30November2012, the Japanese Financial Services Agency (FSA) and the Ministry ofInternal Affairs and Communications granted new services to Japan Post Insurance withconditional approvals based on the Postal Service Privatization Act, Article 138, Paragraph
4.

WP- D / #06 / EJ to J

Enlarging business scope of financial institutions

The BRT recommends enhancement of consumer convenience by enlarging the businessscope of financial institutions (e.g., deregulation for the legislative framework of insurance
sales through banks).
<Recent Progress>
As for measures to prevent internal collusion on sale of insurance carried out by banks, the
FSA revised part of the regulations that prevented bank from selling insurance to loanborrowers and that went into effect on 1 April 2012.

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<Background>
The FSA has been monitoring the status of bank sales of insurance. However, the FSA
decided to keep the basic framework unchanged and will conduct a review when necessaryrather than setting a timetable for future review.

WP- D / #07 / EJ to J

Tax issues in JapanOn transfer pricing the BRT recommends the following.
 All cross-border transactions should be dealt with under transfer pricing legislationand not under domestic corporate tax rules relating to donations
 To ensure consistency between transfer pricing methodology for audit assessmentand methodology used in Advanced Pricing Agreement



The BRT recommends that tax authorities accept and process applications for tax
rulings and tax law provides for right to request and obtain tax rulings.

<Recent Progress>
Limited progress.
<Background>
Transparent and fair taxation is key to the activities of global companies and economic
development.

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Recommendations
from both European and Japanese industries
to the EU
WP- D / #08 / EJ to E

Banking Union and Financial System Stability

The BRT advocates the EU Banking Union and expects its further development in 2013 tosolve the current crisis and restore stability in the financial system.
<Recent Progress>
This is a new recommendation.
<Background>
Successful completion of the Banking Union initiatives by the EU Government will be theimperative to break the link between banks and sovereigns and then restore confidence ofconsumers and international financial markets, so thereby revitalise the economic growth in
the region, and consequently and hopefully remove the current uncertainties looming
around economic and business activities both in Japan and EU, or elsewhere globally.
Banking Union proposals include, i) a single banking supervisory mechanism by ECB, ii) a
single deposit guarantee system for greater protection and iii) a single resolution regime for
failing financial institutions including a pan-EU resolution fund. The BRT welcomes any
progress of those important initiatives and expects political wisdom to overcome any
differences and difficulties on the course of policy agreement.
The BRT calls the EU to be mindful that, during the course of negotiation and reachingcompromise for the initiative, it takes a due and diligent political process to overcome any
conflicts due to interests of each member state including, but not limited to, interests related
to divergence of fiscal policy as well as differences in political approach between euro-zone
and non euro-zone member states. No outcome of the efforts should result in anythinghindering the region’s economy and impairing the advantage of the EU single market.

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WP- D / #09 / EJ to E

Solvency margin regulation on insurance companies

The BRT expects that the procedure regarding the equivalence decision is implemented
constructively and Japanese supervisory systems will be regarded as equivalent toEuropean systems.
<Recent Progress>
Assessment Reports are in preparation.
<Background>
The European Insurance and Occupational Pensions Authority (EIOPA) is trying to
introduce new prudential regulation “Solvency II” of a Europe-wide harmonized framework
which provides the right incentives for insurers to better understand, measure and manage
their risks. In 2013, the EIOPA will continue to assist the European Commission (EC) in
preparing equivalence decision pertaining to supervisory regimes in third countries by way
of producing final, fully consulted upon advice. During the first half of 2013, the EIOPA
plans to provide the EC with the revised Assessment Reports for the Equivalence ofJapanese supervisory system.

WP- D / #10** / EJ to E

Tax on Financial Transaction

The BRT expresses serious concern over the recently released EC’s draft Council Directive
implementing enhanced cooperation in the area of financial transaction tax (FTT),
particularly with respect to its wider application and extraterritorial impact. For instance, as
the proposed Directive introduces both a residency and issuance test for such unilateraltaxation, it risks causing costly double and multiple taxation.
If imposed, the FTT will increase trading costs and result in reduced volume of financialtransactions and decreased liquidity. In addition, the FTT on secondary market trading insuch a wide scope of asset classes will significantly increase the funding costs and impair
legitimate hedging activities by parties such as business corporations in the financial
markets. The decreased liquidity in secondary markets is likely to cause impacts on primarymarket eventually.

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< Background >The EC announced proposals in September 2011 to impose a Financial Transaction Tax
on financial instruments between financial institutions when at least one party to thetransaction is located in the EU but it has concluded since that a common FTT system
could not be attained within a reasonable amount of time by the EU as a whole. On 14
February 2013, the EC has adopted a proposal for a Council Directive implementing
enhanced cooperation between 11 Member States in the area of financial transaction tax.
The proposed Directive mirrors the scope and objectives of the original FTT proposal put
forward by the Commission in September 2011. The approach of taxing all transactions
with an established link to the FTT-zone is maintained, as are the rates of 0.1% forshares and bonds and 0.01% for derivatives.
The proposed Directive will now be discussed by Member States, with a view to its
implementation under enhanced cooperation. All 27 Member States may participate in thediscussions on this proposal. However, only the Member States participating in enhanced
cooperation will have a vote, and they must agree unanimously before it can be
implemented. The EU Parliament will also be consulted.

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