Recommendationsof theEU-Japan Business Round Table
to the Leaders of the European Union and JapanTokyo, April 19 – 20, 2010
Working Party D
Financial Services; Accounting and Tax Issues

Working Party Leaders:Denis Duverne
Member of the Management
Board - Strategy,
Finance and Operations
AXA

Working Party D
Financial Services; Accounting and Tax Issues
Recommendations Report
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Kazutoshi Inano
Chairman of the Board ofNomura Asset Management,
Co. Ltd.

Recommendations to the EU and Japan<Financial Services>
D-EJ-1

Progress in the financial market reform since the financial crisis

・ 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.
・ Specifically, under the G20 framework the Basel Committee of Banking
Supervision (BCBS) has made proposals regarding bank’s capital requirements,
leverage regulation and liquidity regulation in order to enhance the soundness ofthe bank’s management. And the Financial Stability Board (FSB) has presented
the international principles for the compensation practices in the financialinstitution. Now it seems that a new regulatory order based on the untraditional
way of thinking is about to be built, including such measures as imposing
additional regulations on the “systemically important financial firms,” which arelarge and complex financial institutions.
・ We agree in general that these financial reforms will stabilize the financial systemand enhance the transparency and accountability of financial institutions, financialmarkets, and financial products, while ensuring their fairness and integrity. The
stabilization of the financial market and financial system is important for market
users including the companies that raise capital.
D-EJ-2

Issues to be mindful of when proceeding with reform・ At the same time, we point out that there are several issues we should bear in mind as weproceed with regulatory reform. Innovation in the financial market is important and acareful balance must be struck between innovativeness and regulation.
・ We also have to recognize that maintaining the 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 the regulatory reform should move
forward in order to prevent the next financial crisis, we also have to be mindful of
preventing the lack of liquidity in the secondary market. Asian countries areexpected 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 still

Working Party D
Financial Services; Accounting and Tax Issues
Recommendations Report
Page 2 of 8based on the traditional banking system. If the low liquidity in the secondary
market and the credit restraint due to the bank’s capital requirements should
happen in such countries, the corporate finance could face constraints from both
capital market and banking system, and this could give 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 the regulation and practices greatly vary from country
to country. For example, in East Asian countries including Japan, banks’ financing(debt) is basically through stable small deposits, and their dependence on theshort term capital is not so large as financial institutions in the US and Europe.If
the uniform regulation on the leverage leads to the restrictions on deposit taking
and thus the reductions in lending regardless of the risk to the financial system,
this could give a negative impact on economic activities. Also, in economiesincluding Japan the credit risk has been concentrated in the banking sector, andthus the need for risk diversification through securitization is still very high in orderto mitigate systemic risk.
・ When the regulation is discussed in the global context, the characteristics of eachcounty and region should be fully considered. We believe that we should build
harmonized regulations through multilateral discussions on a global basis.

<Accounting>
D-EJ-3

Accounting Issues in EU and Japan・ Working Party D (previously Working Party 2) has recommended enhancement ofthe 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 theIASB 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 the wide-ranged report on the activities of AccountingStandard Board. We support these trends and look forward to furtherdevelopments. We also support the progress towards the IFRS introduction in
Japan and look forward to further discussions on the 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 when setting
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standards. Changes in accounting standards have impact on corporate activities
and thus on the economy. We believe that net income with recycling arrangement
is useful as accounting information. Companies set the prices for goods andservices they sell based on cost. If items not recycled such as the actuarial gains
and losses in the pension accounting are expanded and thus profit and loss notreflected in the net income are expanded too, we are concerned that underlying
business activities such as cost management and selling price formation could be
disrupted.
・ IASB is in the process of revising its financial instrument accounting standard andwe support the approach to recognize the net unrealized gain on available-for-salesecurities 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 netincome but the realized gain is recognized as OCI, not as net income. We cannot
agree with this approach.
・ The net realized income has been described by some as a kind of income
manipulation, but we believe that the sale of the securities is one way of showing
the management’s decision, and thus recognizing the net realized income as net
income gives more useful accounting information. In the insurance context, assets
held by insurers are managed consistently with the asset liability management andthe risk management of the company in order to back insurance liabilities and tomeet insurers’ commitments toward policyholders and not in the interest only of
the shareholders (and so not for “managing earnings” over time). Furthermore, theremoving of the available for sale (AFS) category is inconsistent with the businessmodel approach on which the IFRS 9 is based: the long term business model of
insurance should be recognized through the AFS.
・ As part of the process to strengthen the immediate recognition in the accounting
standards for employee benefits, the actuarial gains and losses may berecognized immediately upon accrual as OCI. The immediate recognition of theactuarial gains or losses coming from short term financial market fluctuations could
cause the pension plans, which are long term promises between employers andparticipants, to give excessive fluctuation to net income. We support the approachto recognize the actuarial gains and losses as OCI and not as net income. On theother hand, we believe the actuarial gains and losses should be recycled for theabove mentioned reason.
・ We ask IASB to discuss the revenue recognition criteria with careful considerationof the actual business practices in countries around the world. It is necessary torecognize the possibility that changing the accounting standards affect thebusiness practices. We believe that accounting standard reform is necessary
when there are concrete problems that may hinder investor’s decision making, but
if not, the established accounting practices should not be overruled.

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・ With regards to the IASB’ s financial statement presentation project, in addition toOCI issues and the removing of the two separate statements (income statementand statement of comprehensive income) we are concerned about therequirement for the use of direct method in cash flow statement. The users offinancial statements are able to acquire sufficient useful information fromdisclosures with indirect method. Based on the fact that companies will incur large
amount of cost, we do not see any overriding benefit coming from the requirementof direct method.

<Tax >
D-EJ-4Tax 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, they should introduce clauses that will enable corresponding
adjustments and arbitration in tax treaties. In addition, they should harmonise andsimplify 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 the Governments ofJapan and Europe respond flexibly to the deviations.
・ 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 the resource allocation and damage
the sound growth of companies and economies. We hope that transparent and fair
tax reform and implementation are continued.

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Financial Services; Accounting and Tax Issues
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Recommendations only to Japan<Financial Services>D-J-1 Financial Service Issues in Japan・ The Japanese Government changed the Postal privatization policy andannounced the policy that would allow its entry into new business areas andspecial regulation while the government share ownership is maintained, andfinancial institutions in EU and Japan have expressed strong concerns. We believethat new product development and business expansion, as well as the increase or
the abolishment of the limit on both postal savings amounts and insurance, should
not be implemented until a level playing field is established. In addition, it isnecessary to establish transparency procedure and involve constructive
discussion through reform process.
・ FSA has deregulated insurance sales through banks and consumer convenienceis improving. However, there are still some regulations to avoid banks’ pressure
sales. For example, corporate clients who have a loan cannot purchaseinsurance products through their lender bank. The regulation will be reviewed by
the end of 2010, and the regulatory reform should be discussed for further
enhancement of the consumer convenience, while paying attention to theprotection of consumer’s interest.

<Accounting>
D-J-2

Accounting Issues in Japan・ In IFRS the compensated absences are recognized as liability. However, since thereserve for the compensated absences has never been recorded in Japan andsuch requirement could have a relatively heavy impact, we believe prudent
discussion should be held.

<Tax>
D-J-3

Tax Issues in Japan・ In order for companies to carry out international business expansion smoothly, weask the tax administration of Japan to implement transfer-price taxation using an
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international common model such as the OECD model, and secure furthertransparency.
・ We request the Japanese government to consider reducing corporate tax rates.
While many countries are lowering effective corporate tax rates rapidly, Japanese
corporate tax rate remains at around 40%, the highest level around the world. Interms of securing Japanese companies’ international competitiveness and also
furthering foreign investments, Japan should lower its corporate tax rate to theinternational equivalent of around 30%.
・ As Japanese society ages, Japanese individuals in the workforce will need toinvest and accumulate more assets for retirement. The role of private sector
insurance will be more important in such fields as medical (hospital), long termcare and pension insurance. We ask the Japanese tax authority to continue toexpand the tax breaks to encourage the development of individual preparation forretirement.

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Recommendations only to the EU<Financial Services>
D-E-1 Solvency margin regulation
・ The solvency margin regulation of insurance companies has been discussed on
global basis and we support the Japan and EU governments’ approach towards
regulation, which acknowledges the dialogue between public and private sectors.
When the equivalence assessment of its regulations is conducted between the EUand external parties, such process should be conducted in a constructive manner.
<Tax>
D-E-2

Tax Issues in the EU

・ 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 to enjoy thebenefit of the Single Market to its full extent. In particular, taxation on unrealised
gains as a result of a goodwill transfer within a group should be deferred;transactions within a group should be exempted from the application of thearms-length principle; and the off-setting of profits and losses within a groupshould be allowed.

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Financial Services; Accounting and Tax Issues
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