Announcement
The Tax Issue Committee,
Japanese Association for Business Recovery
July 25, 2008

Announcement of Requests for 2009 Tax Reform
Concerning Business Recovery
The Tax Issue Committee of the Japanese Association for Business Recovery hassummarized requests for 2009 tax reform to help bring about a swift and sustainablebusiness recovery in Japan.
For a long time, we have requested “tax deferment of income arising from debt
exemption” for enterprises under reorganization. Major tax reform implemented infiscal 2005 substantially dealt with this issue by clarifying the treatment of certain
valuation losses or losses carried over. However, requests have been made regarding
aspects that have still not been remedied or points to which the revised law cannot beeasily applied. The main points of the requests for revisions include:
1. More flexible tax treatment of debtors
2. Practical treatment of bad-debt loss in bankruptcy and related issues
3. Clarification of the tax system for funds and investors
The Tax Issue Committee, a panel of professional business people and academics
concerned with finding business recovery solutions, seeks early implementation ofthese and other requested revisions, which have been compiled based on the results ofa recent questionnaire survey of JABR members.
Inquires should be made to:
Secretariat of Japanese Association for Business Recovery(Located within Shojihomu KK)
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 3-chome, Tokyo 103-0025/
Tel:03-5614-6086 Fax:03-3664-8845
Email: jabr@shojihomu.co.jp
URL: http://www.shojihomu.co.jp/jabr.html

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Rev. oflaw

Requested Matters

Rev. of
CircularI. For debtors
1. Flexible treatment of Reasonable Debt Treatment Plan
2. Expansion of assets under CTL Article 33
3. Clarification of credit evaluation in DES arrangement
4. Disguised accounting 1 – Clarification of pertinent
requirements in disguised accounting
Disguised accounting 2 – Switch from a tax credit
system to a refund system
Disguised accounting 3 – Extension of correction period
in disguised accounting
5. Tax deferment of income arising from debt exemption
6. Expansion of application of overdue losses

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II. For creditors
7. Approval of bad-debt loss by fair appraisal
8.Clarification of requirements for bad debt in a privatearrangement
9. Statute of limitation and requirements for bad-debt loss
10.Calculation method for collectible amounts under apersonal guarantee
11. Timing and method for bad-debt loss in bankruptcy
12. Increase in the transfer ratio for bad-debt allowance
under formal standard
III. For funds and investors
13. Clarification of treatment of collected receivablesbought at discount
14. Income tax on gains under DES arrangement
15. Lower taxation standards for corporate per capita
residential tax
16. Permanent arrangements for special-treatment
measures in scale-of-capital tax standards for the
Factor Based Tax

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See details for the above in a separate document, “Requests for 2009 Tax Reform
Concerning Business Recovery”.

2Requests for 2009 Tax Reform
Concerning Business Recovery(Summary)
I. For Debtors
1. Flexible treatment of Reasonable Debt Treatment Plan (Revision of law)1) Flexibility of the existing requirements
The Reasonable Debt Treatment Plan (RDTP) stipulated in Article 24-2, Para. 1, of theGovernment Order (GO) under the Corporate Tax Law (CTL) permits the application of
Para. 3 of CTL Article 33 (valuation losses) to non-legal proceedings or to a privatearrangement. The application of overdue losses before valid “blue losses” also requires
the same conditions for DTP, according to CTL Article 59, Para. 2, Item (3). However, it
is difficult to satisfy the requirements of RDTP stipulated in Article 24-2, Para. 1, of
GO under CTL because small- and medium-sized enterprises often use only one
financial institution, or it is impossible for more than two specialists to be involved intheir business reorganization.
The above requirements have become increasingly important, as they are also therequirements to relax application of usage restrictions on losses carried over inbusiness reorganization. We therefore request flexible requirements for RDTP in order
to apply them to the reorganization of small- and medium-sized enterprises.
Specifically, we request a change in the number of disinterested specialists involved
with business reorganization (Article 8-5 of Enforcement Regulations of CTL) fromthree or more to two or more in order to satisfy the debt-exemption requirements of anumber of financial institutions (Article 24-2, Para. 1, Item (4) of GO under CTL) andthus facilitate the reorganization of small- and medium-sized companies.
2) Addition of new requirements
We seek to add cases where 90% or more of the capital construction is replaced in a“buyout type” or “sponsor type” as a new requirement of Article 24-2 of Enforcement
Regulations of CTL to diversify business reorganization.
2. Expansion of assets under CTL Article 33 (Revision of law and revision of Circular)
1) Addition of monetary claims
CTL Article 33, Para. 2, permits deduction of asset valuation losses from income where
the reorganization plan is approved in accordance with the Company Reorganization
Law or the law on special exemptions etc.,concerning reorganization proceedings forfinancial institutions (hereinafter referred to as the “Company Reorganization Law),
and where it is necessary to carry out revaluation under these laws, or where othercertain conditions apply. However, loan receivables, trade-account and otherreceivables are excluded from assets with accountable revaluation losses, as they arecollectively categorized as “deposits and the like” in CTL. It is therefore requested thatmonetary claims such as trade-account and loan receivables, security deposits/caution
money etc. be added to eligible assets for the purpose of revaluation losses.
2) Addition of small assets
We request that the application of CTL Article 24-2, Para. 4, Item (5), which is theprovision defining “small assets,” become an option for an entity where CTL Article 33,
Para.3, for the calculation of valuation losses is applied.
33. Clarification of credit evaluation in DES arrangement (Revision of Circular)
We request clarification of the evaluation method for credits in a debt equity swap
(DES) permitted for taxation purposes in the calculation of increased capital and thelike for debtors in DES.
4-1. Disguised accounting 1 – Clarification of pertinent requirements in disguised
accounting (Revision of law)
Under current law, once they are unrecognized, bad-debt loss and provisions for
doubtful accounts that should have been deducted based on generally accepted
accounting principles are not taken back retroactively as deductible expenses for theaccrual period. However, to the extent that the management who participated in awindow-dressing settlement takes responsibility in a subsequent business year andmakes a concrete restatement or amendments for past accounts, we request
clarification under tax law that unrecognized bad-debt loss and provisions for doubtful
accounts be considered “misrepresentation by disguising a fact,” as stated in CTL
Article 70.
4-2 Disguised accounting 2 – Switch from a tax credit system to a refund system(Revision of law)
We request that the tax credit system currently in force be changed to a refund system
concerning the corporation tax for overstatements based on disguised accounting.
4-3 Disguised accounting 3 – Extension of correction period in disguised accounting(Revision of law)
We request that the period of correction determined by the Director of the Tax Office be
extended from the current five years to seven years in cases of overstatements based on
disguised accounting.
5. Tax deferment of income arising from debt exemption (Revision of law)
Following the introduction of amendments to the tax system in fiscal 2005,
prescriptions concerning taxation on income arising from debt exemption have been
made in that 1) valuation losses of assets are also counted as deductible expenses incases based on a civil rehabilitation plan and any other rehabilitation plan (RDTP)
corresponding to this, and that 2) the so-called preferred usage of overdue losses are
permitted in certain cases. However, in cases of civil rehabilitation and RDTP, thecalculation of profit on valuation has to be made in a set. Additionally, there is an
inherent negative risk in the tax office’s calculation of profit on valuation.
It is considered difficult for creditors to relinquish credit at the level where debtors
incur tax on income arising from debt exemption. The relinquishment ratio therefore isinversely calculated to the level at which tax on income arising from debt exemption is
not incurred. As a result, it is necessary to have the total amount of debt correspond toassets with latent losses. In some cases, therefore, drastic credit relinquishment cannot
be made, or only incomplete support is given or repayment installments are made for along time.
The fundamental problem in this issue lies in that tax on income arising from debt
exemption is temporarily incurred by debtors having no tax-bearing capacity.
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Accordingly, we request measures for deferring substantial tax on income arising fromdebt exemption for a certain period (approximately three years), depending on theaccounting of a corporation, where certain reasonability is recognized in the creation
and agreement process of a rehabilitation plan (company reorganization law, civil
rehabilitation law, Article 24-2, Para. 1, of GO under CTL (fact corresponding to adecision to authorize a rehabilitation plan), Article 117 of GO under CTL, CT Basic
Circular No.12-3-1 (facts corresponding to a decision to commence rehabilitation
proceedings))
6. Expansion of application of overdue losses (Revision of law)
Where an entity owns real estate with latent assets but overdue losses comprise themajority of the total losses, a large profit on asset sales arising from the sale of such
real estate comprises taxable income and thus incurs a heavy corporation tax. We
therefore request that profits on asset sales carried out in accordance with arehabilitation plan be counted as overdue losses -- as if it were income arising fromdebt exemption, where “there is no arbitrariness in the decision” of the rehabilitation
plan such as under the company reorganization law, civil rehabilitation law, Article
24-2, Para. 1 of GO under CTL (corresponding to the authorization of a rehabilitationplan), Article 117 of GO under CTL, and CT Basic Circular No.12-3-1 (corresponding to
the decision to commence rehabilitation proceedings) “as it is decided in negotiation by
a number of creditors and to the extent that its contents are deemed to havereasonability.”II.

For creditors

7. Approval of bad-debt loss by fair appraisal (Revision of law and revision of Circular)
Even where fairness in the appraisal of underlying collateral etc. is deemed to be
maintainable, bad debt can be recognized only after the underlying collateral etc. isdisposed of under current rules. We request revision as this treatment is not realistic.
8. Clarification of requirements for bad debt in a private arrangement (Revision of law
and revision of Circular)
Either of the following two requirements must be satisfied before bad-debt loss of credit
or the transfer of provisions for doubtful accounts can be recognized in a privatearrangement under CTL:
1) Liability arrangement under reasonable standards2) Creditors’ meetings and negotiations between concerned parties through an
arrangement by an administrative body, financial institution or other third party.
We request clarification that other third parties may include not only business
partners, financial institutions etc. but also professional specialists (lawyers etc.) who
are selected by them or in an independent position.
9. Statute of limitation and requirements for bad-debt loss (Revision of law andrevision of Circular)
1) There are cases where bad-debt loss is not deductible -- even where credit collection
becomes impossible due to the establishment of extinctive prescription -- because of the5lack of provisions for treating such credits. 2) We request clarification in CT Basic
Circular and Enforcement Regulations of Consumption Tax Law that such cases may
justify bad-debt loss with respect to general credits, excluding the small lot credits
mentioned below, on condition that appropriate credit management is carried out,
where a debtor’s claim for prescription and extinctive prescription is therefore
established. Considering that the emergence of Internet business etc. creates a huge
number of small lot transactions together with fractional receivables on the books ofgeneral business people, we request that the establishment of extinctive prescription beappropriately included in bad-debt loss under CTL. In view of the actual state thatdebtors rarely claim for prescription, we request revision of the CT Basic Circular andEnforcement Regulations of Consumption Tax Law to permit these fractional
receivables as bad-debt loss where a period of prescription has expired.
10. Calculation method for collectible amounts under a personal guarantee (Revision oflaw and revision of Circular )We request a new Circular and revision of law on the provisions of deemed collection
for calculating the collectible amount pertaining to the personal guarantee deductible
from bad-debt loss when the total amount becomes uncollectible due to the asset
condition, solvency etc. of the debtor as well as to deductions from the provisions for
doubtful accounts.
Specifically, we request that the new Circular and revision of Circular articulate an
income-based allowance up to the annual income of the guarantor multiplied by five
years as deemed collection, and that the payer may ignore a collectible amountexceeding that sum.
11. Timing and method of bad-debt loss in bankruptcy (Revision of law and revision of
Circular )Bankruptcy is a judicial proceeding for liquidating the asset relationship and satisfying
creditors in a fair manner when a debtor (individual or corporation) becomes
economically insolvent. At present, approximately 80-90% of the cases wherebankruptcy proceedings were petitioned are abrogated (simultaneous abrogation) at
the same time as, or later than (abrogation at a different time), the commencement ofbankruptcy proceedings. In these cases, generally speaking, the actual situation is thatdebtors have virtually no assets and creditors are virtually unable to collect thereceivables.
In the absence of clear laws, the regulations or Circulars on bad-debt loss frombankruptcy receivables under tax law, CT Basic Circular No. 9-6-2 (bad-debt loss on
uncollectible monetary claims) can be applied. However, the requirements of thisCircular seem too rigid for bankruptcy practice.
While collection is practically impossible, only a formal transfer (50%) of provisions for
doubtful accounts can be made according to Article 96 (maximum transfer to provisions
for doubtful accounts), Para. 1, Item (3-c), of GO under CTL. The remaining 50% of
bad-debt loss is shelved until the fiscal year when the bankruptcy is completed(two/three years later). This means the creditor must live with tax overpayment for aconsiderable period. Such a situation is too harsh, especially for small- andmedium-sized enterprises.
We therefore request that, where a debtor is cleared to commence bankruptcy
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proceedings, bad-debt loss be immediately allowed and that the creditor not recognize
income from recovery until receivables are collected later under a newly issued CT
Basic Circular No.9-6-2 (2) that would deem such a case as substantially a state ofbad-debt loss.
12. Increase in the transfer ratio for bad-debt allowance under formal standard(Revision of law)
The transfer ratio in provisions for doubtful accounts under the so-called formal
standard has been 50% of the amount of monetary claims in the previous credit
write-off special account system. We request a higher rate as it is too low in view of thecurrent actual state. Specifically, we request that the current rate of 50% be raised to
between 70% and 80%.

III. For funds and investors
13. Clarification of treatment of collected receivables bought at discount (Revision of
Circular)
When monetary claims are bought during business recovery, they are acquired at lower
than face value due to the credit risk ascribed to the debtor of such monetary claims.
Collection based on such monetary claims will be made later. However, tax treatmentof the amount collected is not clear. One method treats collection up to the amountbought as the principal part, and the part exceeding that amount as profit. Anothermethod treats the amount of difference arising at the time of the purchase as
adjustable according to either the interest method or the straight line method etc. The
collection amount each time is divided into separate amounts deemed part of theprincipal and the interest.
We consider it reasonable to recognize profit from the time the amount collectedexceeds the amount bought from the standpoint of the purchaser of the monetaryclaims bearing such risk., However, treatment under this method is unstable from theperspective of taxation because of the lack of provisions prescribing such treatment.
We request clarification that there would be no problem in applying the above
treatment for tax purposes.
14. Income tax on gains under DES arrangement (Revision of law)
Following the enforcement of CTL under the revised tax law of fiscal 2006, thedefinition of “amount of capital etc.” was revised to “amount of capital and the like”(Article 2, Item (16) of CTL). Under the revised tax law, the amount of capital and thelike that increases due to a share issue is defined as the amount of assets minus theamount of paid-in money and money granted. In other words, where assets other thanmoney are invested in kind, they will be at market value. As a result, gains from debt
extinguishment will accrue to a debtor in a DES arrangement where the market valueof the credit does not reach face value, excluding cases under eligible investment inkind.
However, in a capital increase in a DES arrangement, redeemable preferred equity
shares are normally issued. This is different from relinquishment of credits and does
not mean that creditors relinquish all of the credit amount. It does not increase
tax-bearing capacity, either. In many cases, charging income tax on gains from debt
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extinguishment will have a major impact on reorganization.
We therefore request deferment of tax on gains from debt extinguishment in a DES
arrangement for an unlisted corporation where requirements of a reasonable
reconstruction plan under company reorganization law, civil rehabilitation law,reasonable private rehabilitation (corresponding to the decision to authorize arehabilitation plan based on Article 24-2 of GO under CTL) and CT Basic Circular No.
9-4-2 are satisfied.
15. Lower taxation standards for corporate per capita residential tax (Revision of law)
Compensation for a loss represents a reduced scale of business activity.. We therefore
request that amount-of-loss compensation be struck from taxation standards applicableto the per capita corporate residential tax.
16. Permanent arrangements for special treatment measures in scale-of-capital tax
standards for the Factor Based Tax (Revision of law)
As for lower scale-of-capital taxation standards for the Factor Based Tax, where loss iscompensated by reducing the amount of capital and the like or the amount of capitalreserves for a business year during the period April 1, 2004, to March 31, 2010, theamount is deducted from the amount of capital and the like. We request that thistransitional measure be made permanent.

8The Tax Issue Committee
Japanese Association for Business Recovery
Requests for 2009 Tax Reform Concerning Business Recovery

Chairman:
Yasuhiko Ueki (tax accountant/Takano General Accounting Office)Vice-chairmen:
Masao Katori (tax accountant/Shin Nihon Ernst & Young Tax Accountant Office)Kazunori Kurebayashi (tax accountant/OAG Certified Public Tax Accountant's
Corporation)
Committee members:
Takafumi Inaba (tax accountant/ /Horwath Sakura & Co.)
Jun Ozeki (certified public accountant/KPMG AZSA & Co., )Toshiyuki Kato (tax accountant/Toshiyuki Kato Tax Accountant Office)Takeo Sasaki (Horwath Sakura & Co.)
Ryotaro Maeyama (tax accountant/Takano General Accounting Office)Yamato Matsuzawa (certified public accountant/Tokyo Kyodo Accounting Office)Committee member/Counselor:
Shigeru Sugimoto (certified public accountant & tax accountant /Horwath Sakura &Co.)

9What is the Japanese Association for Business Recovery?
■ The Japanese Association for Business Recovery (JABR), known as Jigyo Saisei
Kenkyu Kiko in Japanese, was founded on March 16, 2002, to promote the study ofpractical proposals for a swift business recovery in Japan. The group includes
business professionals and academics who exchange opinions and information
among themselves and with experts overseas concerning bankruptcy,
business-recovery methods and related processes.
JABR’s representative
directors are professor Makoto Ito, of the University of Tokyo, and attorney Makoto
Tahira.
■ JABR comprises full members (individuals) and supporting members(organizations) representing various professions.
Full members include
administrative and judicial authorities, attorneys, certified public accountants,
licensed tax accountants and real estate appraisers, as well as managers ofdomestic and foreign financial institutions, business-recovery and PE funds, andconsulting firms. Accounting firms, business corporations and financial institutions,which perform an active role in the first line of business recovery, participate assupporting members. As of July 2008, JABR had 230 full members and 15
supporting members.
■ JABR has a number of committees dealing with business recovery, in addition
to the Tax Issue Committee:(1) The Prepackage Examination Committee (chaired by attorney Hideaki Sudo) was
set up to survey and analyze prepackage type business recovery cases in Japan.
Comparisons have been made with cases in foreign countries including the UnitedStates, and information has been collected on relevant topics based on domestic
and overseas surveys. Explanatory meetings for members were held in June andOctober 2003. At a Nov. 29, 2003, symposium titled “The Present Issue in the
Prepackage Type Business Recovery,” diverse viewpoints on materials under
examination by the committee were discussed. This is summarized in the
independently published book “Finance for Business Recovery” (Business Recovery
Series 4).
(2) The Finance Committee (with the Bank of Japan Finance Market Bureau as
secretariat) was set up to sort out the financial state involving a wide range ofprocesses related to business recovery for both creditors and debtors. It has
examined and discussed the framework under which remedies can be effected
relatively easily, after conducting overseas surveys. Following a May 27, 2004,
symposium titled “A New Viewpoint of Business Recovery” and the independent
publication of the book “Finance for Business Recovery” (Business Recovery Study
Series 5), the committee put out its final report in June. The summary of the report
appears in NBＬ No.789 (July 15 issue).
(3) The Corporate Reorganization Case Study Committee (chaired by professor Junichi

10Matsushita of Tokyo University) was set up to determine trends inbusiness-recovery techniques centering on corporate reorganization plans of recent
years, and to compile books that contribute to effective business-recovery practices
beyond the scope of case studies. The committee has carried out detailed analyses -identified as Reconstruction Techniques, Reorganization Security Right,
Reorganization Credits and Others -- on about 300 reorganization cases nationwide
that were approved on or after 1997. The results appear in the book, “Practice andTheory of Reorganization Plans” (Business Recovery Study Series 6) published inJune.
(4) The Study Committee of Revised Substantive Law on Bankruptcy (chaired byprofessor Katsumi Yamamoto of Kyoto University) was inaugurated following theacross-the-board revision of the Bankruptcy Law. It has studied future applicationof the Substantive Law on Bankruptcy, to which important revisions have beenmade. Since “New Perspective in Business Recovery” was discussed at a May 27,
2004, symposium, six explanatory meetings for members have been held to discuss
Repudiation, Corporate Bond, Leasehold and other significant issues following the
keynote report for each issue.
(5) The Modernization of Corporate Law and Business Recovery Committee (chaired
by attorney Atsushi Toki) was set up in 2004 to sort out the possible impacts on
business recovery and bankruptcy legislation of a completely amended Corporate
Law before the new law takes effect. At a May 28, 2005, symposium titled“Modernization of Corporate Law and Business Recovery“, Financing, Corporate
Governance and other issues were discussed from practical viewpoints.
(6) The Trust and Business Recovery Committee (chaired by attorney Masaya
Miyama) was set up to study possible impacts on business recovery of the firstoverall revision of the Trust Law proposed in 80 years. Significant issues selected
in terms of business recovery have been reported and studied. Based on thoseresults, the committee is preparing comments on the exposure draft of the new
Trust Law.
(7) The M&A Examination Committee (tentatively named) was set up to survey andanalyze the practical application of M&A techniques to the business recovery scene.
Among the broad issues in this perspective, the committee started to discuss legal
procedures, financial restructurings, business restructurings, etc. in order to reporton aspects for a Nov. 29, 2005, symposium.

Inquiries should be made to:
Secretariat of the Japanese Association for Business Recovery(Located within Shojihomu KK)
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,Chu-ku 3-chome, Tokyo 103-0025.
Tel:03-5614-6086 Fax:03-3664-8845
Email: jabr@shojihomu.co.jp
URL: http://www.shojihomu.co.jp/jabr/jabr.html

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