The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

Announcement
The Tax Issue Committee,
The Japanese Association for Business Recovery
August 31, 2004

Requests for Revision of Tax System
Concerning Business Recovery
The Tax Issue Committee of the Japanese Association for Business Recovery(JABR) has summarized requests for tax-system revisions aimed at promoting aswift business recovery. Key points of the requested revisions include:①
Deferring taxes on profit arising from debt exemption.
②
Distinguishing between the tax treatment of statutory arrangements(Corporate Reorganization Law, etc.) and that of private arrangements (Private
Arrangement Guideline, etc.).
③ Widening the range of allowable creditor expenses for bad debt and valuation
losses.
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 were compiled based on the results of a
recent questionnaire survey of JABR members.

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The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

Rev.
of law

Requested MattersI
Tax deferment on profit arising from debt exemption
II For debtors
1. Wider scope of valuation losses on assets, etc.
2. Change in the order of items eligible for inclusion as expenses oflosses carried forward, and extension of the eligibility-applicationlist
3. Lower valuation standards for the fixed property tax, withtaxation based on the proportion of business size to capital
4. Treatment of debt equity swaps (DES)
5. Reduction of the registration license tax when DES increases
capital
6. Exemption or reduction of the delinquency tax
7. Switch to a refund system when overstatements are based onmisleading accounting
III For creditors
1. Procedures for bad debt loss when security is doubtful
2. Clarification of “effective” accounting standards for doubtful
accounts
3. Additions to “formal” accounting provisions for doubtful
accounts
4. Higher transfer rate under “formal” accounting provisions for
doubtful accounts
5. Treatment of debt debt swaps (DDS)Rev.
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Contents of the above are detailed in a separate document, “Requests for Revision
for Tax System Concerning Business Recovery” (to be distributed at the press
conference).
Inquiries should be made to:
The Tax Issue Committee Bureau of the Japanese Association for Business Recovery(located within Shojihomu KK)
Tel: 03-5614-6086 (Direct)
Fax: 03-3664-8845
Email address:

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The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

Requests for Revision for Tax System Concerning
Business Recovery (Summary)I

Tax deferment on profit arising from debt exemption

Profit accruing from at least the partial exemption of debt by a creditor, andprofit arising from the provision of private funds by other persons, are consideredpart of corporate gross revenue. However, since the liabilities of debtors seeking
business recovery, in effect, exceed assets, the debtors may be unable to pay
corporation taxes etc. on the one-off profit arising from debt exemption.
Therefore, where a certain reasonability is recognized in the process of creating
and agreeing to a reconstruction plan (an arrangement under the Commercial Code,a statutory arrangement under the Corporate Reorganization Law and Civil
Rehabilitation Law, a private arrangement under the Law on Special Measures for
Industrial Revitalization – hereinafter referred to as the Industrial Revitalization
Law – the Private Arrangement Guideline, or the Small and Medium Enterprise
Industrial Revitalization Corporation), we request a deferment measure forcorporate taxation on profit arising from effective debt exemption for a certain
period (two or three years). (See separate sheet.)II

For debtors

1. Wider scope of valuation losses on assets

At present, inclusion as expenses of an asset valuation loss is allowed only incases of a legal decision to commence reorganization proceedings etc. in accordancewith the Corporate Reorganization Law. It is not allowed in principle for a privatearrangement. We therefore request relaxation of the requirements (events) so that
inclusion as expenses of an asset valuation loss in a private arrangement, as in alegal arrangement, will be allowed “where there is no arbitrariness andreasonability is pledged.”
In addition, we also request that securities and deferred assets be included asassets subject to valuation losses. (See separate sheet.)
2. Change in the order of items eligible for inclusion as expenses of losses carriedforward, and extension of the eligibility-application list

We request revision of the Corporation Tax Enforcement Ordinance and Notices
law so that, where an agreed private fund provision is accompanied by an asset
arrangement in a private business recovery plan and where security ofreasonability and exclusion of arbitrariness are pledged, inclusion as expenses of3

The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

losses carried forward past an expired time limit can be made, as in a legal
arrangement, and that the order of such items eligible for inclusion as expenses
give priority to losses, as in the Corporate Reorganization Law. (See separate
sheet.)
3. Lower valuation standards for the fixed property tax, with taxation based on the
proportion of business size to capital

When the book value of real estate has been reduced due to legal proceedings, werequest that such value be treated as the valuation standard for affixing theproperty tax, provided that a corporate reconstruction plan has been approved
under the Corporate Reorganization Law or the Civil Rehabilitation Law.
In addition, we request that, when taxation standards are applied based on the
proportion of business size to capital, the calculation of the capital surplus in an“ineligible” reorganization be the same as that for an “eligible” reorganization, andthat, where losses are transferred due to an “eligible” reorganization, capitalsurplus corresponding to the losses be excluded from the taxation standards. (Seeseparate sheet.)
4. Treatment of debt equity swaps (DES)

Treatment of creditors with respect to the acquisition value of equities in debt
equity swaps (DES) is clarified in Corporation Tax Basic Notice 2-3-14 etc., but thetreatment of debtors is not clarified. We therefore request that treatment of debtors(corporate issuers) be clarified. (See separate sheet.)
5. Reduction of the registration license tax when DES increases capital

We request that a DES capital gain accrued by a corporation seeking businessrecovery be separated from other capital increases and that the registration license
tax rate be reduced. In addition, we request that, where DES results in capitalgains, any capital reductions made to compensate for deficits be excluded fromtaxation standards (per capita rate) of the corporate inhabitant tax. (See separate
sheet.)
6. Exemption or reduction of the delinquency tax

We request that, once proceedings for business recovery commence, the punitivedelinquency tax rate for unpaid taxes and public charges be reduced or eliminatedif tax payment funds have dried up. (See separate sheet.)
7. Switch to a refund system when overstatements are based on misleading accounting

With regard to the corporation tax, we request that the current tax-amount
exemption system change over to a refund system tax when overstatements are
based on misleading accounting. (See separate sheet.)4The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

III

For creditors

1. Procedures for bad debt loss when security is doubtful

In the case of bad debt losses on secured money claims, where a material security
was pledged in excess of its fair market value, where a human guarantor is missing,or where a debtor has multiple loans outstanding, it is understood that suchmaterial security or human guarantor need not be taken into consideration.
However, we request clarification of this treatment. (See separate sheet.)
2. Clarification of “effective” accounting standards for doubtful accounts

Provision transfer for doubtful accounts is allowed under both “effective” and“formal” accounting standards, except where repayment has been legally shelved
for a long time. However, since the calculation method for collectable amounts,
other than by a material security or a human guarantee, is not clear with respect
to “effective” standards and to the wide scope of application (reason for transfer
and amount of transfer etc.), its application tends to be avoided. We therefore
request that, in the case of “effective” standards, the method for calculating thecollectable amount be clarified. This is also important from the viewpoint ofpromoting the disposal of nonperforming loans. (See separate sheet.)
3. Additions to “formal” accounting provisions for doubtful accounts

We request that accounting provision events for doubtful accounts under “formal”
standards be balanced with statements of case proceedings for a legal arrangement,
including the commencement proceedings from the Private Arrangement Guideline(corresponding to the Specified Mediation Law) and the application for the
Industrial Revitalization Corporation, etc. (See separate sheet.)
4. Higher transfer rate under “formal” accounting provisions for doubtful accounts

The provision transfer rate for doubtful accounts under “formal” standards hasremained at 50% since 1954 and the Credit Write-off Provisions System. This rateis too low from the perspective of various surveys. We therefore request that thetransfer rate be raised to about 80% (or that the transfer rate be set up during
proceedings for each reconstruction program). (See separate sheet.)
5. Treatment in debt debt swaps (DDS)The provision transfer treatment for doubtful accounts by creditors when debt
debt swaps (DDS) are carried out is not clear. We request clarification of thistreatment.
End

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The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

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 of
proposals aimed at a practical approach to a swift business recovery in Japan. The
group includes business professionals and academics who exchange opinions andinformation 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. At present, JABR has 300 full members and 40 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 inJapan. Comparisons have been made with cases in foreign countries, including
the United States, and information has been collected on relevant topics, basedon domestic and overseas surveys. Explanatory meetings for members were
held in June and October 2003. At a Nov. 29, 2003, symposium titled “ThePresent Issue in Prepackage-Type Business Recovery,” diverse viewpoints onmaterials under examination by the committee were discussed. This issummarized in the independently published book “Finance for Business
Recovery” (Business Recovery Study 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

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The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

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 a Universityof Tokyo professor) was set up to determine trends in business-recovery
techniques centering on the corporate reorganization plans of recent years, andto 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,” “Others” and “Taxation” -- on about 300
reorganization cases nationwide that were approved on or after 1997. The
results appear in the book, “Practice and Theory of Reorganization Plans”(Business Recovery Study Series 6) published in June.
(4) The Study Committee of Revised Substantive Law on Bankruptcy (chaired byprofessor Katsuki Yamamoto of Kyoto University) was inaugurated following
the across-the-board revision of the Bankruptcy Law. It has studied the futureapplication of the Substantive Law on Bankruptcy, to which important revisions
have been made. At the May 27 symposium mentioned above, the “Repudiation
System” was discussed.
Inquiries should be made to:
The Secretariat of the Japanese Association for Business Recovery(located within Shojihomu KK)
3-9-10, Nihonbashi-Kayabacho,
Chuo-ku, Tokyo 103-0025.
Tel: 03-5614-6086
Fax: 03-3664-8845
Email:
http://www.shojihomu.co.jp/jabr/jabr.html

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