The Tax Issue Committee
Japanese Association for Business Recovery
2nd 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
Japanese Association for Business Recovery
August 14, 2006

Announcement of Requests for 2007 Tax Reform
Concerning Business Recovery
To promote a swift business recovery in Japan, the Tax Issue Committee of the Japanese
Association for Business Recovery (JABR) has summarized requests for 2007 tax reform asshown in the following matters.
We have requested “Tax deferment of income arising from debt exemption” for enterprises
under reorganization for a long period. Major tax reform implemented in fiscal 2005
substantially dealt with this issue by clarifying treatment of certain valuation lossesor losses
carried over. However, requests have been made regarding aspects that have still not been
remedied or points to which the revised law cannot be easily applied. The main points of therequests for revisions include:
1. More flexible treatment of debtor taxation
2. Higher transfer rate for doubtful debts under formal accounting standards
3. Clarification of tax system for funds and investors
The Tax Issue Committee, a panel of professional business people and academics concernedwith finding business recovery solutions, seeks early implementation of these and otherrequested revisions, which were compiled based on the results of a recent questionnaire
survey of JABR members.

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

Requested Matters

Rev. oflaw

Rev. of
Circular.

Info
open topublicⅠ. For debtors
1. Flexible treatment of Debt Treatment Plan
2. Revaluation of monetary claims added to assets under CTL
Art. 33
3. Accounting of negative goodwill at start of Corporate
Reorganization Procedures
4. Lower valuation standards for fixed property tax

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Ⅱ. For creditors
5. Higher transfer rate for doubtful debts under formal accounting
standards＊

Ⅲ. For recovery funds and P/E investors
6. Mitigation of income tax on the gains from under DES
arrangement based on a reasonable reconstruction plan
7. Permissible transfer of 50% of DDS to provisions for doubtful
accounts in some cases
8. Clarification of how to treat collected receivables bought at
discount＊＊＊＊

See details for the above in a separate document, “Requests for 2007 Tax Reform Concerning
Business Recovery”.
Inquires should be made to:
The Tax Issue Committee Bureau of the Japanese Association of Business Recovery(Located within Shojihome KK
Tel : 03-5614-6086 (Direct)
Fax: 03-3664-8845
Email: jabr@shojihomu.co.jp

The Tax Issue Committee
Japanese Association for Business Recovery
2nd 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 2007 Tax Reform
Concerning Business Recovery(Summary)
Ⅰ．For debtors
1. Flexible treatment of Debt Treatment Plan
The Debt Treatment Plan (DTP) stipulated in Article 24-2, Para. 1, of the Government Order(GO) under the Corporate Tax Law (CTL) permits the application of Para. 3 of CTL Article 33(revaluation losses) to non-legal proceedings or to a private arrangement. On the other hand,the conditions for DTP are required to use the carry-over of overdue losses, before valid “bluelosses,” when applying CTL Article 59, Para. 2, Item (3).
As a result, above requirements for a DTP, under the 2006 tax reform, especially involvementof 2 or more financial institutions and 3 or more independent specialists, become a significant
hurdle when the use of losses carried over in business recovery is subject to limitations. We
therefore request the relaxation of application requirements so that small- and medium-sizedenterprises can take advantage of DTP.
It should be noted that there is another type of non-legal proceedings stipulated in Item 4 of
Article 117 of GO under CTL that shall be arranged to use the overdue losses carried overafter the blue losses. We request the requirements for that type of non-legal proceedings to be
more clarified, for example as to whether above two conditions are not required under Item 4of Article 117 of GO under CTL.
(See separate sheet)
2. Revaluation of monetary claims added to assets under CTL Article 33
Article.33, Paras. 2 and 3, of CTL permits the inclusion of asset valuation losses as expenses
under certain conditions. However, loan receivables, trade-account and other receivables are
excluded as “deposits and the like” from assets that may show a valuation loss.. It isrequested that monetary claims such as trade-account and loan receivables, guaranteed
deposits/caution money, etc. be added to assets for the purpose of valuation losses.
In addition, we request confirmation that the valuation method stipulated in the Special
Circular (Kaho 2-14, Sacho 4-20) under CTL dated December 4, 1998, “Tax treatment of prices
of credits calculated on the basis of appropriate valuation procedures and real estate securing
bad debts” will be applied to the valuation of monetary claims in that instance.
(See separate sheet)
3. Accounting of negative goodwill at start of Corporate Reorganization Procedures
After the amendment of accounting rule (Article 1, Para.3, of the Enforcement Regulations of
the Corporate Reorganization Law), negative goodwill may be accounted for in therevaluation process under the Corporate Reorganization Law .We therefore request that theThe Tax Issue Committee
Japanese Association for Business Recovery
2nd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

provision stipulated in Article 62-8 of CTL be revised so that it is applicable to thecorporations under the above process.
(See separate sheet).
4. Lower valuation standards for fixed property tax
We request that valuation losses incurred as a result of legal proceedings be added as a
reduction-in-value event in fixed-property taxation standards so that the value adopted as arevised book value, such as a fair value in a real estate appraisal, may be treated as the value
in fixed-property taxation standards with regard to corporations for which an agreement(decision and approval) on a reconstruction plan has been made under legal proceedings inaccordance with the Corporate Reorganization law or the Civil Rehabilitation Law.
(See separate sheet)

Ⅱ．For creditors
5. Higher transfer rate for doubtful debts under formal accounting standards
The transfer rate in provisions for doubtful accounts under the so-called formal standards hasremained at 50% of the subject amount of monetary claims since the inception of the Special
Provisions for Credit Write-down in the former regime. We request an increase in the rate, as
it has been estimated to be too low in light of actual results.
(See separate sheet)

Ⅲ．For recovery funds and private equity investors
6. Mitigation of income tax on the gains from under DES arrangement based on a reasonable
reconstruction plan
Following the promulgation of the New Company Law, 2006 Tax Reform stipulates that anincreased amount of capital and the like should equal the asset value received for the sharesissued (Article 2, Item 16, of CTL). As a result of this change, the debtor company may have torecognize gains from forgiven debt, through a debt equity swap (DES) arrangement, in theamount of the difference between the fair value of the debt and its principal amount. However,
it is still a matter of argument that the fair value of the debt to the debtor should be the sameone with that between the third parties.
The debtor in DES arrangement will not be fully discharged from its original debt but still
carrying responsibility to the new equity in exchange. Moreover, although DES gains
apparently improve the LTV ratio of the debtor, they won’t substantially improve financial
strength. Therefore, income taxes on these gains, especially with regard to corporations in the
reorganization process, could have a significant effect on that process. We request that gains
from forgiven debt exempted under DES be offset against overdue losses carried over before
valid blue losses when it is based on a reasonable reconstruction plan stipulated in CTL BasicThe Tax Issue Committee
Japanese Association for Business Recovery
2nd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845

Circular 9-4-2 in addition to the DTP stipulated in CTL GO Article 24-2, Para. 1 and thereorganization plan of legal proceedings.
(See separate sheet)
7. Permissible transfer of 50% of DDS to provisions for doubtful accounts in some cases(revision of circular)
Debt for Debt Swaps (DDS) should be arranged for the purpose of reducing the burden of
debtors by replacing part of the excessive liabilities with a subordinated loan, sinceborrowings of working capital tend to be self-perpetuating for small- and medium-sizedenterprises. In this instance, the possibility of having to collect on a subordinated loan
following DDS, which is more like capital, will be much lower than for other general credits.
We therefore request that 50% of the subordinated loan after DDS be transferable toprovisions for doubtful debts under formal accounting standards under certain conditions as
reorganization-support measures by financial institutions (and general business enterprises).
(See separate sheet)
8. Clarification of how to treat collected receivables bought at discountWith regard to receivables and claims in bankruptcy and rehabilitation etc. on which interest
has not been paid for a considerable period, we request that the amount of such income not berecognized as a collected claim if the division between the interest and principal amounts is
not clear, and that the collected amount be treated as the collection of the principal amount,i.e., by cost recovery method.
(See separate sheet)End.

The Tax Issue Committee
Japanese Association for Business Recovery
2nd 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 (known as Jigyo Saisei Kenkyu Kiko inJapanese) is a group of professional people dedicated to promoting studies in bankruptcy andbusiness recovery, exchanging opinions and information between people practically involvedin these fields, and fostering international cooperation on problems related to bankruptcy andbusiness recovery. JABR was founded on March 16, 2002. Its representative directors areprofessor Makoto Itoh of Tokyo University and attorney Makoto Tahira.
■ JABR consists of 300 individuals (full members) and 40 organizations (supporting
members). Full members include a variety of professionals actively engaged in the businessrecovery field, including 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 funds and PE funds, consulting
firms, etc. Supporting members include accounting firms, business corporations and financial
institutions that perform an active role in the first stage of business recovery.
■ JABR has other committees dealing with various themes in the business recovery field, in
addition to the Tax Issue Committee. The following are some recent activities: (1) The Prepackage Examination Committee (chaired by attorney Hideaki Sudo) was set up
to carry out surveys, analyses etc. of prepackage-type business recovery cases in Japan forcomparison with cases in foreign countries beginning with the United States. It hascompiled questionnaire survey information on prepackage-type business recovery, carriedout overseas surveys and held explanatory meetings (in June and October 2003) for
members. At the Nov. 29, 2003, symposium titled “The Present Issue in Prepackage-Type
Business Recovery”), the examination contents of the Committee were considered fromdiverse viewpoints as materials for discussion. This is summarized in the independently
published book titled “Prepackage-Type 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 of processes related tobusiness recovery and to create frameworks in which both creditors and debtors can carryout undertakings more easily. It has evolved amid continuous discussions and overseas
surveys, etc. Following the aforementioned Nov. 29, 2003, symposium, a May 27, 2004,
symposium titled “A New Viewpoint of Business Recovery,” and the independent
publication of a book titled “Finance of Business Recovery” (Business Recovery Study
Series 5), the Committee put out its final report in June 2004. The report summary
appears in NBL No. 789 (July 15, 2004 issue).
(3) The Corporate Reorganization Case Study Committee (chaired by professor Junichi
Matsushita of Tokyo University) was set up to determine trends in business recovery
techniques centering on reorganization plans in 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 of reconstruction techniques, reorganization
security rights, reorganization credits, related issues and tax matters involving about 300
reorganization cases nationwide that were approved on or after 1997. The results appear
in the book independently published in June 2004 titled “Practice and Theory of
Reorganization Plans” (Business Recovery Study Series 6).

The Tax Issue Committee
Japanese Association for Business Recovery
2nd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 2-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845(4) The Study Committee of Revised Substantive Law on Bankruptcy (chaired by professor
Katsumi Yamamoto of Kyoto University) was inaugurated, following the across-the-board
revision of the Bankruptcy Law, to determine the revision trend with respect to theSubstantive Law on Bankruptcy and to carry out discussions for developing future
practices. At the aforementioned May 27, 2004, symposium, the Committee developed
discussions on a repudiation system.
(5) The Corporate Law Modernization and Business Recovery Committee (chaired byattorney Atsushi Toki) was set up in 2004 to examine the influence of corporate law on
business-recovery and bankruptcy laws ahead of commercial code revisions aimed atmodernizing legislation. The committee consists mainly of attorneys, scholars besides
other practitioners involved with financial institutions and PE funds. During the firsthalf of 2005, recovery aspects were examined from various points of view. A May 28,
2005, symposium titled “Corporate Law Modernization and Business Recovery” reported
on practical considerations centering on financing, corporate governance, etc.
(6) The Trust and Business Recovery Committee (chaired by attorney Masaya Fukuyama)
was set up in 2005 to examine the influence of trust law, following its revision after 80
years, on business recovery. The committee consists of people in charge of banking legal
affairs including scholars and attorneys. Along with reporting and examining 18
selected items related to business recovery, explanatory meetings with guest lecturers formembers were conducted. Moreover, in response to public comment on the “Trust Law
Revision Outline Draft”, the committee submitted recommendations to the Ministry ofJustice at the end of August, and held an explanatory meeting for members regarding thetentative plan in December. Committee members served as lecturers.
(7) The M&A and Business Recovery Committee (chaired by attorney Hideyuki Sakai) was
set up to examine M&A effects on and application to business recovery in 2005. The
committee has pursued discussions of legal, financial and business restructuring points
related to the business-recovery form of M&A. In addition, at the Nov. 29, 2005,
symposium titled “M&A — The Central Role of Funds (subtitle: The Functions of M&A
and the Role Fulfilled by Funds and Professionals in M&A),” frank opinions of leading
lecturers in the field and those of the panelists were announced ahead of the official
publication of the committee results. The symposium attracted wide interest.

Inquiries should be made to:
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: jabr@shojihomu.co.jp
URL: http://www.shojihomu.co.jp/jabr/jabr.html