The Tax Issue Committee
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

Announcement
The Tax Issue Committee,
Japanese Association for Business Recovery
August 2, 2005

Announcement of Requests for 2006 Tax Reform
Concerning Business Recovery
To encourage a swift and sustainable business recovery in Japan, the Tax
Issue Committee of Japanese Association for Business Recovery hassummarized requests for 2006 tax reform.
The main points of the requests for revision include:① Flexible treatment of debtor taxation,② Wider range of bad debt loss,③ Clarification of how to treat investors including recovery funds④ Early realization of other requests considered desirable
In particular, we have added “Tax deferment of income arising from debt
exemption” to last year’s requests. Although the main part of this request
has been resolved by the comprehensive amendment on the treatment ofvaluation losses and net losses carried over, we continue to seek relief from
pitfalls remaining after the 2005 reform.
The Tax Issue Committee, a panel of professional business people andacademics concerned with finding business recovery solutions, seeks early
implementation of these and other requested revisions, which were compiled
based on the results of a recent questionnaire survey of JABR members.
* Further details and answers to questions will be presented at a press
conference at 4 p.m., Tuesday (Aug. 2), in the third-floor Conference Roomof Shojihomu KK (see attached map).

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The Tax Issue Committee
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

Revisionof law

Requested Matters

Revisionof
CircularOpening
informationtopublicⅠ For debtors
1. Tax deferment of income arising from debt exemption
2. Switch to a refund system for overstatements based onmisleading accounting
3. Extension of statutory limitations for correction ofoverstatements based on misleading accounting
4. Clarification of treatment of debt equity swaps (DES) for
debtors
5. Reduction of registration license tax when capital is increasedby DES
6. Reduction of per capita residential tax when capital is increasedby DES
7. Lower valuation standards for fixed property tax underreorganization procedures
8. Extension of special treatment measures with respect to thescale of capital of the Factor Based Tax
9. Wider scope of the guarantor’s claim for indemnity with respect
to special treatment of capital gain arising from performance ofobligations of guarantee
10. Clarification of treatment of income arising from debt
exemption of individual debtors.

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Ⅱ For creditors
11. Procedures for bad debt loss when security is doubtful etc.
12. Wider scope of credits subject to provisions for doubtful debts
13. Provisions for doubtful debts with respect to the guarantor’s
claim for indemnity
14. Clarification of provisions for doubtful debts based on actual
assessment
15. Extension of the legal rate of provisions for doubtful debts
based on specified events
16. Deduction of consumption tax where provisions for doubtful
debts are accounted for
17. Clarification of the need for a reasonable reconstruction plan

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The Tax Issue Committee
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

Ⅲ For recovery funds and P/E investors
18. More flexibility in pricing new shares allocated to a third party
19. Procedures for accumulation accounting of receivables bought
at a discount
20. Clarification of how to treat collected receivables bought at
discount
21. Clarification of the scope of Permanent Establishment forforeign partners of LLPs and the like
22. Deferment of capital gain arising from investment in kind in
LLPs
23. Clarification of taxation for foreign entities
24. Scope of financial income to be withheld from foreign partnersof LLPs

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Regarding the contents of the above, please refer to a separate document, “Requests for2006 Tax Reform Concerning Business Recovery.’’ (This will 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: jabr@shojihomu.co.jp

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The Tax Issue Committee
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

Requests for 2006 Tax Reform
Concerning Business Recovery(Summary)
Ⅰ For debtors
1. Tax deferment of income arising from debt exemption
Where a rationale exists to create and agree to a reconstruction plan -- under the
Corporate Reorganization Law, Civil Rehabilitation Law, or Article 24-2, Paragraph 1,
Item 1 (commencement of corporate arrangement in accordance with the Commercial
Code) and Item 2 (a fact corresponding to an authorization of a reorganization plan or
the like) of the Government Order of the Corporation Tax Law -- and where it is clearthat a company is expected to adopt a measure to use the earnings from debt
exemption in the future process of reconstruction, we request that a deferment
measure be taken to match the taxable period of the income arising from debt
exemption with that of a specified minimum amount of related expenses that thecompany expects to accrue in the future. The above income, to be accounted for in a
special reserve, would be offset by the expected expenses when the expenses wereactually recognized.
2. Switch to a refund system for overstatements based on misleading accounting
We request that the tax credit system currently in force be changed to a refund system
concerning the corporation tax for overstatements based on misleading accounting.
3. Extension of statutory limitations for correction of overstatements based onmisleading accounting
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 the case of overstatements
based on misleading accounting.
4. Clarification of treatment of debt equity swaps (DES) for debtors
The Basic Circular of Corporation Tax Law 2-3-14 etc. clarifies treatment pertaining
to creditors, such as acquisition prices etc. of shares acquired by creditors via DES, but
not to debtors. Clarification of how to treat debtors (equity issuers) is therefore
requested.
5. Reduction of registration license tax whencapital is increased by DES

Where a corporation aiming for a certain type of reorganization increases capital by
DES, we request that the registration license tax rate be reduced by separating the4The Tax Issue Committee
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
DES amount from other capital increases.
6. Reduction of per capita residential tax when capital is increased by DES
Where capital is increased by DES and losses brought forward are compensated for bya capital reduction etc., we request that reductions of capital carried out for loss
compensation and other purposes be exempted from the taxation standard of the percapita residential tax on corporations.
7. Lower valuation standards for fixed property tax under reorganization procedures
We request that revaluation as a result of legal proceedings be added as a
reduction-in-value event for taxation standards of the fixed property tax. The value
adopted as book value, such as market value in a real estate appraisal -- with regard tocorporations for which a reconstruction plan in legal proceedings under the Corporate
Reorganization Law or Civil Rehabilitation Law is approved in due course -- should betreated as the value for taxation standards of the fixed property tax.
8. Extension of special treatment measures with respect to the scale of capital of the
Factor Based Tax
One of the taxation standards of the Factor Based Tax is the size of capital plus
additional paid-in capital (Capital etc), which basically includes an amount forcompensating losses brought forward by a capital decrease or a reversal of capitalreserves. Although special measures allow this amount to be subtracted from Capitaletc., the application of these measures is limited to the fiscal period of April 1, 2004, to
March 31, 2006. We therefore request that the period of this special measure should be
extended..
9. Wider scope of the guarantor’s claim for indemnity with respect to special treatmentof capital gain arising from performance of obligations of guarantee
In connection with the special treatment of capital gain arising from the performanceof obligations of guarantee prescribed in Article 64, Paragraph 2 of the Income Tax Law,
we request clarification by Circular that the scope of the guarantor’s claim forindemnity under the Income Tax Law include necessary expenses (legal fees etc.) for
performance in a case where executive officers etc. of a corporation become unable topay off the indemnificaton.
10. Clarification of treatment of income arising from debt exemption of individual
debtors.
As for the treatment of income arising from debt exemption of individual debtors, aCircular notes that, when it becomes extremely difficult for a debtor to satisfy
obligations, the income arising from a debt exemption shall not be included in taxable
income. We request clarification of the extent of distress required to omit this income.

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The Tax Issue Committee
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

Ⅱ For creditors
11. Procedures for bad debt loss when security is doubtful etc.
In accounting for bad debt loss on secured monetary claims: ① Where nothing in
effect will be left because a material security is pledged and a security right with anearlier order has been set up in excess of the price of its fair value etc., or ② wherecollection, in effect, is not expected to be made; and where a human guarantee ispledged (guarantor etc.) but the guarantor is either missing or identified as a debtor
with multiple loans, it is understood that these material and human securities neednot be taken into consideration. We request clarification of these treatments.
12. Wider scope of credits subject to provisions for doubtful debts
The requirements pertaining to monetary claims subject to provisions for doubtful
accounts prescribed in Article 96, Paragraph 1, Item (2) of the Government Order of the
Corporation Tax Law realistically stipulate that, for each debtor, liabilities should
continuously exceed assets for a considerable period. We request, however, that assets
be taken into consideration not for each debtor as a whole but for each debt in which
different terms of recourse may apply.
In addition, in the Basic Circular of Corporation Tax Law 11-2-18, provisions for
doubtful accounts prescribed in Article 52 of the CTL do not include bailed credits(deposits, caution money, guarantee money, or the like) among monetary claims. We
therefore request that the above Circular be amended so that guarantee money forleasing -- excluding the part of caution money that is substantially close to monetaryclaims from the viewpoint of collectability -- become a subject credit.
13. Provisions for doubtful debts with respect to the guarantor’s claim for indemnity
A guarantor’s claim for indemnity may become subject to bad debt loss or provisions
for doubtful accounts only after such guarantee obligations are performed. We
therefore request an amendment to the Circular stipulating that when the guarantor
receives a claim for performance from the creditor the claim for indemnity shall be
included in the monetary claims subject to the provisions for doubtful debts.
14. Clarification of provisions for doubtful debts based on actual assessment
Transfer of provisions for doubtful accounts is allowed both under the effective
standards based on actual assessment and the formal standards based on specified
events, except where legal proceedings etc. have shelved repayment for a long time.
With both standards, the calculation of a collectable amount exceeding collection of amaterial security and a human guarantee is not clear with respect to the effective
standards. Although the scope of application (reason for transfer and amount oftransfer) is said to have widened, application of the effective standards tends to be
avoided. We therefore request that the calculation of the above collectableamount(including DCF method) according to the effective standards be clarified. Thisis important also from the viewpoint of promoting the disposal of non-performing loans.
6The Tax Issue Committee
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

15. Extension of the legal rate of provisions for doubtful debts based on specified
events
The transfer rate of provisions for doubtful accounts under the so-called formal
standards (based on specified legal events) has remained at 50% since 1954 at the
inception of the former Credit Write-off Provisions System. However, this rate has
been estimated too low, as indicated by various surveys of actual data. We therefore
request that the transfer rate be raised to about 80% ( or that the transfer rate be set
up for proceedings particular to each reconstruction program, etc.
16. Deduction of consumption tax where provisions for doubtful debts are accounted for
Exemption from the consumption tax pertaining to bad debts corresponds toaccounting for bad debt loss according to the Basic Circular under the Corporation Tax
Law. We request that an earlier deduction of the consumption tax be allowed -- as theprovisions for doubtful debts are accounted for.
17. Clarification of the need for a reasonable reconstruction plan
In accordance with the Basic Circular under the Corporation Tax Law 9-4-2, losses
arising from support of subsidiary companies etc. should be accounted for as deductible
business expenses instead of as charitable contributions, where they are based on a“reasonable reconstruction plan.” We request further clarification of the need for this.

Ⅲ For recovery funds and private equity investors
18. More flexibility in pricing new shares allocated to a third party
When a capital increase takes place by means of a new-share allocation to a third
party, the standard discount ratio of 10% prescribed in the Basic Circular under the
Corporation Tax Law is not always reasonable. We therefore request that the standard
be more flexible so as not to hinder raising capital.
19. Procedures for accumulation accounting of receivables bought at discountWe request clarification of treatment involving money claims acquired at a lower
price than the principal amount, thus reflecting the credit risk of a debtor. Revenue
should be recognized when the amount collected from the debtor exceeds theacquisition cost of the receivables, i.e., by cost recovery method instead of theaccumulation method or the installment method.
20. Clarification of how to treat collected receivables bought at discountWith regard to receivables and claims in bankruptcy and rehabilitation etc. on whichinterest has not been paid for a considerable period, we request that the amount ofsuch income not be recognized as a collected claim if the division between the interest
and principal amounts is not clear, and that the collected amount be treated as the7The Tax Issue Committee
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
collection of the principal amount, i.e., by cost recovery method.
21. Clarification of the scope of Permanent Establishment for foreign partners of LLPs
and likes
We request that the purport of the interpretation or standard be clarified in a Circular
and Q&A with respect to the notion that a Limited Liability Partnership under the newJapanese LLP legislation is always regarded Item 1 P.E. It should also be clarified that
foreign partners in other type of partnerships shall not always be regarded as
possessing P.E. in principle according to such interpretation or standard.
22. Deferment of capital gain arising from investment in kind in LLPs
We request that investment in kind in an LLP under the new Japanese LLP
legislation be deemed a transfer at book value, and that neither capital gain nor loss berecognized when contributed assets are returned to the initial contributor at the timeof the LLP’s dissolution. Capital gain or loss should not be recognized at the time ofdissolution either.
23. Clarification of taxation for foreign entities
When a business entity organized under foreign legislation participates in a corporate
reorganization in Japan, its income is treated immediately as belonging to theparticipants -- i.e., pass-through in its own jurisdiction -- the standard on whether totreat it as pass-through or not is not clear enough to enable an easy estimate in Japan.
We therefore request clarification of the treatment of business entities operating under
foreign legislation.
24. Scope of financial income to be withheld from foreign partners of LLPs
The withholding tax on distributions to partners of non-residents or foreign
corporations of partnerships was newly stipulated in the 2005 tax reform. The
distribution income of a partnership comprises business income from positive businessactivities as well as financial income arising mainly from passive investment. We
therefore request that the Government Order under ITL be amended so that
distribution income from passive investment not be subject to such withholding tax.
End.

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The Tax Issue Committee
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

What is Japanese Association for Business Recovery?
■ 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. As of July 2005, JABR had 230 full members and 22
supporting members..
■ JABR has a number of committees dealing with business recovery, in addition
to the Tax Issue Committee:(1) The Corporate Reorganization Case Study Committee (chaired by professor
Junichi Matsushita of Tokyo University) was set up to determine trends inbusiness-recovery techniques centering on corporate reorganization plans ofrecent 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 and other issues involving 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 Series6) published in June 2004.
(2) The Study Committee of Revised Substantive Law on Bankruptcy (chaired byprofessor Katsumi 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. Since the “New Perspective in Business Recovery” symposiumon May 27, 2004, six explanatory meetings for members have been held todiscuss repudiation, corporate onds, leaseholds and other significant issues
related to the respective keynote report.
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The Tax Issue Committee
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(3) Modernization of Corporate Law and Business Recovery Committee (chaired
by attorney Atsushi Toki) was set up to sort out possible impacts on businessrecovery and the body of bankruptcy legislation in general of the fullamendment to the Corporate Law before it went into 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.
(4) Trust and Business Recovery Committee (chaired by attorney Masaya
Miyama) was set up to study possible impacts on business recovery of theoverall revision to the Trust Law, which was to be proposed after an 80-year
interval. Significant issues relevant to business recovery have been reported on
and studied. As a result of these efforts, the committee will prepare comments
for the released draft of the new Trust Law.
(5) M&A Examination Committee (tentatively named) was set up to survey andanalyze the practical application of M&A techniques on the business recovery
scene. Among the broad issues in this perspective that the committee started
to discuss were legal procedures, financial restructurings, businessrestructurings etc. It will report on these issues at a November 29, 2005
symposium.
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: jabr@shojihomu.co.jp
URL: http://www.shojihomu.co.jp/jabr/jabr.html

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