Proposal for Fiscal 2023 Tax Reform（Summary）
September 13th, 2022
KEIDANREN（Japan Business Federation）

Table of ContentsⅠⅡⅢ

ⅣIntroduction
Tax measures to drive the engine of growth
1. Corporate Taxes
2. Tax measures concerning Land and Housing etc.

（Slide#）２

３～４５Taxation for a Sustainable Economy and Society
1. Automobile-Related Taxes
2. Tax measures for GX
3. Taxation System for Realizing a Virtuous Circle ofGrowth and Distribution
Taxation System that Supports Global CorporateActivity
1. Toward smooth implementation of the Pillar 1 and 2
2. Review of the JCFC taxation system with the introduction ofPillar 2６６７８９1Ⅰ．Introduction
 Fiscal 2023 tax reform should aim to encourage investment in “People”, “science, technology,and innovation”, “startups”, and “Green Transformation （hereinafter GX） and Digital
Transformation （ hereinafter DX ） ”, each of which contributes to maintaining andstrengthening corporate value creation and competitiveness. In addition, a "virtuous cycle ofgrowth and distribution" and a "sustainable capitalism” should be established.
 Keidanren continues to engage in the design of an international taxation framework, including
the digital taxation system, from the perspective of reducing administrative burdens oncompanies. At the same time, the Japanese Controlled Foreign Companies (JCFC) taxation
system must be simplified.
 It is essential to hold a broad discussion on the ideal tax system to promote a "virtuous circle ofgrowth and distribution" in Japan, while considering increased tax burdens and administrative
burdens accompanied by major changes in the international taxation framework.
＜Domestic Taxation＞＜International Taxation＞

Strengthen the ability to create innovation bydriving the engine of growth.

[Top Priorities]
 Research and Development tax credit incentives.
 Tax incentives for start-ups.
 Tax incentives for capital investment.
 Digitalization and simplification of tax procedures.
 Land and housing taxation.
 Automobile Taxes.
 Tax measures to double asset-based income.

Establish an international taxation framework tha
does not hinder global activity.
[Top Priorities]
 Smooth implementation of Pillar 1 and Pillar 2.
 Revision of the existing JCFC tax system.

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II. Tax measures to drive the engine of growth1-1. Corporate Taxes Keidanren will encourage the momentum of wage increases and contribute torealization of a "virtuous cycle of growth and distribution”.
At the same time, we will actively promote "investment for the future" while
keeping in mind the ripple effects on the domestic economy.
(1) Expansion and Extension of the Research and Development tax credit incentives
 Extension of provisional tax credit rate and maximum tax credit cap (especially, forthe general type).
 Revision of definitions for "start-ups" within the OI (Open Innovation) type.
 Revision of the scope of R&D expenses in line with changes in business models (e.g.,expenses related to service development, humanities and social sciences, and inhouse software).
(2) Tax measures for start-ups
 Expansion of tax measures for stock option (e.g., extension of exercise period).
 Tax measures on open innovation activities (addition of acquisition ofoutstanding shares at the time of M&A).
 Research and Development tax credit incentives (aforementioned)
 Expansion of tax measures for spin-offs where a company continues to retain
a portion of its equity.
 Consideration of tax measures for the “web3 era” (e.g., review of period-end
fair value taxation of crypto assets issued and held by the same company).

3II. Tax measures to drive the engine of growth1-2. Corporate Taxes(3) Tax measures for investment expansion
 Extend existing tax measures to promote DX and revise therequirements and targets (e.g., making investment in essential humanresources for DX eligible).
 Further tax measures to enhance GX.
 Property tax on depreciable assets should essentially be abolished.
 Extension and expansion of special provisions for replacement ofbusiness assets related to long-term land holdings.
 Extension of tax measures to promote urban revitalization.
(4) Digitalization and Simplification of Tax Procedures<National taxation>
 Expansion of e-Tax functions.
 Digitalization of tax audits.
 Necessary actions related to The Act on Special Provisions concerning
Preservation Methods for Books and Documents Related to National
Tax Prepared by Means of Computers.
 Digitization of income tax procedures.
<Local taxation>
 Online notification of local taxes (especially fixed asset tax).
 Digitization of procedures for tax returns and applications.

4II. Tax measures to drive the engine of growth２．Tax measures concerning Land, Urban and Housing etc.
(1) Taxation related to Land Extension and expansion of special provisions for replacement ofbusiness assets related to long-term land holdings (aforementioned).
 Property tax on land needs to be reconsidered upon economicconditions. In addition, measures should be taken from a mediumto long-term perspective to optimize the burden, etc.

(2) Urban and Housing Taxation
 Extension of the Urban Revitalization Taxation System (aforementioned)
 Extension of special measures for real estate acquisition tax onpurchase and resale of houses, etc.
[Other major items]
Extension of expired special measures concerning taxation.
 Marine transportation-related taxation (tonnage tax, special depreciation system forocean-going vessels, and special replacement of vessels).
 Tax measures to build an economy and society resilient to natural disasters.
 Tax measures that contribute to maintaining and ensuring stable air transportation.
[Local Taxes]
 Simplification of pro-forma standard taxation of corporate enterprise tax
 Revision of tax base of corporate enterprise tax for electricity and gas supply industries.

5III. Taxation for a Sustainable Economy and Society

1. Automobile-Related Taxes / 2. Tax measures for GX

1. Automobile Related Taxes National discussion and examination of the ideal medium- to long-term
taxation system should be promoted beyond the automobile industry.
Complicated automobile-related taxes should be simplified to reduce theexcessive burden on users and aim for a system that contributes to CO2emission reduction.
 As a first step, it is essential to realize the following in the FY2023 tax
reform:• Expansion and extension of the Tonnage Tax Reductions/Exemptionsfor Eco-Friendly Vehicles.
• Expansion and extension of Special Automobile Tax Reductions(including mini-vehicles).
• Abolition of the Environmental Performance-Based Tax (includingmini-vehicles).

2. Tax measures for GX
 In order to achieve "carbon neutrality (CN) by 2050," tax measures should
first be implemented to support and accelerate various R&D investments
and capital investments in a focused manner.
 Introducing a new carbon tax or raising the tax rate of the existing global
warming tax is not reasonable for now.
 Comprehensive consideration should be given to the "GX Economy
Transition Bonds (tentative name)," including the appropriate redemption
period, while taking into account various factors such as their use,beneficiaries, burden bearers, and economic impacts.
 The tax exemption for raw material use should continue to be considered. 6

III. Taxation for a Sustainable Economy and Society

3. Taxation System for Realizing a Virtuous Circle of Growth and Distribution(1) Tax measures to double asset-based incomes It is crucial to fundamentally expand existing NISAs in order to create a“broad middle class”. The following revisions should be made with thenecessary reorganization:• Making the expiration date permanent.
• Making the tax-exempt holding period indefinite.
• Increasing the tax-exempt investment limit.
• Expansion of eligible products.
(2) Pension Taxation
 Special corporate tax on retirement pension funds should be abolished assoon as possible. At a minimum, the taxation freeze should be extended.
(3) Tax measures to facilitate labor mobility and improve productivity
 The deduction for retirement income should be reviewed.
(4) Other financial, securities, and insurance taxation
 Further unification of financial income taxation.
 Extension of tax exemption for lump-sum gifts of education, marriage,and child-rearing funds.
 Revision of inheritance tax assessment of listed stocks.
 Expansion of deduction for life insurance premiums.
7IV. Taxation System that Supports Corporate Global Activities

1. Toward smooth implementation of the Pillar 1 and 2
 In designing both the Pillar 1 and 2 rules, it is essential to reduce practical complexity to themaximum extent possible and to ensure sufficient predictability.
(1) Pillar 1 Based on Keidanren's opinion, the practical burden on Covered MNE Groups should be reduced.
(2) Pillar 2
 To simplify the practical burden on companies, domestic legislation should be enacted afterensuring the introduction of the safe harbors.
 The domestic legislation of the GloBE rules should be implemented after sufficient time is given
to MNE groups to prepare for the establishment of systems and practical measures including
accounting.
 Tax measures to encourage the accumulation of intangible assets such as data should continue
to be considered.

8IV. Taxation System that Supports Corporate Global Activities

2. Review of the JCFC taxation system with the introduction of the Pillar 2

 The administrative burden related to the existing JCFC taxation system should besignificantly reduced and the excessive income inclusion should be optimized toward thedomestic legislation of the Pillar 2.
 The JCFC taxation system should be reviewed based on a hybrid of the entity approachand the transactional approach, on the premise that the threshold of effective tax rate ismaintained at 20%.
(1) Simplification by meaningfully narrowing the scope of JCFC
 The effective tax rate should be consolidated to the 20% standard.
 CFCs can be excluded from the taxation system by an appropriate indicator(s). (For example, forthe Pillar 2 covered MNE Groups, a CFC with pre-tax profits of less than 100 million JPY, whichcannot be large in size among the entire group, should be excluded from the scope.)(2) Fundamental revision of the economic activity tests
 (e.g., exclusion of copyright provision from the business purpose test, further revision of theunrelated party test for wholesale business, etc.)(3) Review of the scope of income inclusion The shareholding ratio requirement for dividends should be lowered and the determination of
the shareholding ratio for the group as a whole, including indirect investments, should beallowed.
 Partial inclusion of abnormal income should essentially be abolished, and at least the gain on
debt forgiveness at the time of liquidation should be excluded, etc.
(4) Other measures to reduce administrative burden The timing of inclusion should be reviewed in the direction of moving it backward.
 Consideration should be given to the utilization of elements of the Pillar 2.
 The requirement to attach various documents should be changed to a preservation requirement.

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