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

Announcement
The Tax Issue Committee,
Japanese Association for Business Recovery
July 25, 2007

Announcement of Requests for 2008 Tax Reform
Concerning Business Recovery
The Tax Issue Committee of the Japanese Association for Business Recovery hassummarized requests for 2008 tax reform that are conducive to a swift and sustainablebusiness recovery in Japan.
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 the treatment of certain valuation losses orlosses carried over. However, requests have been made regarding aspects that have still notbeen remedied or points to which the revised law cannot be easily applied. The main pointsof the requests for revisions include:
1. More flexible treatment of debtor taxation
2. Practical treatment of bad debt loss in bankruptcy and related issues
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.
(Note) The Tax Issue Committee comprises businessmen and knowledgeable people,
including scholars concerned with business recovery.

Inquiries should be made to:
Secretariat of 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

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

Rev. of Rev. of Info.
law
cirto
cular
publicRequested Matters

I. For debtors
1. Flexible treatment of Debt Treatment Plan
2. Revaluation of monetary claims added to assets under CTL
Article 33
3. Market value of credit under DES arrangement
4. Disguised accounting 1 – Clarification of pertinent
requirements in disguised accounting
5. Disguised accounting 2 – Switch from a tax credit system to arefund system
6. Disguised accounting 3 – Extension of correction period in
disguised accounting

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II. For creditors
7. Approval of partial bad debt loss loss
8. Clarification of requirements for bad debt in privatearrangement
9. Statute of limitation and requirements for bad debt loss
10. Calculation method of collectable amounts under a personal
guarantee
11. Timing and methods of bad debt loss in bankruptcy

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III. For recovery funds and P/E investors
12. Clarification of how to treat collected receivables bought at
discount*

IV. For business reorganization techniques
13. Income tax on gains under DES arrangement based on a
Reasonable Reconstruction Plan
14. Lower taxation standards for per capita residential tax for
corporations
15. Permanent arrangement for special treatment measures ofscale-of-capital tax standards for the Factor Based Tax
16. Grants for company separation and fixed property tax burden,
etc.

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See details for the above in a separate document, “Requests for 2008 Tax Reform
Concerning Business Recovery”.

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

Requests for 2008 Tax Reform
Concerning Business Recovery(Summary)
Ⅰ. For debtors
1. Flexible treatment of Debt Treatment Plan (Revision of law, and info to public)
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 (valuation losses) to non-legal proceedings or to a private arrangement. On theother hand, the application of overdue losses before valid “blue losses” requires the same
conditions for DTP, according to CTL Article 59, Para. 2, Item (3).
As a result, the above requirements for a DTP, which 2006 Tax Reform cited as therequirements for carrying over losses in business reorganization -- especially the
involvement of two or more financial institutions and three or more independent specialists-- become a significant hurdle when losses are carried over not only in business recovery but
also in business reorganization. We therefore request the lenient application of theserequirements so that small- and medium-sized enterprises can take advantage of DTP.
It should be noted that there are other types of non-legal proceedings stipulated in Item (4)of Article 117 of GO under CTL and CT Basic Circular 12-3-1(3) (hereinafter collectively
referred to as “Reasonable Asset Arrangement”) that shall be arranged to use overdue losses
carried over after blue losses. We request that requirements for these types of non-legal
proceedings be clarified further, for example, as to whether the above two conditions are
exempt to Reasonable Asset Arrangement.

2. Revaluation of monetary claims added to assets under CTL Article 33 (Revision oflaw and revision of Circular)
CTL Article 33, Para. 2, permits deduction of asset valuation losses from income when the
reorganization plan is approved in accordance with the Company Reorganization Law or
law on special exemptions, etc., concerning reorganization proceedings for financial
institutions, etc. (hereinafter collectively referred to as “Company Reorganization Law,etc.”), and where it is necessary to carry out revaluation under these laws, or where othercertain conditions apply. However, loan receivables, trade-account and other receivables are
excluded from assets with accountable revaluation losses, as they are collectively
categorized as “deposits and the like” in CTL. It is therefore requested that monetary claims
such as trade-account and loan receivables, security deposits/caution money, etc., be added
to eligible assets for the purpose of revaluation losses.

3. Market value of credit in DES arrangement (Revision of Circular)
Following the promulgation of the new Company Law of 2005, the definition of “amount of
capital and the like” under CTL was revised under 2006 Tax Reform. As a result of thatrevision and 2007 Tax Reform, treatment of debtors in a debt equity swap (DES) withinvestment in kind was interpreted as follows: The market value of the assets (monetaryclaims), other than the face values contributed in kind in DES, is treated as an increased3

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

amount of capital and the like under CTL. Except when the DES falls under non-tax
Qualified Reorganization, the difference between the market value and the face value isincluded in calculated taxable income from evaporated debt on the balance sheet.
However, because the assets (monetary claims in DES), other than money invested in kindin DES, are credited to the debtor himself, it is still a matter of argument as to the valuethat the debtor should adopt.
Accordingly, we request a set of Circulars and the like showing examples of the evaluation
methods acceptable under CTL.

4. Disguised accounting 1 – Clarification of pertinent requirements in disguised accounting(Revision of law)
According to 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, will not be taken back retroactively as deductible expenses for the accrual period.
However, to the extent that management responsibility is taken in a subsequent businessyear and concrete restatement or amendment proceedings are taken for past accounts, werequest clarification under tax law that unrecognized bad debt loss and provisions for
doubtful accounts should be included as misrepresentation by disguising a fact, as stated in
CTL Article 70.

5. Disguised accounting 2 – Switch from a tax credit system to a refund system (Revision oflaw)
We request that the tax credit system currently in force be changed to a refund system
concerning corporation tax for overstatements based on disguised accounting .

6. Disguised accounting 3 – Extension of the 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 .

Ⅱ. For creditors
7. Approval of partial bad debt loss (Revision of Circular)
Bad debt loss cannot be recognized even for debtors clearly in the state of bankruptcy aslong as a collectible guarantee by a person or a property exists. We therefore request ameasure to allow partial bad debt loss as deductible expenses.
8. Clarification of requirements for bad debt in private arrangement (Revision of law andrevision of Circular)
The following two requirements among others must be satisfied before bad debt loss ofcredit or the transfer of provisions of doubtful accounts can be recognized in private

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

arrangements under CTL.: □ liability arrangement under reasonable standards and □creditors’ meetings and negotiations between concerned parties through an arrangement by
an administrative body, financial institution or other third party.
Concerning the first requirement, we request clarification to allow preferential or lenient
treatment for small amount creditors and a tolerant compromise of affordable creditors,
depending on circumstances.
Regarding the scope of other third parties, i.e., “financial institutions and other third party”
with respect to the latter requirement, we request clarification that the third party may
include persons in an independent position such as financial institutions that are business
partners, lawyers, etc.
9. Statute of limitation and requirements for bad debt loss (Revision of Circular)
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 the lack ofprovisions for treating such credits. Considering that the emergence of internet businesscreates a huge number of small lot transactions together with fractional receivables on thebooks of ordinary business, we request that the establishment of extinctive prescription beappropriately included in bad debt loss under CTL.

10. Calculation method of collectable amounts under a personal guarantee (Revision of
Circular)
We request a set of new Circulars to treat the collectible amount pertaining to the humanguarantee deductible from the amount of bad debt loss when the total amount becomes
uncollectible due to the asset condition, solvency, etc. of the debtor, as well as to suchdeductions from the provisions for doubtful accounts.
Specifically, we request that the new Circular articulate an income-based allowance bywhich the payer may ignore a collectible amount from the human guarantee exceeding theannual income of the guarantor multiplied by five years.

11. Timing and method of bad debt loss in bankruptcy (Revision of Circular)
Where a debtor (an individual or a corporation) has filed bankruptcy proceedings, it isalmost impossible to collect receivables.
Absent clear laws, regulations or Circulars on bad debt loss from bankruptcy receivables
under tax law, application of the CTL Basic Circular 9-6-2 (bad debt loss on uncollectible
monetary claims) can be explored. However, the requirements of that Circular seem sorigid for bankruptcy practice that the following bad debt provision will be examined.
While collection is practically impossible, only a formal transfer (50%) of provisions for
doubtful accounts can be made according to Article 96 (amount of maximum transfer toprovisions 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. Thismeans the creditor must live with tax overpayment for a considerable period. Such asituation is too harsh, especially for small- and medium-sized enterprises.
We therefore request that, where a debtor is cleared to commence bankruptcy proceedings,
bad debt loss be immediately allowed and that the creditor not recognize income fromrecovery until receivables are collected later.

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

Ⅲ. For recovery funds and private equity investors
12. Clarification of treatment of collected receivables bought at discount (Revision of
Circular)
We request that a Circular be issued stating to the effect that, when the amount ofmonetary claims bought at discount (lower than the principal amount) reflects the credit
risk of the debtor, the purchaser of the claims can carry the claims at cost without adjusting
the difference between the principal amount and the purchase price until the collectedamount recovers the cost and that the collected amount exceeding cost should be recognizedin gross revenue upon collection i.e., by the cost recovery method instead of theaccumulation or installment method.

Ⅳ. For companies under business reorganization process
13. Income tax on gains under DES arrangement based on a Reasonable Reconstruction
Plan (Revision of law)
DES arrangement for an unlisted company under a reorganization plan is usually carriedout by issuance of preferred redeemable shares. The income from debt evaporation arisingfrom offsetting acquired debt in this arrangement is brought over from the technicalpresentation on the debtor’s balance sheet and is different from substantial debt
extinguishment as creditors do not completely waive the amount of receivables. Moreover, it
never increases the debtor’s tax-bearing capacity. Therefore, if tax is levied on the income
from debt evaporation for a debtor in the process of reorganization, it may become a fatal
threat to the reorganization plan.
We request that taxable income arising from debt reduction under DES arrangement foran unlisted company be deferred to the extent that the redemption clause is compulsory or
conditional and the requirements of a reasonable reconstruction plan are satisfied under
the Company Reorganization Law, Civil Rehabilitation Law, a reasonable private
reorganization (corresponding to the Debt Treatment Plan (DTP) under Article 24-2 of GO
under CTL ) and Reasonable Reconstruction Plan based on the Basic Circular 9-4-2.
Nevertheless, when redeemable shares are converted into ordinary shares, or when it
becomes certain that they will not be converted, deferment of income from debt reduction
will be suspended at the time.

14. Lower taxation standards for the per capita residential tax for corporations(Revision of law)
Taxation standards of the per capita corporate residential tax involve “amounts of capitaland the like” under CTL. The reason is understood to be that the amount of capital and thelike are recognized as a certain tax-bearing capacity representative of the scale of thecorporation. However, compensation for a loss also represents a reduced scale of businessactivities. We therefore request that amount-of-loss compensation be struck from taxation
standards applicable to the per capita corporate residential tax.

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

15. Permanent arrangements for special treatment measures of scale-of-capitaltaxation standards for the Factor Based Tax (Revision of law)
Regarding lower scale-of-capital taxation standards for the Factor Based Tax, where loss iscompensated by reducing the amount of capital or the amount of capital reserves for abusiness year during the period April 1 2000, to March 31, 2008, the amount is to be
deducted from the amount of capital and the like. However, this treatment should not be
divided into time blocks. We therefore request permanent arrangements (or extension of thearrangements).

16. Grants for Corporate Divestiture and fixed property tax burden, etc. (Revision oflaw)
When Corporate Divestiture is carried out, a fixed property tax and a depreciated property
tax are occasionally allocated between the corporation succeeding the separated unit andthe corporation separating it in accordance with reasonable standards such as the holding
period pertaining to the separated business. We request that a Circular stating that thosetaxes allocated to the succeeding corporation is considered just an expense at the time ofunit succession and will not fall under the ineligible grants, which may disqualify above
Corporate Divestiture from a non-tax reorganization for CTL purposes.

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The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 3-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 ofpractical proposals for a swift business recovery in Japan. The group includes businessprofessionals and academics who exchange opinions and information among themselves
and with experts overseas concerning bankruptcy, business-recovery methods andrelated 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 realestate appraisers, as well as managers of domestic and foreign financial institutions,business-recovery and PE funds, and consulting firms. Accounting firms, businesscorporations and financial institutions, which perform an active role in the first line ofbusiness recovery, participate as supporting 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 theTax 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 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.
(2) 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 application of
the Substantive Law on Bankruptcy, to which important revisions have been made.
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.
(3) The Modernization of Corporate Law and Business Recovery Committee (chaired byattorney Atsushi Toki) was set up to sort out possible impacts on business recovery
and bankruptcy legislation by the complete amendment of the 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 otherissues were discussed from practical viewpoints.

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The Tax Issue Committee
Japanese Association for Business Recovery
3rd Floor, Kayabacho Broad Square, 9-10, Nihonbashi-Kayabacho,
Chuo-ku 3-chome, Tokyo 103-0025. Tel: 03-5614-6086 Fax: 03-3664-8845(4) The Trust and Business Recovery Committee (chaired by attorney Masaya Miyama)
was set up to study possible impacts on business recovery by the first overallrevision of the Trust Law proposed in 80 years. Significant issues selected in termsof business recovery have been reported and studied. Based on those results, thecommittee is preparing comments on the exposure draft of the new Trust Law.
(5) 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 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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