TOKYO - Japan's National Tax Agency is preparing a major overhaul of the way unlisted shares are valued for inheritance tax, a reform that could significantly affect business succession at profitable, asset-rich companies and would mark the first fundamental revision of the rules since they were introduced in 1964.
Inheritance tax is generally calculated based on the market value of assets inherited from a deceased parent or other person. While cash and publicly traded shares can be valued relatively easily, determining the market value of shares in privately held companies is more difficult.
The National Tax Agency has therefore established valuation rules under its Basic Property Valuation Circular. However, authorities have become increasingly concerned about cases in which taxpayers technically followed the rules while combining various methods to sharply reduce the assessed value of company shares.
The planned revision is intended to address those practices rather than simply increase inheritance tax revenue.
The potential impact is broad because roughly 99% of Japanese companies are unlisted. While it is still unclear whether particular industries will be affected more than others, companies with large net assets and high earnings are expected to face the greatest changes.
Under the current system, there are two main methods for valuing shares in privately held companies.
One is the comparable industry method, which uses share prices of listed companies in similar industries as a reference. The other is the net asset value method, which bases the assessment on the company's net assets. In some cases, the two methods are combined.
Authorities have identified schemes in which companies could substantially influence valuations by deliberately changing their apparent size, transferring assets within a corporate group, or shifting the timing of dividends and financial settlements.
Such measures have in some cases reduced assessed values by tens of billions of yen and, in extreme cases, by close to 10 billion yen.
Japan's Board of Audit has also raised concerns about situations in which companies could effectively exert a significant degree of control over their own valuations, helping prompt the current review.
Although the government says the purpose is not to raise inheritance taxes, some taxpayers are expected to face significantly higher liabilities under the new rules.
The National Tax Agency's main objective is understood to be the creation of a fairer taxation framework.
Business groups, however, have expressed concern that higher inheritance tax burdens on small and midsize companies could make business succession more difficult.
Under the reform proposal, the comparable industry method would be abolished and replaced with an entirely new formula, a change that would represent a major departure from the existing system.
In simplified terms, the proposed method would add a company's expected profits over the next five years to its net assets and then apply a specified coefficient.
As a result, shares in highly profitable companies or businesses with large net asset values are expected to receive higher valuations than under the current system. Shares in smaller companies, however, could be valued lower.
Calculations by Nikkei illustrate the possible scale of the change.
In one example involving a construction company with annual sales of 1.7 billion yen and profit of 29 million yen, the assessed share value under the current rules was 96 million yen.
Under the proposed system, the valuation would rise to about 304 million yen, roughly 3.2 times the current level.
Another example involved a small retailer with annual sales of 400 million yen. Because the company was operating at a loss, its valuation under the existing rules was zero.
Source: テレ東BIZ
