Contracts, Markets, and Laws in the US and Japan
Edited by Zenichi Shishido
Chapter 16: Income tax and incentives for corporate transactions: a Japanese perspective
There are many transactions between a corporation and its stakeholders (i.e. shareholders, employees, creditors, directors, and so on). In many cases, the tax burden cannot be ignored. The Companies Act is a national-level (not a state or other local) law in Japan. The Income Tax Act (ITA) and Corporate Tax Act (CTA) are also national-level laws. Accordingly, tax rules may have an effect on corporate transactions that are also governed by the Companies Act. So there may be an incentive to arrange transactions in such a way that the tax burden could be mitigated. Even if corporate law and tax law were not the same level of law, tax rules would have an effect on incentives in corporate transactions. For example, bond interest is generally deductible by the issuing corporation (CTA. Art. 22(3)) but any dividend payment is non-deductible (CTA. Art. 22(5)). Accordingly, there is an incentive to prefer debt financing for corporations compared with equity financing. The purpose of this chapter is to consider whether the tax rules that provide an incentive or disincentive for corporate transactions are desirable or not as a matter of legislation. In other words, how should corporate law and tax law live together in the real world of business?
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