Well, I see the "wall of worry" that has been dogging you for a while is starting to loom larger. I don't know if this has been posted before, but there seem to be some new capital gains tax proposals being floated that could put a crimp in investor's profits from IPOs:
Issued: January 24, 2000
Tax policy threatens entrepreneurs
IPO levies could soar after elimination of withholding option
Owners of start-up companies, such as these prospective members of Mothers stock exchange, could see a larger portion of their IPO wealth siphoned off by capital-gains tax.
A prospective change in Japan's capital-gains tax threatens to thwart an expected boom in initial public offerings of the nation's most promising young companies.
The worry may hurt Tokyo's new venture-oriented equity markets: the Tokyo Stock Exchange's Mothers market that began operating last month, and its rival Nasdaq-Japan, expected to debut in June.
Some entrepreneurs are now asking for a delay in the tax-rule change planned for next year.
Currently, investors can choose between two formulas for calculating their capital-gains tax on selling stocks. One calls for brokerage houses to withhold the tax at a rate of 1.05% on the value of the sale.
The other assesses a 26% tax on the declared profit, the value of the sale less the acquisition cost. In both cases, such a trade is taxed independent of the taxpayer's overall income.
Most shareholders usually opt for the first method because it is cheaper. However, the withholding option is set to be abolished in April 2001. That means the declaration format will be the only choice in what will amount to a huge tax increase, already dubbed the "2001 shock."
The change will hit owners of newly public businesses particularly hard, siphoning off a great deal more of their profit. Company founders will have acquired shares at far lower costs than their post-IPO values.
Critics warn the change could smother a rise in entrepreneurial zest that Japan is counting on to propel the nation's industrial rejuvenation.
The tale of Masayuki Shinoda illustrates the dilemma. Shinoda is chairman of Colin Corp., a medical-equipment maker registered on the JASDAQ over-the-counter market since November 1997.
Shinoda plans to sell some of his company shares, and use the proceeds to help create a foundation dedicated to conduct research on arteriosclerosis.
Ballooning levy
Suppose Shinoda received 1 billion yen ($9.5 million) on the sale. If he did so by March 2001, the deal would cost him 10.5 million yen in capital-gains tax. After that time, the levy would balloon to nearly 260 million yen.
"Business founders should be allowed to follow their management tenets in the use of their personal wealth," Shinoda contends. Entrepreneurship would definitely be hurt, if as much as a quarter of its fruit is taken away in taxes to be spent on something taxpayers have no control over, he said.
Moves are already afoot to get around the problem by something called "crossing" the shares in question. That means selling shares one day and buying them back the following day, to increase their book value and thus alleviate higher capital-gains taxes on post-March 2001 stock sales.
In one such exercise last month, Yasuo Konaka, chairman of retailer Konaka Co., sold and then repurchased his entire equity interest in the company.
In another instance, Nippon Kodoshi Corp., a manufacturer of electric insulation paper, disclosed that several of its senior executives, including the president, would do the same with a total of 600,000 company shares.
Not that these firms acknowledge the transactions as outright anti-2001 shock measures. Nippon Kodoshi says the executives decided on the timing of the trades based on various factors, including earnings and the stock price, as well as the tax situation.
Still, brokerage sources widely expect an increase in trades linked to the tax-rule change this year.
The change itself has drawn few critics because tightening of capital-gains taxation has become a global trend. By international standards, tax authorities maintain, Japan's current withholding tax rate on capital gains is low, while the forthcoming 26% single rate is not particularly high.
The key question may be the timing of the de facto tax hike, coming when efforts to foster a venture-friendly environment in Japan are increasing.
It could kill off individual Japanese investors' nascent interest in putting their money in start-ups, worries Yoshito Denawa, chairman of D. Brain Securities Co., which runs a market for stocks of unlisted companies.
Venture-business shareholders deserve preferential tax treatment to keep their dreams of making it big from being discouraged, asserts Kiyohide Kugisaki, president of Puff Co., an Internet-based employment agency and a would-be Mothers listing.
Actually certain tax breaks are available. For example, capital-gains taxes are assessed at 13%, or half the regular rate, if a company's founders are selling shares held at least three years before the IPO, and the sale occurs within a year of the IPO.
Starting in April, an even more favorable rate of less than 7% will be available to the founders of government-designated small businesses.
But Ryo Naito, who heads parking venture Parc Inc., is skeptical about a government imprimatur helping creative new industries flourish.
Such tax breaks should be available to all venture shareholders, insists Naito, who intends to take Parc public in 2003.
Many market experts expect Japan's IPO volume to grow sharply over the next two or three years. They contend the drive of entrepreneurs aspiring to strike it rich on IPOs is likely to help fuel revitalization of the economy.
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