Japan Panel Set to Extend Stock Tax Cuts in Part

A tax panel of Japan's major ruling party has agreed to extend tax cuts on capital gains and dividends to cushion the impact of ending them on a faltering stock market, while setting a ceiling on income subject to the lower rate.

Capital gains and dividends are now taxed at 10 percent thanks to concessions introduced in 2003 to shore up the Tokyo equity market, but the rate is due to return to 20 percent by March 2009.

But members of the Liberal Democratic Party's panel said on Monday they were working to extend the lower tax rate for capital gains, while only allowing a limited amount of income -- put at "several million yen" -- to qualify for the reduced rate.

The current tax breaks on dividends will also be kept at least for an unspecified "small amount" of income, they said.

The issue of extending the stock tax breaks is key in the year-end tax reform debate among politicians worried about the impact on the stock market of fallout from U.S. subprime problems.

Many in the LDP and Financial Services Agency representing brokerages have been seeking to extend the cuts, while the tax-hungry Ministry of Finance wants to abolish them in the face of colossal public debt totaling nearly 150 percent of gross domestic product.

"In the process of policy making, we may have to make some compromises," Financial Services Minister Yoshimi Watanabe told a news conference on Tuesday.

The LDP's coalition partner New Komeito also wants to end the preferential measures as it sees the tax breaks as largely benefiting the wealthy.

The ruling coalition will finalize on Thursday its annual proposals for revision to Japan's tax system, which will become the basis of government tax bills for the following fiscal year starting in April.

But the opposition bloc, which controls parliament's upper house, is against extending the stock tax cuts and could delay the passage of the government's tax bills.

At an informal meeting on Monday, most members of the LDP's key tax panel agreed to extend the lower tax rate for capital gains for one to two years while setting a ceiling on income subject to the lower rate at around 5 million yen ($45,000), the Nikkei business daily reported on Tuesday.

The panel also plans a ceiling on dividend income. One proposal sets that ceiling in a range between 500,000 yen and 1.5 million yen, the newspaper said.

The Japanese government's less powerful tax advisory panel has proposed abolishing the tax breaks, which were initially set to expire by March next year but were extended for another year.

The government's tax panel has called for adopting a measure to let investors offset losses against profits not only on stocks but also on other financial products to help reduce taxable income and encourage risk taking.