By Jeff Wynkoop

The Tokyo municipal government has recently decided to enter into discussions with the Ministry of Internal Affairs and Communications to consider changing how the fixed asset tax (kouteishisanzei) is calculated and assessed for buildings. The goal is for the changes to take effect and be extended to all of Japan by the beginning of the 2021 fiscal year.

How the Fixed Asset Tax is Currently Calculated

Fixed asset tax in Japan is paid annually to the local government by owners of land and/or buildings, with the tax basis assessed once every three years. The basic tax rate is 1.4% of this assessed amount.

For buildings, the assessment process entails the local government appraising the value of each material used in construction of the building (wood, reinforced concrete, etc.), which is known as the cost of reconstruction (saikenchikukakaku) valuation method.

This valuation method was first introduced in Japan during the 1963 fiscal year.

Problems with the Current Method

The problem with this valuation method is that it takes a lot of time and effort for the authorities to calculate.

For new high-rise buildings, in the worst case scenario it can take up to two years after construction is completed for the final assessment amount to be fixed. This can be a significant obstacle for international developers and potential purchasers wanting to make detailed revenue forecasts for construction projects in advance.

The hope is that changing the valuation method can shorten the time needed to calculate the tax basis to a few months at most.

Acquisition Price of Property

The main new valuation method being considered is based on the acquisition price of the property. This method, where the basis is determined by the acquisition price notified to the authorities at time of purchase, is currently in use in Shanghai, which competes with Tokyo and other Asian megacities for foreign investment.

Nevertheless, the authorities are also considering the discounted cash flow method used in most western megacities such as London, Paris, and New York. The discounted cash flow method is a present value valuation of all revenue (such as rent revenue, sales price, etc.) projected from the property, and as such is useful in determining the attractiveness of an investment opportunity. The problem with this method, however, is that future revenue projections may lack a sufficiently objective basis and therefore be too speculative for reasonable tax assessment.

Simplifying to Reduce Disputes

Another reason for changing the valuation method is that currently it is not uncommon for disputes to arise concerning the assessed tax basis.

Taxpayers often complain that the government makes mistakes in the assessment process, which can happen sometimes due to the current method being so complicated.

Simplifying the valuation method should help reduce the number of such disputes. In addition, it is expected that actual tax revenue for the government from fixed asset taxes will not be greatly affected by the change.

Source: Nikkei Shinbun morning edition, April 13, 2016

Top Photo: From the Marui Kingei 100th Anniversary Birthday Exhibition. Marui Kingei (1909-1979) was a Nihonga artist active in the pre-WWII period.

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