The withholding tax saga which damaged international confidence in the Japanese Government Bond (JGB) market last year has taken another twist. Though the change in Japanese tax law which takes effect today was agreed towards the end of 2001, it was not until the last days of March that the International Securities Market Association (ISMA) was informed of the consequent need to include additional wording in the Global Master Repurchase Agreement (GMRA) when members deal with Japanese counter-parties resident in Japan. ISMA announced on 27 March that it was still in negotiations with legal advisers, the Bond Market Association and the Japanese Securities Dealers Association (JSDA) over the new wording, but was being forced to issue a temporary form of words to prevent foreign-Japanese transactions drying up when the new tax regime came into force today. “The scope of the exemption is complicated,” the ISMA counsel wrote to members in a letter accompanying the additional wording. A number of other conditions are certain to be set by the Ministry of Finance, but these have yet to be published.
Separately, Bank of Tokyo Mitsubishi has warned clients that – “despite our repeated requests” – the Ministry of Finance has not revealed how the tax reform will affect foreign funds eligible for exemption from withholding tax on JGBs. However, the bank did obtain from the Ministry a list of investment vehicles which will qualify for the exemption. They include US investment companies, UK and Irish unit trusts, French and Luxembourg FCPs, German investmentfonds, Italian mutual funds, European UCITS funds in any of the fifteen member-states of the European Union, Australian managed funds and Canadian investment trusts. But only a lawyer could afford the time to decipher the exact meaning of the accompanying legal verbiage. No wonder so many foreign firms are wondering if it is worth continuing to do business in Japan.