Japan’s Finance Ministry plans to close a tax loophole that came to light after SoftBank Group paid no tax in Japan last year thanks to a series of complex paper transactions.
Creating large scale losses by shifting assets within the group, and negating profits made in other sectors with the intent to reduce the tax bill, will not be tolerated.
For instance, if a parent company took away the core operations from a subsidiary and sold off the company for a cheap price, the difference between the book value and the sale price can be counted as paper losses.
To shut down this loophole, the ministry is considering automatically reducing the book value when the core operation is spun off.
In March 2018, SoftBank succeeded in reducing its tax bill by separating the core business from U.K. semiconductor subsidiary Arm Holdings.
The Japanese parent received a three-quarters stake in Arm’s core business Arm Limited. This in turn slashed Arm Holdings’ enterprise value.
SoftBank then sold nearly 80% of its shareholdings in Arm Holdings to group companies including the SoftBank Vision Fund.
Because the book value had fallen sharply compared with when SoftBank acquired the chip designer, the “losses” canceled out SoftBank’s other profits, allowing it to pay no corporate taxes for the year. Arm Limited remained part of the group throughout this entire maneuver.
None of these transactions are illegal on their own. But the Finance Ministry had been considering options to prevent a recurrence since this summer, following an inquiry from the National Tax Agency.
Some experts pushed the government to create a general anti-avoidance rule (GAAR), or a comprehensive framework for preventing tax avoidance — an approach the U.K. and India have adopted. But authorities around the world are still struggling to determine when to take action under such rules.
Meanwhile, companies are wary of new comprehensive framework under which they are not sure how tax authorities will act, and worry that they could face new unexpected tax bills. For now, Japan’s Finance Ministry is opting for a piecemeal approach instead of a general rule.
This article was first published on Nikkei Asian Review.