PE firms oppose Japanese tax changes

A group of private equity firms have written to the Japanese Ministry of Finance setting out their opposition to proposed tax changes that could have a significant impact on foreign investment.

A ten strong group of private equity investors including The Carlyle Group, Warburg Pincus and JP Morgan Partners are lobbying the Japanese Ministry of finance with regard to proposed tax changes that they say would discourage foreign investment in Japan, according to a report from Reuters.

The proposed changes include the imposition of a 20 percent withholding tax on capital gains and have already been initially approved by the Japanese cabinet according to the report.

The ten firms, including foreign and Japan-based groups, have sent a letter to the tax authorities stating that “the proposed changes risk reducing foreign investors’ appetite to invest in Japan.”  A spokesperson for one of the firms has confirmed the signing of the letter.

The letter goes on to state that the proposals are at odds with a policy address given the Japanese prime minister Junichiro Koizumi in 2003, in which he stated an intention to double foreign direct investment into Japan to 2.4% of gross domestic product by 2008.

According to figures from the Asian Venture Capital Journal, $8 billion (€6 billion) was invested by private equity firms in Japan in 2004.

The proposed changes by the Japanese government appear to be a response to criticism of foreign investors following the turnaround of Shinsei Bank led by US private equity firm Ripplewood Holdings.

The deal, one of the most successful private equity investments of all time, has already delivered proceeds to the investor consortium of 231 billion yen ($2.1 billion; €1.7 billion) when the company listed on the Tokyo stock exchange in February 2004. The consortium will sell a further 34 percent tranche of shares, worth approximately 290 billion yen in February.

The problem with the transaction from the Japanese perspective was that the Japanese government had used approximately $72 billion of taxpayers’ money to write off Shinsei’s bad loans prior to the original buyout by Ripplewood.

The proposals are not due to be debated in the Japanese parliament before April and market observers have suggested that the proposals may be watered down (for example by exempting or reducing withholding tax for countries that have signed a double tax treaty with Japan – of which the US is one).

The buyout market in Japan remains active. The Carlyle Group has just completed its second realisation in the country by selling its entire stake in cash management outsourcing services provider Asahi Security. Carlyle acquired Asahi in February 2002 for about 10 billion yen and has agreed to sell its stake to Toyota Industries for 19.5 billion yen.