Appendix C
REVALUATION OF ASSETS

Economic Consideration

The income tax, as it has been developed, was not designed to operate effectively in the midst of a serious inflation such as Japan has experienced during the past few years. Moreover, generally the practice of corporate and business accounting, as it has grown under the stimulus of the income tax, has likewise paid little heed to the effects of drastic general changes in the price level. The income tax and corporate accounting have remained largely unchanged in form over this period of inflation. Thus it is not surprising that a situation has developed where some drastic remedial measures must be taken if accounting is to attain its proper status as a realistic representation of the economic health and progress of business, and if the income tax is to be prevented from impairing further the growth of capital in the economy.

Fundamentally the trouble arises from the fact that both the income tax and the practice of accounting are built upon the hypothesis that the monetary unit, in this case the yen, maintains an approximately constant value over a period of time. Even ordinary fluctuations in the value of the money unit do impair somewhat the operation both of accounting and of the income tax. But ordinary fluctuations do not bring about conspicuous failure of accounting and income tax procedures. However, when inflation occurs to the extent that it has in Japan, the failure becomes obvious and remedies must be adopted.

In strict theory, the income tax should be applied to all accruals and appreciations in value as soon as they occur. If this were done, the net effect of taxing nominal income would be that during the inflationary period a drastic capital levy would be imposed. In effect a fraction of capital each year would be included in the income tax base along with the real income, and subjected to the income tax rates. As long as the inflation continued, this would continue, and if the inflation were severe enough the capital levy might be sufficiently heavy to produce a serious impairment of the real productive capital of the community, or at least that in private hands. But as soon as the inflationary period was over, the income tax would immediately return to a tax on real income, and in effect the balance sheets would show assets at current prices, there having been, in effect, a continuous revaluation of property as the inflation progressed. The damage would all be done, and there would be nothing further to do.

In practical application, both the income tax law and accounting rules agree with the theory to the extent that eventually they attempt to insure (assuming all enterprises sooner or later go through a liquidation process) that all of the increase in nominal values shall emerge as nominal income. But theory is modified by the fact that this emergence of income and concomitant revaluation of assets are actually postponed to a greater or lesser extent. The usual rule is that this increased nominal value and the corresponding income shall be recognized only when attested to by an actual sale or exchange for money, or for something that is itself fairly directly exchangeable for money. This sale and realization may be complete and direct, as when a piece of land or a plant is sold, or when an entire business is sold in a reorganization. Or it may instead be partial or indirect or both, as for example when a machine is partially used up in the manufacture of an article which is itself sold. The net proceeds from the product, after deducting all other expenses, represents the price received for this amount of "using up" of the machine, while the depreciation allowance represents a more or less arbitrary allocation of a part of the original cost of the machine to this particular amount of "using up". The difference is the profit, which includes both the real profit and the nominal profit arising from the increase in the nominal value of the amount of "using up" that has thus been sold.

Because of this varying delay in the "realization" of the nominal income, we have now arrived at a situation where some of the revaluation of assets has already taken place, together with the realization of the corresponding income. In principle, at least, the income tax has also been paid on this nominal income. In other cases, however, realization and taxation of this nominal income have not yet taken place, and values still stand on the books at levels far below those of the current price level.

Another effect of this delay in realization is that, so long as inflation continues, the longer the realization of a given increase in value can be postponed for tax purposes, the smaller will be the real value of the money in which the tax will have to be paid. Thus, even if the income tax had been uniform and completely enforced, and if all assets were now reappraised immediately and the full amount of the nominal income so revealed were included in the tax base, taxpayers with the relatively lowest current book values would still wind up having paid a lighter aggregate tax. They would, in effect, have managed to defer the realization of their nominal incomes the longest, and would still be bearing a lighter total tax burden over the entire inflation period than those who had realized their nominal gains earlier and who therefore had paid the same nominal amount of tax, but in money of a higher purchasing power.

Accordingly, there are only two possible justifications for allowing a revaluation without the assessment of the corresponding income tax in full, if unequal treatment of various income taxpayers is to be avoided. One possible justification is the assumption that the tax has in the past been very poorly enforced, at least with respect to the inclusion in income of the nominal income due to inflation. For this argument to be valid, the enforcement must have been so poor that those who have already realized this gain have in fact been less heavily burdened than would be those who have postponed this realization if the tax were to be assessed now even though the latter would be paying the tax with currency of a lower value. The other possible justification for exempting revaluation increases is the purely pragmatic one that the effects of assessing the regular income tax on such increases are so bad that any further assessment should be sharply curtailed regardless of equity considerations.

Actually, in the present situation, a great deal can be said for both of these considerations. During the inflationary period there was a great deal of confusion, and the assessment of income for income tax purposes was notoriously incomplete, at least as compared with what should have been assessed if all nominal income was to be included. In many cases income was assessed on the basis of general indices of the taxpayers' prosperity that made little or no allowance for any such nominal inflation income as the taxpayer might have had. Thus it may well be true that taxpayers whose nominal inflation income was realized during this period are in fact no worse off than those who have yet to realize on this income, even if the revaluation increase is very lightly taxed.

On the side of economic effects, it is clear that an attempt to enforce the collections either at once or over a period of time of the balance of this tax at the full rates will have a serious effect on the economy, regardless of what effect may have resulted from whatever tax was collected on the nominal income in the past. The economic effects in the past were to a large extent mitigated by the fact that the assessment of the tax was far from accurate. These effects were, moreover, masked by the effects of inflation. If for the future we are resolved to have sound and well administered tax system, a comparable degree of inadequacy in the assessment of the tax cannot be tolerated, and in a stabilized economy the effects of full collection of such a tax are likely to be more prominent and more disturbing.

But while the effects of attempting to assess a full tax on the appreciation profits, either immediately or as they are realized, are substantial, it is easy to overstate the case.

The chief, and perhaps the only urgent reason for wanting to modify or eliminate the income tax on nominal profits arising from inflation has to do with the effect of this tax upon the accumulation of capital. Japan is at present badly in need of additional savings and additional investment in order to bring her productive machinery to modern standards and to make good the damage and the lack of progress caused by the war. Any factor that interferes with the process of saving and investment is therefore a serious matter.

On a rational basis, the chief way in which the levying of the income tax on the realization of inflation profits hinders the accumulation of capital is through its effect on savings and hence on the availability of equity capital to investors. On the substantive side, the chief effect derives from the fact that the tax is peculiarly likely to be paid out of capital, that is, either through a diminution of savings tat would otherwise be made, or through actual disinvestment. It is difficult or impossible to pass such a tax on to consumers, in part because of price controls and in part because of the competition of new firms operating with freshly acquired assets on which there is no realization of a nominal inflation profit to be taxed. And it is difficult to pay such taxes by reduction of dividends in the case of corporations or by reduction of withdrawals for living expenses in the case of individuals, since in most cases these amounts are too small compared with the tax to be borne. Thus the tax will inevitably result in reducing the real value of the equity of owners of businesses. Unless this impairment of their real capital can be offset by increased savings and investment by others, this means a reduction in the total capital available to the economy. At a time when the Japanese economy is seriously short of capital for the development and modernization of industry, such a reduction in the supply of capital is a serious matter.

Also, since the tax falls particularly heavily on individuals and corporations engaged in business, the impairment of capital may fall particularly heavily on equity interests and on the shares of those actively controlling industry. As a result, the equities may become narrower and the whole credit structure may be thrown off balance. Thus disturbance of the credit structure may make it more difficult for those with savings to find investments suited to their requirements, or for those who need funds to find lenders willing to advance them under the conditions and terms that can be afforded by industry. Hence, even though the direct impairment of capital is small compared with the national total, it may have a very strategic effect on the economy.

There are, however, other ways in which the tax on the inflation profits affects the accumulation of capital. Although to a large extent these influences depend on irrational behaviour on the part of individuals, their effects are none the less real and must be taken into account.

For example, as long as the tax is being collected on the inflationary profits of firms with old assets, there will be some tendency to refrain from additional investment in the same line because of the heavy apparent tax burden, even though no comparable tax would actually be assessable on the new investment as long as no further inflation takes place. Or, since the equity of those in control of the older firms is being impaired, they may be unable to borrow or otherwise secure the additional capital necessary to enable them to continue their business at its former level. If they can secure such additional capital, this may be possible only by sacrificing some of the control over the business, and thus perhaps placing the business in part in less experienced hands. Or, the additional capital may be secured only by borrowing to an extent that may require the payment of exorbitant interest rates, with the result that the solvency of the firm is placed in jeopardy, and management is put under pressure to make uneconomical decisions when faced with risky prospects. Or the borrowing may be from banks who are then placed in the position of making large volumes of loans that are of a nature that it too risky for sound banking practice, with the result that the financial structure of the economy is jeopardized.

Again, as long as the income tax is based on this nominal income, it will be extremely difficult to set up effective accounting; accounts will continue to show substantial profits when in fact on a "real" basis there may be only a small income or ever a loss. While to some extent management will tend to ignore this fictitious profit in determining policy, these accounting figures are very likely to exert a subtle but substantial influence on actions. Thus dividends and higher salaries may well be paid out somewhat more liberally. To some extent prices may be kept down by this book "profit"; the management also may have more difficulty in withstanding demands for higher wages, particularly as wage earners and labor leaders are commonly not inclined to give much credence to explanations that involve special extra adjustments to eliminate the inflation element in profits.

If the tax had been assessed in full in the past, and if individuals were not deceived by the nominal figures shown by their accounting, then allowing revaluation free of tax or subject to a substantially reduced tax would be a serious inequity with few redeeming features. About the most that could be considered warranted under these circumstances would be for the government to segregate the revenue from such a tax and use it to promote capital formation, either by making investments directly, or by setting it up as a loan fund, or by otherwise promoting savings investment.

Considering the way taxes were actually assessed, however, it appears that permitting revaluation, subject to a reduced tax rate, will on the whole not be much if at all more inequitable than requiring these nominal gains to be taxed in full either immediately or as they are eventually realized, while, if no action is taken, the effects on the accumulation of capital in the economy and on the rational choice of production policies are likely to be considerable.

Accordingly, if the administrative difficulties in carrying out such a partially tax-free revaluation of assets can be overcome, there is a good case for such an operation. There is, on the other hand, a good case for not exempting entirely the revaluation profits from all income tax but imposing upon such profits a moderate rate of tax which will not constitute too great a drain on the resources of taxpayers and will not unduly deter them from revaluing up to the full current value of their assets. Such a moderate rate would serve in some degree to mitigate any inequity there may be as between such taxpayers and those who had already realized their inflation profits and paid taxes thereon.

Moreover, bondholders and other creditors have suffered real economic losses due to the fall in value of the yen. Although a 1,000 yen bond purchased in 1936 is still worth 1,000 yen, its purchasing value has declined more than 125 times until the 1,000 yen will actually purchase no more goods and services than could have been obtained for 8 yen at the time the bond was acquired. This economic loss has not been allowed as a loss in determining taxable income of bondholders. To allow such losses in computing income taxes would have such a disastrous effect on revenue collections and would involve such administrative difficulties that it cannot even he considered. If the bondholders and other creditors are not to be allowed their real losses, then the owners of property should not be entitled to reappraise the value of their assets unless some tax were paid on such reappraisal gains in order to gain at least a minimum of equity as between such taxpayers.

Such a rate will also serve to cushion the impact of revaluation upon the national revenues. And it will help in some degree to check taxpayers who might otherwise be inclined to push the revaluation process to extravagant lengths in the hope of thereby reducing future taxes by increasing future depreciation allowances.

[# top of this page ]

Application

Different classes of taxpayers and various types of assets all require analysis in a determination of the extent to which reappraisal is to be permitted. Thus, we must consider whether reappraisal should be applicable only to corporations; or whether it should be applied to both individual taxpayers and corporations. Also, it must be decided whether or not it should apply to land, and to non-business assets.

In theory, no real distinction can be drawn between the case for allowing the corporation to reappraise its assets and that for the individual to do likewise. If the principle is to be applicable to one, it would at first seem that it must also, in theory, be applicable to the other. There are significant practical differences, however, that warrant a departure from theory. Generally, corporations maintain fairly accurate books of account, whereas individual taxpayers do not. Approximately 70 per cent of all assets, by unit, that are owned by corporations are covered by proper accounting; only 30 per cent or less of property that is owned by individual taxpayers is covered by adequate records. As to property of corporations, therefore, it may be administratively feasible to apply a price index to arrive at the replacement cost of such assets; it is much more difficult to handle the problem in that manner for individual taxpayers. Nevertheless, to deny reappraisal because of administrative difficulties to individual taxpayers engaged in business would tend to drive more individual entrepreneurs to change to the corporate form of doing business for the sake of the tax advantages. Such denial would also place a heavy penalty on individuals who had operated as such, as opposed to whose who, to avoid the high personal tax rate incorporated their businesses. If corporations are to be permitted to revalue their assets, the case for reappraisal of the business assets of individual taxpayers viewed in this light appears beyond question.

The reappraisal of assets is particularly important in connection with business assets that are subject to depreciation and depletion. From an administrative standpoint business assets must be defined so as to include all assets which are either wholly or partially used in the business of the taxpayer. The discrimination between taxpayers results largely from the inequality of the amounts that are deductible for depreciation and depletion from gross income. That such discrimination is substantial is shown clearly by two tables set forth in an annex below, analysing (1) the dates of acquisition of assets, by value and by unit, of various spinning and weaving companies in Japan and (2) the dates of acquisition of assets, by value, of various chemical, mechanical and mining companies in Japan. Reappraisal must from the outset extend to those assets subject to depreciation and depletion because a basis must be established on which depreciation and depletion can be taken. But if we are to be successful in the promotion of better accounting standards, it would be difficult to achieve that end with some of the fixed business assets revalued on the books of the taxpayers and not others. Thus from an accounting standpoint alone, it seems essential that the other fixed business assets, (chiefly land) should likewise be reappraised. But again, from an administrative standpoint it would be difficult to reappraise only such land as is used in the business of an individual entrepreneur. His home and place of business may be combined in a single building so that the separation into business and non-business is difficult. This would be particularly true where the shop occupied the first floor and his home comprised the second. It therefore seems necessary at this time to revalue all land and houses, even though those assets which are subject to depreciation and depletion may be treated somewhat differently.

As to non-business assets other than land and buildings, the basis for capital gains purposes may be left to be established sometime in the future, since it does not effect any tax assessment until the time of sale or disposition. Inasmuch as revaluation of these assets is permitted chiefly to prevent the taxation of nominal profits and avoid discrimination, such revaluation must be harmonized with the treatment of capital gains and losses.

In summary, all depreciable and depletable business assets wholly or partially used in the taxpayer's business, all land, and all dwellings of any character owned by individuals, should immediately be reappraised as of some given date (but for farm land, revaluation should be postponed). The values so established should be used for all tax purposes. But as to other property owned by corporations and individuals, its reappraisal need not be carried out at this time; however, the matter should be reconsidered sometime after the above recommendations have been put into effect. Decision can then be taken in the light of the then existing economic conditions and of the experience gained in effecting the reappraisal herein recommended. It should be indicated again, however, that any basis established with reference to these other types of property must be coordinated with the treatment of capital gains and losses arising from the sale or disposition of such property. As will be indicated later, the reappraisal gains of these other types will not be taxed currently, while the fixed assets other than land will be subject to a light tax, payment of which is to be spread over a three year period. The full details of the taxes payable on the reappraisal gains will be discussed later.

[# top of this page ]

Method of Reappraisal

It must be accepted at the outset that it is impossible to select any method of revaluation which will bring about the desired results with respect to all assets. Certainly, a gigantic reappraisal, such as this, will have many rough spots in its operation; the values so established will be only approximately correct. But those new values, as between taxpayers, will more nearly reflect actual values; the present discrimination between taxpayers will therefore be alleviated considerably. On balance, it seems clear that reappraisal must be carried out even though its results should not be accurate in every respect.

[# top of this page ]

Corporations with Adequate Accounting Records

The use of price indices to revalue properties is the most frequent suggestion. If price indices alone are adopted, discrepancies in reappraisal values may occur depending on the type of index adopted and the weight given to each factor in building up that index.

Indices with reference to a particular industry might at first seem preferable to a general index. That this is fallacious is clearly evident when the indices are analyzed. Subsidies from the National Government over the past years would be certain to distort indices for certain selected industries. Then, too, the shortages caused by the dislocation of the war will only further distort those and other indices. By using a general index these factors will be reduced to a minimum and it is believed that over the long run such an index will tend to reflect future stabilized values with a greater degree of accuracy.

Moreover, even were there no practical difficulties in using specific indexes and even though such indexes were not affected by temporary disturbances, it would still be preferable on theoretical grounds to use a general index. For we are not trying to exempt from tax all gains, but only those gains that do not represent a real increase in purchasing power. If the price of a particular type of asset has gone up 200 times while the general price level has gone up only 100 times, the owner of such assets is better off than the owner of assets that have gone up only in proportion to the general increase in prices. He is accordingly well able to bear the additional tax that will be imposed if he is allowed to revalue only to the extent of 100 times. On the other hand the owner of assets that have risen only 50 times in value has suffered a real loss in purchasing power, that is, in the amount of general goods and services that he can buy with what his assets will bring on the market. It is in theory at least quite in order to permit him to revalue up to 100 times, and to eventually have the benefit of deducting this real loss. It is, therefore, recommended that a general index be used in the task of reappraisal. Indices dealing with consumer's prices, wholesale commodities' prices and exchange rates might be used. The exchange rate index, however, is not complete because of the absence of exchange during the war years. As between the other two there appears to be little choice. They are set forth on the following pages.

	Wholesale Commodities Price Index (Bank of Japan)	Consumer's Price Index (Bank of Japan)	Consumer's Price Index All City (SCAP)
1931 average	78.7	135.5
1932	87.3	136.8
1933	100.0	145.6
1934	102.0	148.7
1935	104.6	151.6
1936	109.0	159.2
1937	132.3	174.3
1938	139.6	199.7
1939	154.2	223.6
1940	172.9	259.7
1941	183.4	262.9
1942	197.2	270.5
1943	209.1	287.0
1944	233.0	321.4
1945 Jan	246.7	361.6
Feb	251.4	369.7
Mar	264.6	384.2
Apr	300.4	393.8
May	304.2	412.6
Jun	306.0	430.7
Jul	312.6	445.4
Aug	320.6	475.1
Sept	346.6	477.7
Oct	354.4	483.9
Nov	377.0	488.5
Dec	584.9	945.9
Average	330.8	472.4
1946 Jan	672.6	1,057.2
Feb	734.6	1,276.9
Mar	1,184.5	1,851.5
Apr	1,437.1	2,455.3
May	1,489.4	2,761.4
Jun	1,538.2	3,154.9
Jul	1,731.7	3,291.8
Aug	1,832.0	3,229.7
Sept	2,006.7	3,432.5
Oct	2,003.5	3,854.5
Nov	2,225.5	4,016.9
Dec	2,330.3	4,352.1
Average	1,598.8	2,894.6
1947 Jan	2,473.9	4,515.5	110.7
Feb	2,547.6	4,566.4	123.0
Mar	2,680.7	4,791.7	137.1
Apr	3,121.2	5,344.1	137.3
May	3,323.4	5,585.5	163.3
Jun	3,455.5	5,666.1	189.7
Jul	4,871.1	6,849.2	222.9
Aug	6,503.2	7,623.0	216.1
Sept	6,960.0	8,770.3	224.4
Oct	7,832.9	11,670.6	236.1
Nov	8,599.1	13,601.1	250.1
Dec	8,929.1	14,552.8	282.2
Average	5,108.1	7,794.7
1948 Jan	9,143.6	14,924.3	286.5
Feb	9,288.3	15,575.3	302.3
Mar	9,485.4	16,217.4	310.0
Apr			322.1
May			328.7
Jun			343.9
Jul			394.7
Aug			420.5
Sept			417.8
Oct			406.3
Nov			433.0
Dec			456.7
1949 Jan			475.1
Feb			466.2
Mar			468.1

Inasmuch as the inflation has been greater in Tokyo than other cities, the consumer's price index for Tokyo will have to be combined with the all-city consumer's price index which has been maintained only since August, 1946.

As to land, several special considerations apply. In principle, of course, if land were subject to free sale like any other commodity, there would be little excuse for not using a general price index in connection with land also. However, much land has been subject to forced sale at prescribed prices, and rents have been controlled at levels that are far below what they would be in a free market. And the price of such land as has been subject to free sale has increased much less than the general increase in the price level. Moreover, unlike buildings, no depreciation is allowable with respect to land, so that for the taxpayer who does not intend to sell his land immediately, there is no immediate advantage to be gained from a high valuation on the land. Moreover, land is valued for other purposes than income tax: the land and house tax is to be based on a capital value determined for the land (or, capital value times an adjustment factor, for farm land). It would in general be awkward to have two values established for land, one for the purpose of the land and house tax representing (for urban real estate) approximately the market value, and another considerably higher wholly artificial value obtained by applying a general price index to an acquisition cost or capital levy value. Also if a value for tax purposes were set substantially higher than the current market value, there might be a tendency for taxpayers to want to sell the land for the sake of obtaining the benefit of the loss.

Accordingly, it seems preferable to deviate from the principle slightly at this point, and use a specific index of urban land prices for the purpose of revaluing urban land, in order to avoid a rather substantial systematic difference between the value set by the revaluation and the value as determined for other purposes. Whatever inequities are produced in this way from the point of view of the income tax, as compared with the theoretical revaluation according to a general price index, will be largely overridden by the effects of the various other restrictions and regulations connected with the rental of urban land. However, while it would be possible to use several distinct price indices for the various types of urban land it seems preferable to use only one overall price index for all urban land. If, before revaluation can proceed, each tract of urban land must be classified according to use, the administration, will be materially hampered, and in many borderline cases the classification would necessarily be somewhat arbitrary and discrimination might result. In any case, the variation between the indexes for the different types of land is not great enough to produce any serious deviation in the result, as is shown in the following table:

Price Index of Urban Lands, Classified by Areas
(Source:Hypothec Bank of Japan)

Year	Commercial area	Residential area	Industrial area	Average
1936(Sep)	100	100	100	100
1937( " )	102(102)	101(101)	104(104)	102(102)
1938( " )	106(104)	107(106)	116(111)	109(107)
1939( " )	110(104)	114(107)	127(109)	114(105)
1940( " )	117(106)	117(103)	137(108)	123(108)
1941( " )	120(103)	133(114)	147(107)	129(105)
1942( " )	120(100)	142(107)	152(103)	135(105)
1943( " )	128(107)	170(120)	187(123)	155(115)
1944(May)	129(101)	186(109)	206(107)	163(105)
1945( " )	163(126)	246(132)	262(131)	210(129)
1946(Jan)	214(131)	312(127)	303(116)	262(125)
1946(Sep)	443(207)	599(192)	531(175)	501(191)
1947(Sep)	1,238(279)	1,597(267)	1,453(274)	1,364(272)
1948(Mar)	2,483(201)	2,845(178)	2,628(181)	2,507(184)
1948(Sep)	3,586(144)	4,015(141)	3,926(149)	3,653(146)
1949(Mar)	4,670(130)	5,168(129)	4,960(126)	4,703(129)

[# top of this page ]

Individuals with Adequate Records

It may be more appropriate to use the consumer's price index for all business assets of individual entrepreneurs which are to be revalued, other than land. As to non-farm land used in the taxpayer's business, either wholly or partially, the same average price index indicated for use for urban lands held by corporations should be used to revalue land held by individuals.

Assets that are to be reappraised which are not used either partially or wholly in the taxpayer's business should be revalued in a different manner in order to harmonize more effectively with other tax treatment. Most assets that are now owned by the same individuals who owned them on March 3, 1946 were required to be valued by those individuals for purposes of the capital levy. The base used for the capital levy should be used as the base here, adjusted in accordance with the consumer's price index. To the extent that the individual evaded the tax by undervaluation, then to that extent he would be deprived of a higher basis for reappraisal purposes. In that respect the harmonizing of the capital levy, the income tax treatment of capital gains and losses, and the revaluation approach has considerable merit. However, individuals owing less than 100,000 yen of net taxable assets were exempt from the capital levy, so that no report was made of such assets. In this case the amount that an individual is allowed to take as a basis should be restricted, for assets owned continuously from March 3, 1946 to date, to an aggregate amount not exceeding 100,000 yen times the ratio of increase in the consumer's price index, adjusted for items sold since March 3, 1946. As to land and other fixed assets subject to reappraisal that have been acquired since March 3 1946, the cost to the taxpayer, adjusted by the average land price index for land and by the consumer's price index for all other fixed assets, would be the ceiling of the taxpayer's reappraisal basis.

The establishment of a standard to revalue is highly important, because the new basis must be determined primarily through a self-administered system. That requirement rules out methods that otherwise might seem possible. Valuation of the properties of a taxpayer based on going concern value could not be used even if this were desirable. Likewise the method of capitalization of past earnings should not be used; also, such a method would merely perpetuate the discrimination now existing between taxpayers. The price indices clearly seem a practical and equitable standard to reappraise assets where adequate records have been maintained.

[# top of this page ]

Timber Land

In the case of timber land, revaluation should be applied not only to the value of the land itself, but also to the amounts expended in the past for replanting and other care. Such outlays should in effect be treated in the same manner as capitalized expenditures for improvements and betterments to a building would be rather than as outlays on goods in process. Ordinary manufacturing processes involve such a short lapse of time from the time of outlay to the sale of the product that to allow revaluation in such cases would involve more trouble than the slight gain in equity that would result would be worth. With forestry, however, the outlay is made often twenty to forty years before the product is sold, and in this case the long lapse of time makes revaluation imperative if equity is to be preserved. Similar considerations apply in the case of orchards. In both cases the principle to be applied is to use the consumer price index to adjust the actual outlays, making proper allowance for any interim proceeds from thinning or other incidental products.

[# top of this page ]

Where records are lacking or inadequate

It has already been indicated that many corporate and individual taxpayers have not kept proper records for the application of the price indices. With respect to those taxpayers some system must be devised to give necessary protection to the revenues,which will also avoid discriminating against taxpayers that have adequate records.

Corporations

All corporations, whether they have or have not maintained adequate records, will be required to effect a self-revaluation of their assets. For those with adequate records, the ceiling of the reappraisal basis will be determined by the price indices. For those without adequate records, the Ministry will develop standards for land and for other fixed assets which can be applied by examining agents in determining whether the ceiling of the revaluation basis was exceeded by the taxpayer in his self-revaluation. Special committee will have specific functions with reference to reviewing the self-revaluation by both classes of corporate taxpayers.

Individuals

All individual business proprietors, whether they have or have not maintained adequate records, will be required to file a self-revaluation of their assets to be reappraised. All of such assets, other than land, are to be revalued by using the base of such assets for purposes of the capital levy and adjusting that base by the consumer's price index. Land will be revalued by using the capital levy tax base and applying the average land price index to arrive at the revaluation basis. Individuals owning less than 100,000 yen of net taxable assets were exempt from the capital levy. Where no records were kept for assets acquired since the date of the capital levy, or where individuals were exempt from the capital levy, the Ministry of Finance would have to develop some standards which could be used by its examiners. However, an individual who was not subject to the capital levy will in no case be allowed to take as an aggregate basis for all assets, including both land and other fixed assets owned on March 3, 1946, an amount exceeding 100,000 yen as adjusted by the consumer's price index.

[# top of this page ]

Adjustment common to all depreciable and depletable properties

Depreciation under the Japanese income tax has been based on the declining balance method. In arriving at the book value or cost to be adjusted by the various price indices, that cost must be arrived at after proper adjustments for depreciation have been made to that cost by application of the declining balance method of depreciation. Of curse, any expenditures made during the service life of an asset that were capitalized and expensed would merely add to the book value or cost for tax purposes. If this principle is not rigorously followed, distortions will be accentuated in the reappraisal bases of different assets. Asset subject to depletion will be adjusted on the bases of cost depletion.

Determination of Policy and Review of Reappraisal

In general, the main emphasis in administration would be placed on seeing to it that reappraisal values are not excessive. However, all taxpayers should be required to file reappraisal returns. Where no return is filed within the specified time limit, the tax offices should have the authority to make an arbitrary reappraisal which should be considered final. And while normally taxpayers should be allowed a reasonable amount of undervaluation for purposes of reappraisal, as possibly representing their belief that their assets were partially obsolete, where taxpayers submit an unreasonably low figure, the tax administration should have the power to raise it to a more reasonable level and assess the 6% tax on the write-up.

Although a committee system is generally undesirable in the administration of an income tax, such a system is in this case almost indispensable and should, with a properly balanced membership, give the necessary protection to the revenues. Where records and accounting systems are inadequate, and where the degree of obsolescence of assets must be determined, problems arise which committees would be particularly well qualified to deal with. The specific composition of such committees is of the highest importance if they are to function properly. Also, the procedure of the committees deserves careful consideration. In this report only the broad outlines can be indicated.

An over-all coordinating Central Committee is required. Its responsibility would be to examine the various problems that are expected to arise in the reappraisal of assets and in the review of the returns filed and to issue instructions so that the administration of the reappraisal of assets would be uniform through-out Japan. Below that Central Committee, there could be either local committees or national and local committees. A National Committee would have jurisdiction over a particular industry or industries which are national in scope and adaptable to over-all review by such committee. The Local Committees would have jurisdiction over one or more specified industries that are located in geographical areas determine largely by the extent of such industry or industries in that particular region. The membership of these committees should include representatives of the Ministry of Finance, of the Local Tax Offices, of financial institutions of the academic profession who are men of knowledge and experience in public finance and taxation, and of the industry or industries whose reappraisals are to be reviewed by the particular committee (including representatives of taxpayers both with and without adequate accounting records). Industry representation should never exceed fifty percent of the membership of any committee.

These committees would only review the self-reappraisal returns of the various taxpayers. It would be incumbent upon the Ministry of Finance to make the initial examination of the self-reappraisal returns. Where taxpayers with adequate records had exceeded the ceilings determined by the price indices or there was evidence that the assets might be obsolete in accordance with standards set up by the Ministry of Finance, and where taxpayers without adequate records had exceeded the ceilings determined by standards set up by the Ministry of Finance, the examining agent would refer the returns to the appropriate committee together with his recommendation. The committee would then review the revaluation data on the return and where necessary secure additional information in whatever manner it desired. It would then determine the proper reappraisal basis of the taxpayer. The self-reappraisal return form should require considerable information so that the examining agent could properly review the return, as also could the appropriate committee where it was found necessary.

The decisions of the various committees should ordinarily be final. It might be desirable to provide for appeals to the Central Committee under restricted circumstances; at most, the appeal would require an application by the taxpayer, the government, or the committee. The Central Committee would then grant or deny the application within its sole discretion. In order to promote uniformity, applications of the Committees should be granted more freely than those of the Government or the taxpayer. But over-all, the Central Committee would have to be extremely selective in granting appeals. Equity may at times have to be sacrificed in order to complete the reappraisal within a relatively short time. It would seem not only desirable but necessary that final action be taken generally on all reappraisals within about one year (except for farmers, for whom a two-year period should be allowed). It should be provided that the reappraisal of all taxpayers be completed before October 1, 1951.

[# top of this page ]

Filing requirements and standards applicable after revaluation

Corporation and individual taxpayers who are currently keeping adequate records and who have filed a self-reappraisal return form will be permitted to file their income tax information and compute their tax on a blue colored form. All other taxpayers will be required to file on a white form. No increase in depreciation will be allowed as a result of revaluation to any taxpayer filing on the white form. Also, the Ministry of Finance will not take such increased depreciation into account in determining standards to be applied to those taxpayers who file on the white form. And such taxpayers may in some cases be denied any depreciation allowance whatever. A taxpayer filing on the white form may become entitled to file on the blue form upon the establishment and maintenance of adequate accounting records which have been approved by the Ministry of Finance.

Effective Date of Reappraisal

To avoid windfalls it is suggested that the date as of which property is to be revalued should be some time prior to the publication of this report, say July 1, 1949. The benefits of reappraisal should then become available to all taxpayers as of January 1, 1950.

[# top of this page ]

Reappraisal Gains

Unless effective safeguards are placed around the right to reappraise, some taxpayers may try to obtain reappraisal bases above that permitted by price indices or by the standards set up by the Ministry of Finance. We recognize that equity argument in favor of a tax on the reappraisal gains is not too strong when it is subjected to scrutiny. It is likely that much of the capital gains that have already been realized through the disposition of property was not subjected to the full capital gains tax legally applicable. Nevertheless, some taxpayers undoubtedly did pay a tax on their capital gains. Also creditors have not been granted any allowances for losses in real value due to the depreciation of the yen. It seems equitable that the property owners should be allowed a higher basis for their property only if some tax is assessed so that as between creditors and owners of property come semblance of equity may be observed. For this reason and also as a safeguard against over-reappraisal, an immediate flat tax of 6 percent is recommended on those reappraisal gains attributable to depreciable and depletable property, other than farm property and timberland. This tax will be payable over three years in installments of 3 percent, 1 1/2 [# 1.5] percent and 1 1/2 [# 1.5] percent. As to the reappraisal gain on all other assets to be revalued, (urban land and urban dwellings, chiefly) the gain should be determined now (except that farm property and timberlands would be valued as of October 1, 1952, the value being determined as soon thereafter as is practicable), but the tax should not be payable until future sale or disposition of the property. The owner would therefore become entitled to a much higher basis and the tax on the disposition of such property would be correspondingly reduced. In other words, the gain on final disposition would be divided into two segments: (a) the reappraisal gain which would be taxed at a flat rate of 6 percent and (b) the gain since the reappraisal date, which would be included in its entirety in the taxpayer's income and subjected to the applicable personal income tax rates.

Once the new basis is established by the revaluation of assets, that basis must be used as a minimum basis for all tax purposes -national, prefectural or local.

It also seems essential that the reappraisal gains should not be used at this time as a basis upon which to issue additional capital stock. To permit such stock to be issued would lead to increased speculative manipulation, would hinder the accumulation of savings to finance new capital equipment by encouraging increased dividends, and would in effect constitute a distribution from capital rather than earnings which in principle is undesirable. The gains should be set up in a special reserve capital account, and for a period of five years no distribution should be made and no transfer of the gain should be permitted to capital account. At the end of that time, it should then be determined whether the net assets of the company justified a capitalization based on the combined total of the reappraisal gains account and the capital account.

[# top of this page ]

Exception to the General Rules Applicable to Reappraisal

Unless inequities are to be created among creditors of the 4,990 corporations that became special accounting companies under the Enterprise Reconstruction and Reorganization Law, some special provision for these companies will have to be made. The reorganizations under that law have been pushed with vigor and care and nothing should be done at this time to upset the effective work already accomplished.
The present status of the work under that law is summarized below:

	Non-Restricted Summarized Plans	Restricted Concern Plans	Total
1. Total plans submitted	4,428	562	4,990
2. Plans approved to 31 May 1949	4,059	337	4,396
3. Plans approved in June 1949	71	27	98
4. Total plans approved to 30 June 1949	4,130	364	4,494
5. Plans yet to be approved	298	198	496
6. Percentage of completion	93.2	64.8	90
7. Capital increase to date	¥11,745,328,200	¥7,878,975,200	¥19,624,303,400
8. Second company capital to date	¥2,139,652,000	¥2,721,100,000	¥4,860,752,000
9. Total new capital to date	¥13,884,980,200	¥10,600,075,400	¥24,485,055,400

It is estimated by the Anti-trust and Cartels Division that their work under this law will be completed by about January 1, 1950.

If revaluation were made effective prior to the completion of this reorganization work, creditors of those companies whose plans were not approved completely would receive better treatment than those companies whose plans have been consummated. Even if this discrimination could be overlooked, there would be considerable pressure to reopen completed plans to allow their creditors to participate in a new reorganization plan involving a similar reappraisal of the assets of their companies. In any economy already highly unstable, those consequences should be avoided. This can be accomplished very simply and equitably by providing that no special accounting company is entitled to reappraise until its plan is approved by the Anti-Trust and Cartels Division. Until thus authorized, special accounting companies would not be entitled to the benefits that flow from revaluation. Some reappraisals may therefore have to be postponed but, if so, the reappraisal will be made as of the same date set for all other companies. With this safeguard it is believed that the reorganization work of the Anti-Trust and Cartels Division will not be hindered; in fact, it is quite likely that the incentive to obtain the benefits of reappraisal will actually expedite the reorganization work because the remaining special accounting companies will want the benefits of revaluation at the earliest possible date and they will therefore press to get their plan approved.
Creditors of all companies that have or have had the special accounting status will receive identical treatment in the valuation of assets under the Enterprise Reorganization Law.

Two further exceptions seem required. In the first place, certain property in Japan has been tentatively marked for reparations. This property is still in the possession of the owners and is actually used by them in their businesses. To require reappraisal and to levy a 6 percent tax while the property is tentatively marked for reparations would seem somewhat harsh and unwarranted. For that reason, it should be provided that property tentatively marked for reparations could be reappraised along with other property not so marked but that no tax should be payable until final disposition of the reparations issue. If later the property is removed from the reparations list, then the tax together with a reasonable rate of interest should be payable within a relatively short time thereafter. If the property is taken as reparations, the Japanese Government would be required to take title to the property first.

In special accounting companies, property designated for reparations has been written down to zero, with the former book value being placed in special suspense account. If the reparation lien is removed the amount of this special suspense account is to be made available to the old creditors. Any revaluation write-up on such property, however, should be separated and transferred to the special capital account upon the release of the lien.

In the second place, certain overseas companies had branch offices in Japan before the Occupation and owned considerable assets located in Japan. These assets were segregated and taken over by the Civilian Property Custodian. Until final disposition of the issue with respect to those assets, an exception to the general rules of reappraisal would seem proper. As soon as the final disposition is determined, revaluation should be permitted under the same circumstances as for all other companies. The only exception would be that tax benefits resulting from the increased depreciation on the higher reappraisal basis would not accrue for any fiscal period prior to that period in which the taxpayer became entitled to revalue such assets. If this exception were not made, these tax benefits might flow long before the payment of the 6% tax on reappraisal gains. The interest lost by the Government on delayed payment, so to speak would be off-set by the tax benefits lost by the taxpayer. It is understood that the assets in Japan of these companies will be treated is somewhat the same manner as the assets of special accounting companies. If so, until the plan of such a company is approved the company should not be entitled to reappraisal.

[# top of this page ]

Farmers

Farmers provide a special problem under revaluation, since they do not have the right to sell their land except at the official price, which is still the price at which land was purchased under the land reform program. We therefore recommend that farmers be treated as follows for purposes of revaluation:

Revaluation of farm land should be postponed to April 1, 1952. The official price on that date should be the value for revaluation purposes. The revaluation gain should at that time be subject to the 6 per cent tax, or, at the option of the farmer, should be declared for the income year as a capital gain, and spread over a five-year period as described in Chapter 5, Section B, and the supporting appendix.

The dwellings of farmers should be treated in the same way as other dwellings, for purposes of revaluation. Thus the farmer should revalue his house as of July 1, 1949, but pay no 6 per cent tax on the revaluation gain until he disposes of it by sale, gift or bequest.

[# top of this page ]

Effect of Reappraisal on Revenue Collections

Corporations

The present book value of all fixed assets owned by corporations is 78 billion yen. If reappraisal were affected in the manner permitted herein, the maximum reappraisal value of 90 per cent of the fixed assets would be in the neighborhood of 1,427.9 billion yen representing reappraisal gains of 1,349.9 billion yen. Of this gain, 1,100.0 billion yen represents gain from depreciable and depletable assets. Elsewhere it was recommended that these prices be taxed at the rate of 6%, payable over three years at the rate of 3%, 1 1/2 [# 1.5]% and 1 1/2 [# 1.5]%. The yield from the tax on reappraisal gains should yield approximately 30 billion yen in the first year and 15 billion yen in the second and also the third years after reappraisal.

A decrease will, of course, occur in the revenues from the corporate taxes as a result of taxpayers taken higher depreciation and depletion deductions from gross income. The above calculation assumes a write up of 18.3 times the book value of all fixed assets. In calculating revenue decreases in the corporate tax collections it is estimated that depreciation deductions will increase by about 16.7 times the present aggregate deduction of 3,977 million yen. Consequently, the deduction for depreciation will increase by 66,414 million yen. The revenue from the corporate income tax would, therefore, decrease to approximately 19 billion from a currently estimated collection of 39 billion yen. Also, the abolition of the excess profits tax will result in an annual loss of approximately 9.88 billion yen according to present estimates. The net revenue effect would be that in the first year after reappraisal, the collections from the tax on reappraisal gains will offset the losses in collections from the decrease in the corporate income tax and from the abolition of the excess profits tax. For the second and third year, the net revenue effect will be a loss of approximately 15 billion yen in each year. For several years thereafter, the net revenue effect will be a loss of approximately 30 billion yen in corporate tax collections. It is believed, however, that the greater efficiency in the administration of the tax laws, better accounting methods induced by revaluation, and better compliance will reduce the estimated losses materially in each succeeding year after reappraisal.

The above net revenue effects resulting from reappraisal assume that the excess profits tax will be abolished regardless of what is done regarding reappraisal, as is recommended in another section of this report. If the excess profit tax were not abolished and reappraisal of corporate assets were authorized, it is estimated that the total annual collection under the excess profits tax would be approximately one billion yen. But whether or not reappraisal of assets is permitted the excess profits tax should be repealed because of its capricious and discriminatory incidence. The true picture of the net revenue effects of revaluation should, therefore, exclude the present collections from the excess profit tax. If this is done, the present collections of 40 billion yen of corporate taxes should be taken as base. The net revenue effect would, therefore, be an increase of 10 billion yen in the first year, a decrease of 5 billion yen in the second and third year after reappraisal and for several years thereafter a decrease of approximately 20 billion yen. Again, however, it is believed that the great efficiency in the administration of the tax laws will reduce the estimated losses materially in each succeeding year after reappraisals set forth below in full detail. Table A is an analysis of the estimated current collections from the corporate income and excess profits tax, and Table B shows the effect of the reappraisal on those estimated revenues.

Table A
Estimate of Depreciation for Corporation Income and Excess Profits Tax, 1949-50
(money figures in millions of yen)

Rate of Profit	Capital		Amount of Profit	Profit by Percentage				Fixed Assets excluding land	Depreciation
	Present of Total	Amount		Not more than 30%	30% to 50%	50% to 100%	More than 100%		Amount	Percent of Assets
Loss	10.0	20,000	-	-	-	-	-	6,631	133	2%
Not more than 30%	25.0	50,000	7,500	7,500	-	-	-	16,576	663	4%
Not more than 50%	20.0	40,000	16,000	12,000	4,000	-	-	13,261	795	6%
Not more than 100%	30.0	60,000	45,000	18,000	12,000	15,000	-	19,892	1,392	7%
More than 100%	15.0	30,000	45,900	9,000	6,000	15,000	15,900	9,945	994	10%
Total	100.0	200,000	114,400	46,500	22,000	30,000	15,900	66,305	3,977	6%

Excess profits tax:	rate		10	15	20
	amount	9,880	2200	4500	3180
Normal Tax at 35%		39,900
Total Tax		49,780

[# The crossed parallel lines on the table are drawed for easy viewing by this web editor }

Table B
Estimated Depreciation and Net Profit after Revaluation
(money figure in millions of yen)

Rate of Profit	Capital			Profit before Revaluation	Increase in depreciation	Profit after Revaluation	Excess profits by brackets
	Percent of Total	Amount of Write-up	Revalued Amount				30% to 50%	50% to 100%	Over 100%
Loss	10.0	(134,995)	154,995	-	2,221	-	-	-	-
Not more than 30%	25.0	(337,488)	387,488	7,500	11,072	750	-	-	-
Not more than 50%	20.0	(269,990)	309,990	16,000	13,276	2,724	400	-	-
Not more than 100%	30.0	(404,987)	464,987	45,000	23,246	21,754	1,200	1,500	-
Over 100%	15.0	(202,492)	232,492	45,900	16,599	29,301	600	1,500	1,590
Total	100.0	(1,349,952)	1,549,952	114,400	66,414	54,529	2,200	3,000	1,590

Excess profits tax:	rate		10%	15%	20%
	amount	988	220	450	318
Normal tax at 35%		18,945
Total Tax After Revaluation		19,933
Decrease due to revaluation		29,847
Tax before revaluation		49,780

[# The crossed parallel lines on the table are drawed for easy viewing by this web editor }

Individuals

It is difficult to estimate the decrease in revenue that may result under the personal income tax from a reappraisal of individual assets. After considerable effort, the Ministry of Finance was able to make some estimates which appear reasonable. Table C below indicates that the total collections from the tax on reappraisal gains of individuals would be approximately 10.74 billion yen. The estimated annual loss in collections from the personal income tax due to increased depreciation, if all taxpayers were permitted to file on the blue return, would be approximately 5.35 billion yen. Thus, for the first year after reappraisal, the loss of revenue will off set the increase due to the tax on revaluation profits. In the second and third years the net loss will be about 2 1/2 [# 2.5] billion yen and thereafter 5.35 billion yen. Just as in the case of corporate income tax collection, it is believed that increased efficiency in administration of the individual income tax will tend to reduce this estimated annual loss in revenue.

[# The following tables "A-2,B-2,C-1 and C-2" are moved from the next Section]

[# Table A-2 for the present]

Table A
Old, Rehabilitated, and New Spinning and Weaving Equipment by Companies

Year		End of Aug. 1945		End of 1947			End of 1948			End of June 1949
Description Letter of alphabet substituted for name of company		Operable at end of War	Percent of present(a)/(K)	Rehabilitated since Sept. 1945 (B)	Percent of present number (c)/(K)	Operable end of 1947 (a)plus(c)	Rehabilitated during 1948	Percent of Present No. (f)/(K)	Operable at end of 1948 (e)plus(f)	Rehabilitated during 1949	Percent of Present No. (m)[# (i)]/(K)	Operable(G)=E/F
		(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)	(i)	(j)	(K)
A	spindles	267,848	57.9	128,268	27.7	396,116	41,120	8.9	437,236	25,296	5.5	462,532
	looms	2,649	43.7	2,712	44.7	5,361	387	6.4	5,748	319	5.2	6,067
B	.	269,580	58.1	149,744	32.3	419,324	28,916	6.2	448,240	15,880	3.4	464,120
	.	5,003	75.8	1,152	17.5	6,155	444	6.7	6,599	1	0	6,600
C	.	231,464	70.0	39,580	11.9	271,044	55,300	16.7	326,344	4,500	1.4	330,844
	.	122	5.6	1,286	59.3	1,408	741	34.2	2,149	20	0.9	2,169
D	.	135,480	49.0	84,020	30.4	219,500	55,440	20.1	274,940	1,280	0.5	276,220
	.	1,841	44.4	1,318	31.8	3,159	643	15.5	3,802	342	8.3	4,144
E	.	190,312	64.0	62,868	21.1	253,180	36,272	12.2	289,452	8,000	2.7	297,452
	.	1,433	41.6	1,172	34.0	2,605	360	10.4	2,965	482	14.0	3,447
F	.	212,488	50.3	151,492	35.8	363,980	54,436	12.9	418,416	4,396	1.0	422,812
	.	2,152	62.2	1,173	33.8	3,325	69	2.0	3,394	65	2.0	3,459
G	.	150,860	53.7	61,532	21.9	212,392	66,156	23.6	278,548	2,296	0.8	280,844
	.	3,292	68.6	573	11.9	3,865	609	12.7	4,474	327	6.8	4,801
H	.	199,452	62.4	111,640	34.9	311,092	6,676	2.1	317,768	1,820	0.6	319,588
	.	2,255	84.6	9	0.3	2,264	31	1.2	2,295	369	13.9	2,664
I	.	175,136	61.7	62,252	21.9	237,388	41,032	14.4	278,420	5,596	2.0	284,016
	.	2,572	65.7	450	11.5	3,022	851	21.7	3,873	40	1.1	3,913
J	.	152,956	85.6	2,192	1.2	155,148	14,292	8.0	169,440	9,240	5.2	178,680
	.	1,859	88.3	-96	-4.6	1,763	251	11.9	2,014	92	4.4	2,106
Total f 10 old Cos.	.	1,985,576	59.9	853,588	25.7	2,839,164	399,640	12.0	3,238,804	78,304	2.4	3,317,108
	.	23,178	58.9	9,749	24.8	32,927	4,386	11.1	37,313	2,057	5.2	39,370
25 New Cos.	.	0	0	43,714	19.4	43,714	57,870	25.7	120,132 d/	13,404	5.9	225,412 d/
	.	2,205	54.9	0	0	2,205	1,527	38.1	3,732	113	2.7	4,013 d/
Grand Total	.	1,985,576	56.0	897,302	25.3	2,882,878	457,510	12.9	3,358,936 /d	91,708	2.6	3,542,520 d/
	.	25,383	58.5	9,749	22.5	35,132	5,913	13.6	41,045	2,170	5.0	43,383 d/

Source:Reproduced through the courtesy of the All Japan Cotton Spinners Assn.

[# The crossed parallel lines on the table are drawed for easy viewing and two parts of the table:(Aug.1945-End of 1947),(End of 1948 - End of 1949) are collected this one by the web editor.]

[# Table B-2 for the present]

Age Distribution of Fixed Assets Acquired by Corporations

Letters of alphabet substituted for name of corporation	1939 and before	1940	1941	1942	1943	1944	1945	1946	1947	1948	Total
Chemical Industry
A	93,566	6,909	7,716	12,192	18,614	20,619	38,181	25,286	3,524	17,312	243,909
	(38)	(3)	(3)	(5)	(7)	(8)	(16)	(10)	(1)	(7)	(100)
B	30,559	3,018	3,691	5,272	6,723	3,758	2,249	157,651	258,830	58,767	530,518
	(6)	(-)	(-)	(1)	(1)	(-)	(-)	(30)	(49)	(12)	(100)
C			33,147	16,611	23,202	42,612	16,623	23,538	34,631	147,307	337,671
			(10)	(5)	(7)	(12)	(5)	(7)	(10)	(43)	(100)
D	5,928	18,646	1,237	434	247	123	78	3,518	190,904	21,525	242,640
	(2)	(8)	(-)	(-)	(-)	(-)	(-)	(1)	(78)	(9)	(100)
Mechanical Industry
E	13,219	2,726	2,711	7,513	5,140	9,058	3,049	2,888	2,340	1,895	50,539
	(26)	(5)	(5)	(15)	(10)	(18)	(6)	(5)	(4)	(4)	(100)
F	8,321	917	2,838	5,765	8,089	4,264	17,261	2,243	4,169	1,277	55,144
	(15)	(2)	(5)	(10)	(15)	(8)	(31)	(4)	(8)	(2)	(100)
G	162,292	31,818	21,930	17,691	27,387	49,076	44,897	55,030	1,091,489	1,573,906	3,075,516
	(5)	(1)	(-)	(-)	(1)	(1)	(1)	(2)	(35)	(51)	(100)
H	82,917	18,314	33,883	14,333	22,996	13,910	9,574	42,323	566,110	1,680,364	2,484,724
	(3)	(1)	(1)	(-)	(1)	(-)	(-)	(2)	(23)	(68)	(100)

[# Table C-1 for the present]

Reappraisal Write-ups and Depreciation Increases for Individual Taxpayers

Type of Assets:	Buildings	Machinery and Equipment	Mining Rights and Leases	Vessels	Total
Current Book Value	16,248	140,039	3	23	156,313
Reappraisal Value	202,299	310,915	256	860	514,330
Amount of Write-up	186,051	170,876	253	837	358,017
Current Depreciation	852	9,341	-	2	10,195
Revised Depreciation	15,441	21,637	21	117	36,946
Increase in Depreciation	14,589	12,026	21	115	26,751

[# Table C-2 for the present]

Effect of Reappraisal of Fixed Assets of Personal Enterprises on Tax Revenues

(million of yen)
Revenue due to imposition of 6% tax upon reappraisal gain	10,740
Revenue loss due to increase in depreciation	5,350
Total increase in revenue, on first year	5,390
Decrease on Revenue, later years	10,740

[# top of this page ]

Experience in Other Countries

Revaluation is not a matter peculliar to Japan. Other countries have experienced severe inflation,and have been driven to adopt various kinds of revaluation procedures as a means of restoring tax and accounting practices to a firmer footing. This has been particularly true of European countries following World War II. And many countries that have not yet adopted revaluation plans are now debating such measures.

In Belgium,for example, revaluation has been allowed, without taxation, for industrial, commercial, and agricultural machinery and industrial buildings and similar assets.
[# *** The table A-2,B-2,C-1 and C-2 were in this place, but they are moved to the end of previous section. *** ]
The asset must have been acquired or constructed before the end of the last accounting year ending before December 31, 1940 thus, ordinarily, before the end of 1939. This provision is designed to deny the benefits of revaluation to assets that were constructed and used by or for the Germans during the Occupation. The asset must still have been in use on December 31, 1945 (in general). The new value of the asset cannot exceed two and a half times the depreciated value, on December 31, 1945 (in general), in August 31, 1939 prices.

Belgium had allowed a similar revaluation in 1927, following the inflation of World War I and its aftermath.

The new Belgian law excludes from revaluation not only land, but also structures with a long economic life, such as the foundations, the walls, and the roof of a commercial building or office building. Office and home furniture and furnishings are also excluded from revaluation. So are intangibles.

Another type of exclusion involves assets that were deemed to be purchased with borrowed money. A fraction is computed by noting the proportions of debt to equity in the 1939 balance sheet and is applied to the assets subject to revaluation to determine the part to be excluded. The reasoning here is that by the depreciation of the franc the owner of the asset gained in relief from real cost of debt redemption as much as he lost through decrease in real value of depreciation charge (on that proportion of the assets bought with borrowed money). This is sound reasoning, but lack of records and the necessity of avoiding complication make ti inadvisable to apply this principle to the Japanese revaluation program.

Revaluation had to be completed by Belgian firms in time to appear in the accounts for the calendar year 1947 or the fiscal year 1947-48. None of the added value represented by revaluation can be distributed to owners or directors or personnel of the concern without loss of the added depreciation.

[# top of this page ]

[# end of Appenidx C ]