During my time as a Diet member, I often raised the importance of using the Advanced Ruling System.

To answer my calls for a closer examination of the Advanced Ruling System, the former Finance Ministry and the National Tax Administration began to take steps on key tax issues regarding derivatives, for example, when taxes are imposed on premiums and proceeds.

The NTA requested that industries provide it with information on the complicated structure of these new financial products. After gathering their opinions, they issued guidelines on how to treat various kinds of derivatives. The guidelines were published on Oct. 30, 1998.

Both of the above regulatory bodies have responded to the market, which wants to know how derivatives will be treated amid the rising interest in such new and globalized financial products.

These guidelines, however, are different from the Advanced Ruling and No-Action Letter systems.

Although all help to clarify the operations of the market, the difference is that guidelines in principle only provide a general interpretation on how a transaction may be interpreted in terms of regulatory and tax matters. They are not meant to be taken as definite answers to specific questions raised.

In other words, the guidelines are not case-specific and can be used by any investor that has a question on regulatory or tax matters. Moreover, there is no time limit with the guidelines.

In contrast, the No-Action Letter and Advanced Ruling are case-specific. They provide some kind of written advanced notice on how transactions will be treated by an authority regarding matters of regulatory compliance or tax categorization.

In addition, both systems have similarities concerning disclosure.

It is crucial that the information in the questionnaire submitted by the investor or financial institution be accurate and completely forthright, regardless of whether or not it favors the party who submits it. This is an important issue with the No-Action Letter and is arguably even more so in the case of an Advanced Ruling because tax matters are at stake.

Questionnaires submitted for an Advanced Ruling must describe the entire scope of the transaction in detail, along with any party that may be involved. Although the investor may think such detailed information to be unnecessary for a mere tax ruling, the NTA might think differently because it categorizes the deal in terms of tax and must analyze it in its entirety, rather than just each leg, especially in cases containing both domestic and foreign factors.

As in the case of the No-Action Letter, an Advanced Ruling by the NTA is heavily dependent upon the scope of the questionnaire, which should be submitted for the general good of taxpayers in Japan.

Each party should realize that it should not submit false or limited questionnaires for the purpose of reducing or avoiding tax payments.

If facts relevant to the answers set forth are false, not explicitly stated, or have changed since it was drafted, then the views of the NTA may change accordingly.

Furthermore, the information contained within the Advanced Ruling should be published on the NTA’s Web site so that the public can benefit.

To satisfy this need for accuracy, the NTA, investors and financial institutions should make good use of outsourcing. The NTA should consult specialists who can advise them on how to adopt the best standardized system to issue timely and accurate opinions, as with its guidelines on derivatives.

Whenever possible, each party that submits a questionnaire should, as in the case of No-Action Letter, accompany it with a professional opinion, preferably from an accountant and/or attorney who specializes in structured financing deals.

This will prevent the NTA from wasting time and ensure that accurate questions are posed in their questionnaires.

Another issue is how to coordinate the No-Action Letter and the Advanced Ruling so that they complement each other.

As many investors and financial institutions consider regulatory and tax issues simultaneously, and because their questions may pertain to both kinds of issues, perhaps the best way is for the investor or financial institution to prepare a single questionnaire containing both elements — the regulatory and the taxation issues — and submit it to both the FSA and the NTA, which would respond to their respective portions.

We can expect the FSA to complete its response faster than the NTA because the analysis it needs to conduct may be simpler. It can then send a copy of the completed No-Action Letter to the NTA and promptly upload it to the Web site.

After receiving the letter, the NTA would understand that the inquirers in question are awaiting its decision, and would feel obligated to complete the Advanced Ruling as quickly as possible.

From this information, the investor could estimate the costs involved, which would stimulate the Japanese market by making it more vigorous and by providing its investors with a greater number of options. This, in turn, would stimulate the Japanese economy by expanding the amount of tax revenues.

A note on the timing of these responses. The Advanced Ruling would be much more complicated than the No-Action Letter and will therefore take more time to complete. As such, it will probably be unreasonable to expect that the NTA can make a decision in the same time that the FSA can complete a No-Action Letter.

Although it is impossible to state the number of days necessary for an Advanced Ruling, a rough estimate should be proposed to the NTA so that it will have an incentive to reach a decision in as timely a manner as possible and as a signal to the market on how long it can expect to wait.

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