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The new securities tax code took effect Jan. 1, featuring tax cuts on dividends from stocks that brokers hope will spur investment in the wake of a tough year in which the Nikkei average sank to the lowest yearend levels in two decades.

But many investors have voiced concern over changes in the capital gains tax, saying abolition of a low 1.05 percent withholding tax and increased paperwork requirements will make them more reluctant to trade shares.

“It’s one win but one loss,” said Norihiro Fujito, senior investment strategist at Mitsubishi Securities Co. “Investors are happy about dividend tax cuts, but they are against changes in the capital gains tax, saying they virtually represent tax hikes.”

Under the new tax code, dividend payments will be subject to withholding tax at a flat rate of 10 percent between April 2003 and March 2008, down from the current 20 percent, for investors filing tax returns. The rate will revert to 20 percent in April 2008.

Under the previous system, dividends were taxed together with a taxpayer’s total income, leaving those with high dividends taxed at rates of up to 50 percent.

Brokers said the change will probably prompt market participants to invest in high-dividend issues, including electric-power companies and real estate investment trusts, to take advantage of the change.

As for the capital gains tax, the new system requires all investors in principle to file tax returns on profits from the sale of shares.

The capital gains tax has been reduced to 10 percent from 26 percent for the initial five-year period. In April 2008, it will rise to 20 percent.

Under the previous system, investors had the option of paying either the 1.05 percent withholding tax on the value of share sales — regardless of whether they made gains — or the 26 percent tax on the annual total of their capital gains by filing a separate tax return.

“Some argue capital gains (tax) is now significantly lower,” Fujito said. “But most individual investors think the other way. They believe the 10 percent rate is virtually a rise from the 1.05 percent withholding tax.”

Although tax reforms appear to be moving in the right direction, brokers say reform alone is not powerful enough to lift share prices and they have called for measures to pull the nation out of deflation.

“A domestic economic recovery and an upturn in corporate earnings are a prerequisite for active transactions,” said Hiroaki Kuramochi, head of the equities department at Credit Lyonnais Securities (Japan).

Improvement in earnings at companies is also vital to enhance attractiveness of the equities markets, he said.

Analysts say that along with macroeconomic measures to boost the economy, the government can do more to lure investors to the market.

“I believe the government can do much more with the new securities tax system,” Mitsubishi’s Fujito said. “If the government is seriously worried about weakness in stocks last year, the government should exempt investors from paying the capital gains tax on any stock transactions,” hopefully with no need to file tax returns.

The 1 million yen tax exemption on capital gains for shares held for more than one year was scrapped Dec. 30.

But individual investors are still exempt from the capital gains tax on shares worth up to 10 million yen if they bought the shares in 2002, keep them until the end of 2004 and then sell during the following three years.

The new code has also launched the so-called special account system, which allows investors to have securities houses file tax returns on their behalf.

The system effectively frees investors from having to do such time-consuming work themselves, reflecting growing jitters over the abolition of the withholding tax system.

Brokerage officials meanwhile said they have not received as many requests for the system as expected because the deadline for transferring shares to special accounts from ordinary ones has been extended to the end of 2003.

“I think investors are now taking a wait-and-see stance about the new scheme,” said a stock sales official at a midsize brokerage. “The truth is that many do not yet fully understand the complicated system, including some of us.”

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