Yoshito Hori speaks about leadership lessons with enthusiasm in a suit and tie

Right now, I am on a flight returning to Japan from the Davos forum. At last year’s conference I vigorously wrote a review of the event every day, but this time I wasn’t able to write a single one. There was a reason: a nagging anxiety in the corner of my mind. It started at the end of last year, and as the new year approached, it intensified.

Why am I so down?

There is something unsettling about the tax reform currently under deliberation by the government. The framework for reform includes a provision for increasing the taxes on the capital gains of foreign investors. This managed to slip through the LDP Tax Commission and cabinet meetings with hardly any debate and is likely to go into effect starting April 1 of this year. There will be huge repercussions across the venture capital industry, should this happen.

I learned about this amended tax system last November, on the 26th. The Ministry of Economy, Trade and Industry contacted the Japan Venture Capital Association, where I serve as director. I quickly expressed my discontent with this reform and at the same time contacted people related to buyout (private equity) funds who would be significantly affected. It was a major issue.

Currently, in terms of the capital gains of foreign investors, if certain conditions are met, they essentially pay the tax in their own countries. In other words, when Japanese investors invest in foreign countries, they only pay tax in Japan. In the same way, when foreign investors invest in Japan, they pay the tax in their own countries, not in Japan.

This certainly does not eliminate the obligation to pay taxes. You are, in principle, taxed in your country of residence. This global standard is observed in all major countries, including the US, the UK, Germany, and so on. Because of this global standard, foreign funds can freely move back and forth across borders. From the perspective of the principle of reciprocity, this is an appropriate commercial practice.

Now, however, the Japanese taxation authorities have gone beyond this principle to strengthen taxation. It is believed that this began, in part, with not being able to tax foreign investors at Shinsei Bank. I seem to remember the tenor of the argument in the Diet:

“Given all the tax revenues thrown into Shinsei Bank, why shouldn’t foreign investors be taxed when they turn a profit?”

At that time, I thought, “Why make this the issue, when the problem of throwing so much tax money comes in the first place from the faulty measures and policies of the Japanese financial authorities, particularly when the revitalization of the Long-Term Credit Bank of Japan benefited all of Japan?”

As a Japanese citizen, this did not feel right. However, in regard to Shinsei Bank, surely criticism should have been leveled at the Financial Supervisory Agency for setting such a low price and going so far as to promise a special agreementーa warranty against defects (cancellation right). If the principle of reciprocity operated in terms of the tax system, one would consider this to be appropriate. This would also be true from the perspective of global standards.

Any way you look at it, the taxation authorities have now chosen to ignore this standard and have suggested introducing a new taxation rule:

“Foreigners investing in Japan must pay taxes in Japan. And, in accordance with the taxation treaty, they should receive a tax refund in their own country.”

If this happens, foreign investors from countries that are not parties to this taxation treaty will have to pay taxes both in Japan and in their own country, thereby facing double taxation. Moreover, pension funds and university (endowment) funds which make up half of all investors are, in the first place, exempt from capital gains tax. So they can’t receive any tax relief. This amounts to having tax revenue sucked from them into Japan without any possibility of receiving a refund.

If they are taxed without receiving refunds, they must consider the amount of tax they pay in Japan (20–30%) as a cost. From the point of view of a fund investor working to obtain the best possible return, the increased cost of taxation is a bitter pill to swallow. From the point of view of foreign investors, should this amendment pass, it would make better sense to invest in other countries like Europe, the US, and other parts of Asia such as China or India. They can just quit investing in Japan altogether.

When an investment in Japan is only 2–3% of overall investment anyway, it’s easy to let go.

The taxation authorities are probably trying to increase tax revenue with this reform, but in reality they are doing the opposite. Needless to say, if they introduce this policy, investment into Japan will fall, and the flow of foreign funds necessary for creating and revitalizing Japan’s industries will stop.

The scale of our GLOBIS Fund is currently 20 billion yen, but 90% of this comes from foreign investment. The reason is simple. When the fund was set up in 1999, only 2 billion yen, 10% of the total, could be raised domestically. I traveled all around the country visiting institutional investors, but they were not interested in venture capital in Japan. With just a few exceptions, I was refused left and right.

For this reason, I started taking long overseas business trips to raise funds. As a result, a 20-billion-yen fund came into being, we invested in a great many companies, and we were able to contribute to the revitalization of Japanese industries.

This new policy would essentially cut off the flow of foreign funds into Japan. To be honest, I’m not that bothered about the impact on my own fund. More important is the fact that Japan will lose trust.

Feeling I had to do something to have this taxation on foreign investors withdrawn from the amended tax system, I’ve been meeting with LDP politicians and visiting the Finance Ministry from last year until this year, all to no avail.

But I haven’t given up.

I managed to get an appointment with the section manager in charge at the Ministry of Finance the day before I traveled to the Davos forum. I went to meet him, accompanied by top executives from major private equity companies. I was very grateful that he made time for us, but I was not at all placated. Below is the letter of thanks I sent to him, which sums up how I’m feeling.

Note: In this extract, the phrase “pass through” is used. Under this new taxation measure, funds are subject to taxation if they acquire more than 25% of the shares of a company. Just as in domestic investment partnerships, funds do not pay taxes on the investment, meaning that the fund itself is not directly taxed. The tax burden is instead passed on to each participant in the fund. In terms of international finance, this “pass through” tax is abnormal and lacking in common sense.


Subject: Thank you for the meeting

Thank you very much for making time for us in your busy schedule. You permitted me to meet with you just one day after speaking on the phone, and I am deeply grateful. At the same time, I think that you appreciate the gravity of this matter, given the fact that the presidents of Unison, Carlyle, MKS, and JP Morgan all cleared their own schedules to attend the meeting on such short notice. I understand your position as you so kindly explained it when we met. I cannot, however, go along with it. Here are the points in which I see huge gaps between our thinking.

1) The Problem with Pass-Through Taxation
The idea to levy taxes on the capital gains of LP Funds is, from the perspective of international commercial financial practice, bereft of common sense. This kind of measure would come with serious misgivings toward Japanese policies, and there is a possibility that the flow of foreign funds into Japan would stop. In fact, I have actually heard that major American pension funds are thinking about stopping their investments. Please carefully reconsider your proposal from this point of view.

2) The Principle of Reciprocity
Under the principle of taxation in the country of residence, Japanese investors enjoy the benefit of not having to pay taxes in foreign markets like the UK and the US. What would it mean to have one-way taxation on capital gains only in Japan? How would governments of the US and Europe react?

3) Impact on Invest Japan
Through this measure, it is clear that investment from overseas would drastically decrease. I encounter investors on a daily basis, and I fully understand the situation. In the case of GLOBIS, 18 billion yen of our 20 billion-yen venture capital fund comes from foreign funds. Suffice it to say that through this measure, foreign investment in future funds would certainly shrink to zero. You may be thinking that there is no need to worry since the US is protected by the taxation treaty, but this is not the issue at hand; the issue is our own stance. Surely investors will lose their desire to invest in a Japanese market that adopts this sort of measure, which is simply abnormal and without any common sense. I feel that this goes completely against the Invest Japan policies of the Koizumi Cabinet.

4) The Issue of Falling Tax Revenue
If the flow of investor funds dries up, one cannot of course expect any increase in tax revenues. The flow of funds will simply stop, and any further stimulation for creating and revitalizing our industries will stagnate. That means you an overall loss in tax revenue.

For several years now, I have been flying around the globe extolling the virtues of investing in the Japanese market. This measure would render my efforts fruitless. As a Japanese citizen, I would be extremely embarrassed if Japan ended up being seen as an abnormal country without a shred of common sense. Up until now, I have never criticized government policies, but I will feel obligated to do everything I can to prevent this measure.

I am writing this email in-flight during a business trip to Europe. The Davos forum starts next week. Participants will include representatives from the private equity industry, high-ranking government officials from around the world, persons from the Japanese financial world, Japanese policy-makers, and the mass media. I intend to explain the situation to all these people and to do whatever I can to see this measure stopped. I will do so because I believe stopping this measure is the right thing for Japan. Although my efforts may seem paltry, I want to do the best I can for Japan.

I fully understand your position, but I implore you to bear in mind these arguments and adopt appropriate measures.

January 20, 2005
Yoshito Hori


As promised, during the Davos forum, I vigorously explained my stance to many people. I shared my written opinion with former Foreign Minister Junko Kawaguchi, Democratic Party of Japan Parliamentarian Motohisa Furukawa, Keizai Doyukai (Japan Association of Corporate Executives) chairman Kakutaro Kitashiro, the president of JETRO, the Nikkei and Asahi Newspapers, and even foreign investors. Then, to help people grasp the magnitude of this problem, I posed a question to a high-ranking Japanese government official during a session on Japan, asking what it would mean to implement measures contrary to the Invest Japan Policy. At the lunch session regarding private equity, I raised my hand and brought the issue to the fore once again.

During the forum, a report arrived from Japan that the bill was already in its final stages. Once it reached the Diet, there would be no way to stop it. I thought I had to do something, and so I left one day early from Davos to return to Japan. It was a shameーI had been looking forward to seeing the Bolshoi Ballet on the last dayーbut I felt it was my duty to return home and do anything I could to stop Japan from going to the dogs.

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