Make a plan of presentation of Mr. Den Fujita business history.

ENTREPRENEUR AND HIS HEIRS.

When the founder of McDonald's Japan, 78-year-old Den Fujita, passed away on April 21, 2004, he bequeathed a rags-to-riches story worthy of dramatization. Born in Osaka, he was brought up bilingually and worked as a translator to earn pocket money during high school. After World War II, with his father dead and family home and most assets destroyed, Fujita started an import business, the profits from which paid his college tuition. He graduated from the University of Tokyo in 1951.

He remained in the import business and, as the story goes, ate his first McDonald's meal while on a business trip to the States in 1967. Impressed with the speed and convenience, he felt the Golden Arches had a future in Japan. Four years and numerous negotiations later, he won the right to become McDonald's joint venture partner in Japan. Fujita opened his first restaurant on July 20, 1971, on a tiny 50 sq. meter lot in Ginza, Tokyo.

Fujita took a huge risk in opening his first restaurant; back then everyone said that Western food eaten with the hands wouldn't sell in Japan. He proved the naysayers wrong. Today McDonald's Japan is by far the largest fast food chain in the country. In 2004 the company had 3,774 restaurants and sales of JPY308 billion (US$2.68 billion). By the time of his death, Forbes identified Fujita as the 437th richest person in the world.

Fujita's is a pretty good story and one that normally would inspire both journalists and future generations of readers to consider entrepreneurship and the meaning of life.

But instead what captivated the Japanese media was the inheritance tax that his heirs had to pay. He left a massive estate worth JPY49.1bn, consisting of real estate, bank deposits, and shares in McDonald's Holdings Japan. The inheritance was purportedly the sixth largest on record in Japan, and the tax hit punctured an otherwise fairytale ending to a productive life. The total tax, JPY-12.2bn, attracted widespread commentary about the fairness of hitting surviving families of successful individuals for death taxes especially after the person earned, rather than inherited, the money, and had already paid income and capital gains taxes.

Inheritance tax is a hot topic anywhere, and, because of a rapidly graying society where more than 30 percent of business owners are older than 60, nowhere more so than in Japan. The tax was introduced in 1905 and then modified by the Occupation Forces in 1950. It was meant to forestall the accumulation of wealth within certain business families, reinforcing the egalitarian aspect of Japanese society, where everyone is expected to work for their rewards, and everyone gets a chance.

This philosophy appeals to the masses, who wish to maintain the fiction that everyone in Japan is middle class; so the tax is structured to target a small, enviable segment of the population - successful business people and artists/celebrities who have made more than their fair share.

But in the last 20 years another segment of the population has come to be hit by inheritance tax. This segment, which has public sympathy, presents a problem for politicians. It consists of regular company employees grandparents living on modest plots whose value has skyrocketed. Many of these people moved back to the ruins of postwar Tokyo and Osaka and carved out a living under the toughest circumstances. They never made much money. They don't want to move, and they certainly don't feel rich or lead extravagant lives. So when they pass away, the tax bill comes as a shock to their heirs.

Because such people form a sizable voting bloc, the government has been trying to adjust the tax regime. One result is that the valuation of houses on plots up to 240 square meters in area has been reduced by as much as 80 percent. The deduction now stands at JPY70-100 million, depending on the number of heirs to the estate.

Regardless of whether you think the government has the right to make everyone start at zero (relatively speaking) in terms of economic advantage, the reality is that the families of successful entrepreneurs, artists, and the elderly in inner Tokyo are all slapped with a heavy tax when the main provider passes away. These heirs, in Den Fujita's case a 75 year-old widow and 52-year-old son, lose a large chunk of the family estate, something that does seem a cruel punishment considering how people like Fujita built their fortunes from nothing.

Until three years ago, Japan had the world's highest death tax rate, 70 percent. Now the upper limit is 50 percent. But, in fact, after deductions, according to the US-based Family Business Tax Coalition (FBTC), the effective rate is more like 30 percent. Today, says the FBTC, the G7 country that levies the highest effective death duties on people having estates worth more than US$1.5m (JPY172 million) is the USA. The FBTC says that although the upper level of estate tax in the USA is 46 percent (2006), the small number of deductions means that the averaged effective rate of tax is around 40 percent - about a quarter more than what the Japanese pay. And remember that this figure doesn't include US state death taxes, which are still levied by more than half of the state governments.

Another point about the US situation is that although the US$1.5m deduction is 50 percent higher than Japan's, the ongoing five-year old property boom has meant that there are now more than 9 million millionaires in the USA, about 44 percent of whom achieved their status on property, and most of whom will be paying a tax that they wouldn't have been five years ago.

 

Make a plan of presentation of Mr. Den Fujita business history.

Translate the following text from Russian into English using the expressions used in the previous table.

Налоговая система Японии, как США и Европы, характеризуется множественностью налогов. В Японии функционируют государственные налоги и местные. Но все налоги страны зафиксированы в законодательных актах. Каждый вид государственного налога регулируется законом. Закон о местных налогах определяет их виды и предельные ставки, в остальном установление ведется местным парламентом. Всего в стране 25 государственных и 30 местных налогов. Их можно классифицировать по трем крупным группам.

 

Первая - это прямые подоходные налоги, как с юридических, так и физических лиц. Вторая - прямые налоги на имущество. Третья - прямые и косвенные потребительские налоги. Основу бюджета составляют прямые налоги, которым отдается очевидное предпочтение.

 

Самый высокий доход государству приносит подоходный налог с юридических и физических лиц. Он равен 56,4% всех налоговых поступлений. Предприятия и организации уплачивают с прибыли: государственный подоходный налог в размере 33,48%, подоходный налог префектуры в размере 5% от государственного, что дает ставку 1,67% от прибыли, и городской (поселковый, районный) подоходный налог в размере 12,3% от государственного, или 4,12% от прибыли. Кроме того, прибыль служит источником выплаты налога на предпринимательскую деятельность, поступающего в распоряжение префектуры. Его ставка — 10,71%. В суммарном итоге в доход бюджета изымается почти половина прибыли юридического лица. Физические лица уплачивают государственный подоходный налог по прогрессивной шкале, имеющей пять ставок: 10%, 20, 30, 40 и 50%.

Work in small groups. Make a list of the main peculiarities in the tax systems of Switzerland and Japan based on the previous texts. Use additional information from the web sites.

Single out the peculiarities of non residents taxation (both companies and individuals) in different countries.

Write a letter to you friend explaining to him the advantages and disadvantages of the tax systems in Switzerland and one of the leading European country (say Germany). Use additional information from the Internet.

TAXATION SYSTEM IN CYPRUS.

Cyprus is no longer an offshore jurisdiction in the strict sense of the word, but its tax regime, coupled with its location at the cross roads of Eastern Europe, the Middle East, North Africa and Asia, an extensive network of double-tax treaties, its membership of the European Union and its relatively sophisticated European business environment and stable economy mean that the island is an ideal place to locate holding, trading and intermediary companies.

 

Cyprus's taxation regime doesn't stand out particularly among its offshore competitors, but changes to tax legislation approved in 2002 gave Cyprus the lowest rate of corporate tax in the EU at 10%. Cyprus has also adopted the EU’s ‘Code of Conduct’ on ‘harmful tax practices’ and is placed on the Organization for Economic Cooperation and Development’s (OECD) ‘white list’ of tax compliant jurisdictions and therefore has a reputational advantage over some of its offshore competitors. Cyprus was also rated as the most attractive tax regime in Europe (with the net attractiveness score of 90%) by a 2009 KPMG poll, ahead of Ireland, Switzerland and Malta.

 

The Income Tax Act No. 118(I) of 2002 applied the 10% corporate tax rate to both ‘offshore’ and ‘onshore’ companies, although after a short transition period, this distinction has now been removed; as from January 1, 2003, an offshore company (IBC) no longer has a separate taxation status, and is taxed according to the same principles as a regular company. Thus, IBCs are now allowed to trade inside Cyprus. A pre-existing IBC which made an irrevocable commitment not to trade inside Cyprus until 2006 was able to claim the existing low tax rate for the three years 2003, 2004 and 2005.

 

Cypriot companies also pay a 2% levy on wage bills (meant to subsidize pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, profits from activities of a permanent establishment situated outside Cyprus are completely exempt. This exemption will not apply to a Cyprus company if: (i) its foreign permanent establishment directly or indirectly engages in more than fifty per cent (50%) of its activities in producing investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus (unlikely unless the foreign PE is located in no- or low-tax jurisdiction). In Cyprus, the term "Permanent Establishment" has the same meaning as defined in the OECD Model Tax Convention on Income and on Capital with the exemption of "a building site or construction or installation project", which constitutes a permanent establishment only if it lasts more than three months.

 

A substantial number of companies involved in the trading or distribution of FMCG and other physical goods use Cyprus as a trading base for the Mediterranean, Middle East and North African region. Non-resident enterprises (i.e. those neither 'managed and controlled' nor with a local permanent establishment) are allowed to store, maintain, break bulk or re-package their own transit goods in bonded warehouses, providing the handling doesn't result in any change of customs' tariff classification. They are also permitted to conduct sales activities on the island, as long as no local deliveries result, and no permanent establishment is created.

 

Cyprus is not a particularly convenient base for supplying the CIS and Eastern Europe in physical terms, but that does not prevent companies with interests in those regions from establishing holding companies in Cyprus, and very many do so. Not only are the Cyprus treaty withholding tax rates normally lower than those in other countries' treaties, but there will be no local taxation as long as no permanent establishment is created, and even if it is, Cyprus's own 10% tax rate on company profits is itself low. The combination is quite hard to beat.

 

A frequent feature of international trade and investment, particularly as between advanced and less advanced countries, is the transfer of technology or 'brand' or intellectual property in return for license, franchise or royalty payments. Due to its network of double-tax treaties (unusually for a ‘low tax jurisdiction, Cyprus has more than 40 double-tax agreements) and favourable taxation regime, Cyprus is a suitable place in which to locate an intermediary company to handle payments streams which might otherwise be highly-taxed in the receiving country.

 

Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low or zero withholding tax (Central and Eastern Europe, China, India, South Africa and a number of Middle Eastern countries). At worst, the income received in Cyprus will be taxed after deduction of expenses at 10%.

There are a number of company forms available in Cyprus, but the most commonly used for a Cypriot holding company is the private limited liability company. When 100% foreign-owned, a private company used to be referred to as an 'offshore company', although the expression International Business Company subsequently came into favour to describe such entities.

 

Cypriot companies are formed under the Cyprus Companies Law, Cap. 113, which is virtually a copy of the English 1948 Companies Act. In order to form a foreign-owned company in Cyprus, a bank reference and copy of the owner's passport is required for the registration. The bank reference must be issued by a bank included on the Central Bank of Cyprus's list of qualifying banks. A holding company using the private limited company form will need at least one shareholder and the minimum share capital is EUR1,000, with share capital of between EUR5,000 and EUR10,000 the norm. A Cypriot private company must have at least one director which can be a natural person or a body corporate of any nationality.

 

Under amendments to the CyprusCompany Law in 2003, every company must prepare a full set of financial statements in accordance with International Financial Reporting Standards, and every parent company that has one or more subsidiaries, other than a company which is itself a wholly owned subsidiary, should present consolidated financial statements. Under article 120, every company must complete an annual return within a period of 42 days from the date of its Annual General Meeting and must file immediately with the Registrar of Companies a copy of the annual return, signed by a director and the company secretary. Under article 121, the annual return filed with the Registrar of Companies must be accompanied by the full set of financial statements.

 

So, as described above, due to the island's combination of tax treaties and low-tax regime, and its membership of the EU, many international investors choose Cyprus as a location for financial holding and investment companies as conduits for investment to and from Eastern Europe, the Near and Far East, and Africa.

 

ENTREPRENEUR AND HIS HEIRS.

When the founder of McDonald's Japan, 78-year-old Den Fujita, passed away on April 21, 2004, he bequeathed a rags-to-riches story worthy of dramatization. Born in Osaka, he was brought up bilingually and worked as a translator to earn pocket money during high school. After World War II, with his father dead and family home and most assets destroyed, Fujita started an import business, the profits from which paid his college tuition. He graduated from the University of Tokyo in 1951.

He remained in the import business and, as the story goes, ate his first McDonald's meal while on a business trip to the States in 1967. Impressed with the speed and convenience, he felt the Golden Arches had a future in Japan. Four years and numerous negotiations later, he won the right to become McDonald's joint venture partner in Japan. Fujita opened his first restaurant on July 20, 1971, on a tiny 50 sq. meter lot in Ginza, Tokyo.

Fujita took a huge risk in opening his first restaurant; back then everyone said that Western food eaten with the hands wouldn't sell in Japan. He proved the naysayers wrong. Today McDonald's Japan is by far the largest fast food chain in the country. In 2004 the company had 3,774 restaurants and sales of JPY308 billion (US$2.68 billion). By the time of his death, Forbes identified Fujita as the 437th richest person in the world.

Fujita's is a pretty good story and one that normally would inspire both journalists and future generations of readers to consider entrepreneurship and the meaning of life.

But instead what captivated the Japanese media was the inheritance tax that his heirs had to pay. He left a massive estate worth JPY49.1bn, consisting of real estate, bank deposits, and shares in McDonald's Holdings Japan. The inheritance was purportedly the sixth largest on record in Japan, and the tax hit punctured an otherwise fairytale ending to a productive life. The total tax, JPY-12.2bn, attracted widespread commentary about the fairness of hitting surviving families of successful individuals for death taxes especially after the person earned, rather than inherited, the money, and had already paid income and capital gains taxes.

Inheritance tax is a hot topic anywhere, and, because of a rapidly graying society where more than 30 percent of business owners are older than 60, nowhere more so than in Japan. The tax was introduced in 1905 and then modified by the Occupation Forces in 1950. It was meant to forestall the accumulation of wealth within certain business families, reinforcing the egalitarian aspect of Japanese society, where everyone is expected to work for their rewards, and everyone gets a chance.

This philosophy appeals to the masses, who wish to maintain the fiction that everyone in Japan is middle class; so the tax is structured to target a small, enviable segment of the population - successful business people and artists/celebrities who have made more than their fair share.

But in the last 20 years another segment of the population has come to be hit by inheritance tax. This segment, which has public sympathy, presents a problem for politicians. It consists of regular company employees grandparents living on modest plots whose value has skyrocketed. Many of these people moved back to the ruins of postwar Tokyo and Osaka and carved out a living under the toughest circumstances. They never made much money. They don't want to move, and they certainly don't feel rich or lead extravagant lives. So when they pass away, the tax bill comes as a shock to their heirs.

Because such people form a sizable voting bloc, the government has been trying to adjust the tax regime. One result is that the valuation of houses on plots up to 240 square meters in area has been reduced by as much as 80 percent. The deduction now stands at JPY70-100 million, depending on the number of heirs to the estate.

Regardless of whether you think the government has the right to make everyone start at zero (relatively speaking) in terms of economic advantage, the reality is that the families of successful entrepreneurs, artists, and the elderly in inner Tokyo are all slapped with a heavy tax when the main provider passes away. These heirs, in Den Fujita's case a 75 year-old widow and 52-year-old son, lose a large chunk of the family estate, something that does seem a cruel punishment considering how people like Fujita built their fortunes from nothing.

Until three years ago, Japan had the world's highest death tax rate, 70 percent. Now the upper limit is 50 percent. But, in fact, after deductions, according to the US-based Family Business Tax Coalition (FBTC), the effective rate is more like 30 percent. Today, says the FBTC, the G7 country that levies the highest effective death duties on people having estates worth more than US$1.5m (JPY172 million) is the USA. The FBTC says that although the upper level of estate tax in the USA is 46 percent (2006), the small number of deductions means that the averaged effective rate of tax is around 40 percent - about a quarter more than what the Japanese pay. And remember that this figure doesn't include US state death taxes, which are still levied by more than half of the state governments.

Another point about the US situation is that although the US$1.5m deduction is 50 percent higher than Japan's, the ongoing five-year old property boom has meant that there are now more than 9 million millionaires in the USA, about 44 percent of whom achieved their status on property, and most of whom will be paying a tax that they wouldn't have been five years ago.

 

Make a plan of presentation of Mr. Den Fujita business history.