4th Report of the Market Access Ombudsman Council (March 17, 1997)

6-(1) Deregulation of preservation of documents on microfilm

1. Complainant: American Chamber of Commerce in Japan

2. Ministry concerned: Ministry of Finance

3. Background:

The requirements for ledger entry and for preserving ledgers under the Tax Law and Regulations are necessary from the viewpoint of ensuring proper and fair taxation under the self-assessment system. For example, corporations filing blue returns are required to keep the necessary ledgers and record transactions therein and to keep those ledgers for a period of seven years, in case of assessment for tax evasion during the period. (Article 126 of the Corporation Tax Law, Article 59, Clause 1 of the Ministerial Ordinance Implementing Corporation Tax Law)

This period was extended to seven years from five years when the law was revised in 1981. However, records for the two additional years (the sixth and seventh years) may be kept on microfilm as long as certain conditions are met)(Article 59, Clause 5 of the Ministerial Ordinance Implementing Corporation Tax Law. The Notification of the Ministry of Finance "Preservation Method Set Down in Article 59, Clause 5 of the Ministerial Ordinance Implementing Corporation Tax Law).

In view of recent progress made in information technology, government ministries and agencies have taken or are considering taking measures by amending the law they administer or by issuing interpretation notices, regarding document preservation on microfilm or other media. The Plan to Promote Deregulation adopts, as general remarks, the implementation of the necessary deregulatory measures based on the results of studies, such as the report submitted by the Working Committee for Reviewing System s of the Advanced Information and Telecommunication Society Promotion Headquarters. The Committee's report (June 1996) states that, even in the case thorough study is especially needed, such study should be completed by the end of FY 1997 and necessary measures should be taken as soon as possible to allow the use of electronic data system (including microfilm) for preserving documents (if law amendment is required, a bill should be submitted to this effect).

4. Complaint:

The complainant raised the following points about document preservation on microfilm.

The Corporation Tax Law requires that tax-related documents be preserved for seven years. Although records for the sixth and seventh years may be preserved on microfilm, those for the first five years must be preserved in the form of the original documents. The Commercial Law and the Civil procedure Law also require that tax-related documents be preserved, but they allow the use of microfilm for documents for the entire period. The Ministry of International Trade and Industry and the Ministry of Labour also require documents to be preserved for a certain period, but they allow preservation to be made on microfilm for the entire period.

Since microfilm is admissible as evidence in court in the United States and other advanced countries, microfilm is used to preserve government and business records. In the United States in particular, a federal law of 1949 states that as long as an original microfilm has been made by the usual method, that copies have been made by the usual method, that the copies are accurate reproductions, and that it can be proved that the copies are faithful reproductions of the original, these can be used as evidence in any trial or administrative procedure. Many states also have laws with similar content.

Although rules for preservation of ledgers for commercial transactions are gradually being relaxed as a result of deregulation, document preservation will not become more practical unless the Corporation Tax Law provisions are loosened as well. Other ministries acknowledge the safety, reliability and efficiency of microfilm, and therefore preservation of documents on microfilm should be allowed under the Corporate Tax Law as well.

5. Results of deliberation:

Government regulation must be continually reviewed to keep up with changing technology. Especially today, when progress in telecommunications is so rapid, conditions may be substantially different than at the time laws were implemented. Accordingly, a review should be carried out, with due consideration for the purpose of the various systems in place. While regulation in other countries reflects progress in technology, Japanese rules which remain unchanged can impede imports and foreign investment in Japan. In this complaint, considering that other countries have incorporated changes in document preservation technology into their regulatory systems, the use of old rules in Japan could be viewed by foreign companies as impeding business activities. Since this is undesirable from the perspective of creating a favorable climate for business and promoting foreign investment in Japan, action should be taken quickly, bearing in mind why the requirement for ledger preservation exists.

The concerned ministry (the National Tax Administration) established a study group to examine the retention of account books and record under the Tax Law and Regulation in July 1996. This group is currently studying the conditions for use of preservation in electronic form and will issue a report in March 1997. Preservation of documents on microfilm will be studied with these results in mind, but the concerned ministry should take steps in the following direction, from the viewpoint of establishing a more positive environment as mentioned above.

(1) For documents whose preservation is mandated by the Tax Law and Regulation, the conditions under which the use of microfilm may be allowed should be studied, from the viewpoint of ensuring fair taxation. Preservation on microfilm should be allowed for the entire period for which preservation is required, taking into consideration the overall cost-benefit to the economy, and keeping in mind the conditions for use of document preservation in electronic form.

(2) Even if this revision requires changes to the Tax Law and Regulation, all procedures necessary for this should be taken during FY1997.

Government decision (March 25,1997)

5-(1) Deregulation of preservation of documents on microfilm

Regarding books and records which must be preserved to meet tax law requirements, conditions for the preservation on microfilm will be studied in order to ensure fairness in taxation. Consideration should also be given to the institutional purposes of preserving books and records, the cost benefits to the economy as a whole, and the requirements for records retention in electronic form. Measures are expected to be taken to allow preservation on microfilm for the entire period required. All procedures necessary to allow this are expected to be taken in FY 1997.