3. Status of forest inheritance tax

#### 3.1. Inheritance tax

All inheritors must pay an inheritance tax, which is applied to all inherited properties, including forests. The amount charged is the exempted amount subtracted from the total value of the property. The current exemption is 30 million yen plus 6 million yen per inheritor. The tax rate is determined by the classification of the chargeable amount. A progressive taxation system is used, and the current rate is 10–55%. In 2015, the exemption was reduced from 50 to 30 million yen and the exemption per person was reduced from 10 to 6 million yen, resulting in a decrease in the minimum value for inheritance tax. In addition, the tax rate classification table was changed in 2015, and the maximum taxation rate was raised from 50 to 55%. The current tax rate table is shown in Table 1. The maximum tax rate decreased from 75 to 70% in 1988, and from 70 to 50% in 2003. In 2015, the maximum rate increased to 55%.<sup>4</sup>

The current method to calculate standing trees is as follows [10]. The value of 1- to 39-year-old standing trees is based on the standard reforestation cost, in which the value for a 1-year-old tree is determined by the national tax office, and the value for 2- to 39-year-old trees is calculated as 1.5% the compound interest rate. The value of trees from 40 years old to the standard final cutting age8 is calculated using the Glaser formula. Figure 1 shows an example of this calculation based on C. japonica, with a standard final cutting age of 60 years.9 In Figure 1, the black line shows the value from 1-year old to the fixed tree age and the red line shows the value from the fixed tree age to the standard final cutting age calculated using the

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In 2004, the compound interest rate was reduced from 2 to 1.5%, the fixed tree age at which the calculation method changed rose from 10 to 39 years, and the standard reforestation cost decreased.10 Figure 1 shows examples of the calculations before and after the 2004 amendment. The value of standing trees per ha decreased markedly for all tree ages after these changes.11

To calculate the value of trees older than the standard final cutting age, the value of standing trees, from the standard final cutting age to twice the standard final cutting age, is calculated

Figure 1. Example of evaluation of standing trees. Note: This is an example calculated using the final cutting age and the

The standard final cutting age is determined by the circular notice from the Director General of the National Tax Agency for forestry areas. In the case of C. japonica, the standard final cutting age may be 50, 55, or 60 years, while that of C. obtusa, may be 60 or 65. In the amendment in 1993, the standard final cutting age was postponed by 5 or 10 years based on actual practices of tree cutting ([11], pp. 18–19). This postponement resulted in a decrease in the standing tree value. In the amendment, the standard distance between the location of trees to the nearest timber yard along forest road was changed. The distance changed from 1.5–2 to 0.3–0.5 km ([11], p. 19), resulting in a decrease in the evaluation of standing trees.

10For example, the standard reforestation cost decreased from 210,000 to 103,000 yen for C. japonica and from 245,000 to

11The 2004 amendment resulted in an average decrease in value to 50%, and maximum decrease to almost 30% ([10], p. 40). In the example in Figure 1, the decreasing rate is greater than the average decrease in the amendment in 2004,

value of standing C. japonica trees at the final cutting age in the Yoshino forestry area.

Tezuka [12] noted that a distance of about 2 km was the average ca. 1955.

because the standard value at the standard final cutting age decreased, as shown in Figure 2.

This graph is based on Figure 2 of Yamamoto [10].

141,000 yen for C. obtusa ([10], p. 38).

Glaser formula.

8

9

## 3.2. Forest inheritance tax

The major taxes related to private forest owners include inheritance tax, which is a national tax, fixed property tax, which is paid as an annual municipal tax, and forest income tax, which is a national sales tax that must be paid by sellers of standing trees.<sup>5</sup>

Forests are evaluated by dividing the area into forested land and standing trees. The forested land evaluation is calculated by multiplying the evaluation of the property tax<sup>6</sup> by a constant number. When forest land is located near an urban area, its value is generally high due to the effect of the housing land price.<sup>7</sup>


Source: National Tax Agency.

Table 1. Tax rate.

<sup>4</sup> In the United States, the maximum rate was 35% in 2011 (Butler [5], p. 374).

<sup>5</sup> There is limited literature related to inheritance tax in Japan in English. Examples include GHQ/SCAP ([6], pp. 64–66), the Forestry Agency [7], and Iwai [8].

<sup>6</sup> The registered area is used to evaluate the annual property tax ([9], p. 145). Generally, in areas where the national land survey has not been completed, the registered area is less than the actual area.

<sup>7</sup> Except for areas restricted to forest practices, forest owners can transfer the land use from forest to other uses, such as housing land.

The current method to calculate standing trees is as follows [10]. The value of 1- to 39-year-old standing trees is based on the standard reforestation cost, in which the value for a 1-year-old tree is determined by the national tax office, and the value for 2- to 39-year-old trees is calculated as 1.5% the compound interest rate. The value of trees from 40 years old to the standard final cutting age8 is calculated using the Glaser formula. Figure 1 shows an example of this calculation based on C. japonica, with a standard final cutting age of 60 years.9 In Figure 1, the black line shows the value from 1-year old to the fixed tree age and the red line shows the value from the fixed tree age to the standard final cutting age calculated using the Glaser formula.

In 2004, the compound interest rate was reduced from 2 to 1.5%, the fixed tree age at which the calculation method changed rose from 10 to 39 years, and the standard reforestation cost decreased.10 Figure 1 shows examples of the calculations before and after the 2004 amendment. The value of standing trees per ha decreased markedly for all tree ages after these changes.11

To calculate the value of trees older than the standard final cutting age, the value of standing trees, from the standard final cutting age to twice the standard final cutting age, is calculated

Figure 1. Example of evaluation of standing trees. Note: This is an example calculated using the final cutting age and the value of standing C. japonica trees at the final cutting age in the Yoshino forestry area.

3. Status of forest inheritance tax

All inheritors must pay an inheritance tax, which is applied to all inherited properties, including forests. The amount charged is the exempted amount subtracted from the total value of the property. The current exemption is 30 million yen plus 6 million yen per inheritor. The tax rate is determined by the classification of the chargeable amount. A progressive taxation system is used, and the current rate is 10–55%. In 2015, the exemption was reduced from 50 to 30 million yen and the exemption per person was reduced from 10 to 6 million yen, resulting in a decrease in the minimum value for inheritance tax. In addition, the tax rate classification table was changed in 2015, and the maximum taxation rate was raised from 50 to 55%. The current tax rate table is shown in Table 1. The maximum tax rate decreased from 75 to 70% in 1988,

The major taxes related to private forest owners include inheritance tax, which is a national tax, fixed property tax, which is paid as an annual municipal tax, and forest income tax, which

Forests are evaluated by dividing the area into forested land and standing trees. The forested land evaluation is calculated by multiplying the evaluation of the property tax<sup>6</sup> by a constant number. When forest land is located near an urban area, its value is generally high due to the

and from 70 to 50% in 2003. In 2015, the maximum rate increased to 55%.<sup>4</sup>

is a national sales tax that must be paid by sellers of standing trees.<sup>5</sup>

Source: National Tax Agency.

There is limited literature related to inheritance tax in Japan in English. Examples include GHQ/SCAP ([6], pp. 64–66), the

The registered area is used to evaluate the annual property tax ([9], p. 145). Generally, in areas where the national land

Except for areas restricted to forest practices, forest owners can transfer the land use from forest to other uses, such as

Table 1. Tax rate.

In the United States, the maximum rate was 35% in 2011 (Butler [5], p. 374).

survey has not been completed, the registered area is less than the actual area.

3.1. Inheritance tax

162 Taxes and Taxation Trends

3.2. Forest inheritance tax

effect of the housing land price.<sup>7</sup>

4

5

6

7

housing land.

Forestry Agency [7], and Iwai [8].

<sup>8</sup> The standard final cutting age is determined by the circular notice from the Director General of the National Tax Agency for forestry areas. In the case of C. japonica, the standard final cutting age may be 50, 55, or 60 years, while that of C. obtusa, may be 60 or 65. In the amendment in 1993, the standard final cutting age was postponed by 5 or 10 years based on actual practices of tree cutting ([11], pp. 18–19). This postponement resulted in a decrease in the standing tree value. In the amendment, the standard distance between the location of trees to the nearest timber yard along forest road was changed. The distance changed from 1.5–2 to 0.3–0.5 km ([11], p. 19), resulting in a decrease in the evaluation of standing trees. Tezuka [12] noted that a distance of about 2 km was the average ca. 1955.

<sup>9</sup> This graph is based on Figure 2 of Yamamoto [10].

<sup>10</sup>For example, the standard reforestation cost decreased from 210,000 to 103,000 yen for C. japonica and from 245,000 to 141,000 yen for C. obtusa ([10], p. 38).

<sup>11</sup>The 2004 amendment resulted in an average decrease in value to 50%, and maximum decrease to almost 30% ([10], p. 40). In the example in Figure 1, the decreasing rate is greater than the average decrease in the amendment in 2004, because the standard value at the standard final cutting age decreased, as shown in Figure 2.

based on a 2% compound interest rate.12 The value of standing trees over twice the standard final cutting age is estimated based on expert opinions.<sup>13</sup>

The standard value of the standard final cutting age changes based on the actual stumpage price. The example in Figure 1 is based on the standard value at the standard final cutting age in the Yoshino forestry area of Nara Prefecture, under the jurisdiction of the Osaka Regional Tax Bureau, a representative privately owned traditional forestry area in Japan. The standard value at the standard final cutting age in this area is shown in Figure 2. Over the past 20 years, the value has decreased, although this decreasing trend recently stopped.<sup>14</sup>

Table 2 shows the standard values per ha at the standard final cutting age in 1999 and 2016. The standard values decreased in all forestry areas. The value in the Yoshino forestry area, used in the example of Figure 1, decreased at a rate of 82.5%, showing the maximum decrease.

As a result of a number of changes, including the standard value of standing trees at the standard final cutting age, the value of standing trees has decreased in recent years.

#### 3.3. Measures to reduce the forest inheritance tax

After evaluating forested land and standing trees, several tax reductions are available. If the forest is specified as a protected forest under the Forest Act (Act No. 249 of 1951), the value of the forest land and standing trees is reduced by 30–80% according to the cutting method allowed (Table 3). In forests where cutting activities are completely prohibited, the reduction rate is 80%. If a forest falls under a forest management plan in the Forest Act, a 5% reduction has been

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Table 2. Standard value at the standard final cutting age of C. japonica.

A 15% reduction is applied to the evaluation value of standing trees. For example, if an inheritor takes possession of a 20-year-old plantation forest and sells the forest when the trees are 50 years old, the forest income tax on 50-year-old trees will be applied. However, because the forest was inherited, ancestor(s) owned from the planting year until they were 20 years old. Thus, the 15% reduction rule16 was introduced for standing trees across the board to cancel out

Category Rate (%) Clear cutting 30 Selective cutting 50 Single tree selective cutting 70 Cutting is prohibited 80

15The forest management plan in the Forest Act changed in the fiscal year of 2012. In the former system, the total area under the forest management plan was generally high, for example, around 75% in 1997. However, the percentage of forest under the new forest management plan decreased. Correspondingly, the area of forest eligible for the 5% reduction

16The rule was introduced to the Inheritance Tax Act (Act No. 73 of 1950) in the amendment of 1954 ([12], p. 3).

applied to the evaluation values of the forest land and standing trees since 2002.<sup>15</sup>

Source: National Tax Agency.

Table 3. Value reduction rate of protected forests.

rule decreased.

future income tax related to the first 20 years of ownership by ancestor(s).

Figure 2. The standard value of standing trees at the standard final cutting age. Source: National Tax Agency. Note: Example in the Yoshino forestry area. As data are lacking for 2002, values for 2002 are the same as those for the previous year.

<sup>12</sup>In the example in Figure 1, the standard values per ha at the standard final cutting age, 60 years, in 2001 and 2005 were 2,500,000 and 480,000 yen, respectively. Calculated from the 2% compound interest rate until two times the standard final cutting age, the value of a 120-year-old tree would be 8,203,000 and 1,575,000 yen, respectively.

<sup>13</sup>This rule is based on the circular notice from the Director General of the National Tax Agency.

<sup>14</sup>Some individuals who elected to postpone payment of the forest inheritance tax expressed their opinion on the reduction of the payment related to the decrease in the standing value because both the stumpage price and standard value at the standard final cutting age decreased ([13], p. 128).


Table 2. Standard value at the standard final cutting age of C. japonica.

the forest land and standing trees is reduced by 30–80% according to the cutting method allowed (Table 3). In forests where cutting activities are completely prohibited, the reduction rate is 80%.

If a forest falls under a forest management plan in the Forest Act, a 5% reduction has been applied to the evaluation values of the forest land and standing trees since 2002.<sup>15</sup>

A 15% reduction is applied to the evaluation value of standing trees. For example, if an inheritor takes possession of a 20-year-old plantation forest and sells the forest when the trees are 50 years old, the forest income tax on 50-year-old trees will be applied. However, because the forest was inherited, ancestor(s) owned from the planting year until they were 20 years old. Thus, the 15% reduction rule16 was introduced for standing trees across the board to cancel out future income tax related to the first 20 years of ownership by ancestor(s).


Table 3. Value reduction rate of protected forests.

based on a 2% compound interest rate.12 The value of standing trees over twice the standard

The standard value of the standard final cutting age changes based on the actual stumpage price. The example in Figure 1 is based on the standard value at the standard final cutting age in the Yoshino forestry area of Nara Prefecture, under the jurisdiction of the Osaka Regional Tax Bureau, a representative privately owned traditional forestry area in Japan. The standard value at the standard final cutting age in this area is shown in Figure 2. Over the past 20 years,

Table 2 shows the standard values per ha at the standard final cutting age in 1999 and 2016. The standard values decreased in all forestry areas. The value in the Yoshino forestry area, used in the example of Figure 1, decreased at a rate of 82.5%, showing the maximum decrease. As a result of a number of changes, including the standard value of standing trees at the

After evaluating forested land and standing trees, several tax reductions are available. If the forest is specified as a protected forest under the Forest Act (Act No. 249 of 1951), the value of

Figure 2. The standard value of standing trees at the standard final cutting age. Source: National Tax Agency. Note: Example in the Yoshino forestry area. As data are lacking for 2002, values for 2002 are the same as those for the previous

In the example in Figure 1, the standard values per ha at the standard final cutting age, 60 years, in 2001 and 2005 were 2,500,000 and 480,000 yen, respectively. Calculated from the 2% compound interest rate until two times the standard final

Some individuals who elected to postpone payment of the forest inheritance tax expressed their opinion on the reduction of the payment related to the decrease in the standing value because both the stumpage price and standard value at the

cutting age, the value of a 120-year-old tree would be 8,203,000 and 1,575,000 yen, respectively.

This rule is based on the circular notice from the Director General of the National Tax Agency.

standard final cutting age decreased ([13], p. 128).

standard final cutting age, the value of standing trees has decreased in recent years.

the value has decreased, although this decreasing trend recently stopped.<sup>14</sup>

final cutting age is estimated based on expert opinions.<sup>13</sup>

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3.3. Measures to reduce the forest inheritance tax

year.

12

13

14

<sup>15</sup>The forest management plan in the Forest Act changed in the fiscal year of 2012. In the former system, the total area under the forest management plan was generally high, for example, around 75% in 1997. However, the percentage of forest under the new forest management plan decreased. Correspondingly, the area of forest eligible for the 5% reduction rule decreased.

<sup>16</sup>The rule was introduced to the Inheritance Tax Act (Act No. 73 of 1950) in the amendment of 1954 ([12], p. 3).
