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Friday December 1, 4:10 PM FACTBOX-Japan panel's proposals for FY2007/08 tax reforms TOKYO, Dec 1 (Reuters) - The Japanese government's tax panel proposed on Friday ending temporary tax breaks on stock trading, while advocating corporate tax breaks to support the country's pro-growth economic policy. In its tax reform proposals for fiscal 2007/08, the tax panel said preferential tax measures on stocks should end as planned, but it underscored the need to find ways to prevent a rush of selling among investors before the tax breaks are repealed. One measure that cuts the tax rate on capital gains to 10 percent from 20 percent is due to expire at the end of next year, while another that reduces the tax rate on dividends will expire at the end of March 2008. Whether to scrap the two tax breaks, introduced in 2003 to support a faltering stock market, is a politically contentious issue as the powerful ruling party tax panel opposes ending them. Generally, proposals from the Liberal Democratic Party's tax panel compiled later in December become the basis for the final tax reform bills for the next fiscal year. On the separate but key issue of lowering corporate tax rates, the panel said it would analyse the possible impact on employment and individual income through the corporate sector. The panel dodged the contentious issue of consumption tax hikes as expected, saying it would examine how each tax should correspond to changes in Japan's socioeconomic structure. Following are key points in the proposals by the government's tax commission, comprising experts and academics, for the fiscal year that starts in April 2007. DEPRECIATION RULES - The current rules should be revised to allow manufacturers to write off the full amount of their newly acquired assets -- rather than the current 95 percent -- to spur capital investment. Depreciation periods should be shortened for manufacturers' equipment and plant as early as possible so that they can keep pace with technological innovation. (Click on [ID:nT134671] for a related story.) TAXATION ON FINANCIAL INCOME - Preferential measures for capital gains and dividends should be abolished by the end of 2007 and March 2008 respectively, with the following points in mind: - Some scheme needs to be devised to prevent the end of the measures from causing swings in equity markets and to secure the flow of funds from savings to investment. - Measures should be reviewed to enable investors to use stock trading losses to offset profits from other financial products. (Click on [ID:nT103400] for a related story.) TRIANGULAR-MERGER TAX RULES - Appropriate tax measures are needed to reflect the adoption of new merger and acquisition regulations next May. The new M&A regulations allow for triangular mergers, in which a foreign company's Japanese subsidiary uses its parent company's shares to buy a Japanese firm. - Tax deferrals on capital gains should be allowed for triangular mergers. - Steps should be considered to deal with cases where triangular mergers could lead to an erosion of Japanese tax income. For instance, if shareholders of the Japanese target company are nonresident investors and receive shares in a foreign parent company, they will be outside Japan's tax jurisdiction. - Steps should be considered to deal with tax evasion that could be made possible by setting up a paper company in overseas tax havens as a new parent company of a triangular merger. (Click on [ID:nT198606] for a related story.) TAXATION ON START-UPS AND SMALL BUSINESSES - Measures should be considered for individual investors to make flexible use of tax incentives in investing in start-up businesses. - Revision of taxation on retained profits should be considered in view of the need to help small and midsize firms build their capital base as well as to support technological innovation by start-up businesses. ROAD TAX REVENUE - The government should seek agreements by the end of this year on putting revenue from automobile-related taxes -- currently ear-marked for road construction -- to general use, keeping the current tax rates.