For our clients

Japanese Government Bond (JGB) Tax Exemption Scheme

October 2001

Global Securities Services Division

TABLE OF CONTENTS 1. Introduction (History/Background)…………………………………………………………………..page 3

2. QFI scheme…………………………………………………………………………………………….…page 5

3. JGB’S Transfer from Recorded Form to Book-entry form……………………………………….page 10

4. Operational Procedures for A/C opening and depositing JGB’s in Book-Entry form………page 11

5. Matching and Settlement instructions for JGB’s in Book-Entry form…………………………page 15

6. Eligibility of UK Pension Fund ..……………………………………………………………………...page 17

7. Tax Adjustment for JGBs in BOJ Net Furiketsu system…………………………….……………page 19

ATTACHMENTS A) FIP Procedure (Released by BOJ) B) Withholding Tax Exemption Scheme for Interest on Japanese Government Bonds (JGBs)

held by Nonresident Investors (Released by MOF) C) Regulations concerning the JGB Book-entry System as of April 2, 2001 (English translation

released by BOJ) D) Statement of the Holding Period E) Application Form for Income Tax Convention F) Power of Attorney

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1. Introduction (History/Background) (1) <The old JGB Book-entry system> ------------1999 To promote international use of Yen, withholding tax-exemption of Japanese Government Bonds had been investigated for a long time. In 1999, tax law was revised and it enabled non-resident who is a final-investor of JGB to enjoy tax-exemption. Bank of Japan has established the rule of JGB Book-entry (Furiketsu-Kitei)

A/JGBs

Depository

Bank of Japan

A/JGBs

Participant

BTM Final Investor

Customer (2) <The abolish of “Clean Bond”>----------2000-2001 As from the coupon calculation period starting on and after 1 January 2001, the tax exemption for JGB’s recorded in the name of Designated Financial Institutions (DFI’s), such as Banks, Securities Companies etc in Japan has been abolished. All the JGB’s recorded in D subject to withholding tax (dirty) with regard to the coupons of which the calculation period start on and after 1 Janu

FI’s are

ary 2001

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(3) <The new scheme under the JGB Book-entry system>----April 2001 The Special Taxation Measures Law has been revised and the scheme of Tax-exemption for Non-resident has launched as of April 1st 2001. Ministry of Finance has established new tax scheme which enables foreign investors using global custodians to enjoy the tax exemption for JGB coupons through Qualified Foreign Intermediary (QFI).

Global Custodian As FIP (QFI)

A/JGBs

Bank of Japan

A/JGBs

A/

BTM Final Investor

JGBs

Depository P rticipant I. Foreign Indirect Customer

New status has been established

a

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2. QFI scheme A. The New structure “overview” The status of Qualified Foreign Intermediary (QFI) has been introduced in the current withholding tax exemption scheme for nonresident investors in order to further increase foreign holdings of Japanese Government Bonds (JGBs). The exemption will apply to interest payments on JGBs deposited by non-resident investors in the Bank of Japan (BOJ) book-entry system via specified foreign branches of QFIs. The QFI applicant must be Foreign Indirect Participant (FIP) of BOJ Book-entry System.

B Schedule I. Authority II. BTM III. Applicant 1 2 3

FIP Pre-applicat

FIP Formal-application

QFI Application

A/C Opening With BTM

Depositing JGBs via BOJ Net

Coupon payment Tax-reclaim(if any)

Through BTM

Nihonbashi Tax-office Bank of Japan

Preparing Application form for withholding tax exemption andStatement of the Holding Period. (Please see Page 6)

Final investor

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C. Requirement in each procedure (1) FIP pre-application 1.FIP pre-application, Additional information, the copy of Bank license of applicant(if the applicant does not have banking license in Japan), are submitted. After BOJ’s examination, you will be required to commit submitting Legal opinion in draft basis, and will be notified pre-approval from BOJ.

Bank of Japan

Notice of FIP-approval

Question, if any(*)

Global Custodian

FIP-Application & Additional Info. Legal Opinion(draft)

Through BTM

Submit by e-mail (*)If you receive several inquiries from BOJ, you must answer them to obtain FIP pre-approval. (2) FIP Formal Application

Global Custodian

Formal Form by mail(**)

Sign and Send by mail

Through BTM

FIP-Formal Application Representative Legal Opinion(***)

Bank of Japan

(**)If GC has office in Japan, who is authorized to sign on behalf of head office, he/she can sign on the documents. (***).In exchange for the notice of FIP approval, representative is required to sign Representation & formal applications written in Japanese, Notarization, and Legal opinion.

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Legal Opinion; BOJ requests Legal Opinion about Representation. No sample document is provided with regard to the legal opinion. According to information available, BOJ request Legal Opinion regarding the effectiveness of Representation. BOJ would like to confirm the following points; --The consent in article 2 is valid under the law of the jurisdiction where applicant is located. --The consent in article 3 is valid under the any law that governs the rights of customers redepositing with the BOJ in respect of Japanese Government Securities.

3. QFI Application A foreign financial intermediary is required to obtain approval from the Nihombashi Tax Office. For approval, it must be:

--a custodian conducting JGB deposit operations --a resident corporation of a contracting state of a tax treaty wi an article of exchange of information, with which Japan is a treaty partner. (Therefore, Non-tax treaty or Non article of exch ge of information, such as Hong Kong Switzerland, cannot apply for QFI . On the other hand, they can apply for FIP.) To obtain approval for a QFI status, a foreign financial in rmediary is required to submit an application form to the

Nihombashi tax office via the BOJ. (The applicant must be FIP before applying to QFI. On QFI app ation, BOJ’s certification of FIP approval is needed.) Sub-custodian in Japan can complete QFI application on be lf of applicant by Power of Attorney from the applicant.

Power of Attorney

Bank of Japan

Global Custodian

Sign and Send mail QFI

Application

Through BTM

Nihonbashi Tax office

QFI Applicatio

Question, if any(*)

Cert of FIP

Notes: Required Information for QFI application 1. Details of permanent establishment(Branch, office) in Japan : if you ve plural offices in Japan, all names and addresses are required. 2. Contact Person in Japan : If you appoint plural sub-custodian, only gle name should be filled in.

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D. Apply for Tax-exemption Application form for withholding tax Exemption

A non resident investor is required to submit to the Nihonbashi tax office via a QFI and its sub-custodian an application form for withholding tax exemption for JGB interest when it deposits its JGBs in the BOJ book-entry system via specified foreign branches of a QFI. This application should be accepted by the tax office, but no “approval” procedure is conducted by the tax office. Statement of the Holding Period

A nonresident investor is required to submit to the Nihonbashi tax office via a QFI its sub-custodian a statement of the holding period of a JGB by one day before it receives JGB interest. Currently, the law requires the investor to submit this form, and it is not yet confirmed if direct participant (Sub-custodian) which does not have direct relationship with the investor can make this statement on their behalf. E. Know your customer –Identification A nonresident investor that submits an application form for withholding tax exemption is also required to submit an identification document1 to a specified foreign branch of a QFI. The specified foreign branch of the QFI is required to identify the name and address in the application form as those in the identification document.

1.Identification documents------ (to be kept at a specified foreign branch of a QFI)--- either of the followings: (a) certified copy of a register (b) certificate for tax payment receipts (c) other "official document" issued by a government office.

All should be within 6 months from the issuance date.

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3. JGB’S Transfer from Recorded Form to Book-entry form Changing form from JGB Letter of Transfer form (Touroku-sai) to JGB Book-entry form (Furiketsu-sai) *Only on or the next payment day of coupon payment date, possible to transfer from “taxable A/C” to “Non-taxable A/C”.

Register to change dirty

FIP approval QFI approval Coupon Payment date

Tax reclamation Transfer from “taxableA/C” to “Non-taxableA/C”

Remarks

L/T form

Dirty

Sell Dirty and buyFuriketsu and deposit them into‘taxable A/C”

Keep hold

Keep holding JGBs

Keep holding JGBsaxable A/C”(*)

Sell Clean and buyFuriketsu and depositthem into “Non-taxableA/C”

Dirty and buyketsu and deposit into

“Non-taxable A/C”

Tax reclamation Transfer from “taxableA/C” to “Non-taxableA/C”

Enjoying tax-exemption

Enjoying tax-exemption

It would berecommendable.

Demerit: Operational work for QFI.

It would be recommendable.

C

Keep holding JGBsin “taxable A/C”(*)

Holding Clear/Dirty

Sell Clean and buyFuriketsu and depositthem into ‘ta ”

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it is

in “t

SellFurithem

lean

ing JGBs

xable A/C

4. Operational Procedures for A/C opening and depositing JGB’s in Book-Entry form (1) Account Opening

Necessary information for account opening are as follows: a. Account name

-If you are the final investor, account name will be your name (A). -If you (A) are the QFI with direct relationship with the final investor (B), account name will be A for B. -If you (A) are the QFI with another QFI (C) between the final investor (B), account name will be A for B QFI C Please note that due to our system restriction, length of the account name is limited to 60 characters.

Please abbreviate where necessary. b. Registration Name and Address

-Full name and address of the final investor. This must be exactly the same as the name and address on ‘Application Form for Withholding Tax-Exemption’ Abbreviation is not acceptable. -P.O. Box is not acceptable for the address. -Address must include the country name.

c. QFI’s name and address

-If there is one QFI between yourselves and the final investor, the full name and address of the QFI. -If there are two or more QFI’s between yourselves and the final investor, the full name and address of the QFI who has direct relationship with the final investor.

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d. Tax Status -Whether the client is a taxable client or tax-exempt client. In case of tax-exempt clients, we need to receive the application form for withholding tax exemption at the time of account opening. (transmission of the copy of the application by fax is acceptable.) -Whether tax treaty between the country of the final investor and Japan should be applied, in case the account holds taxable bonds. (both taxable and tax-exempt clients)

e. Permanent Establishment in Japan

If the final investor has a permanent establishment in Japan, the name and address of the establishment. f. Standing Instruction

-If there is any standing instruction to be set up. -If standing instructions are same as other existing accounts.

g. Eligibility for book entry

Please indicate that the eligibility of the final investor to deposit JGB’s into book entry has been properly confirmed by yourselves as FIP. Example: ‘We have confirmed the client’s eligibility to deposit into book entry based on BOJ’s clarification outlining how the eligibility of foreign investor to hold or settle in book entry should be enterpreted. That is the client is an entity that is regarded as having legal status under the laws of its country of domicile.’

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(2) Depositing your holdings into book entry

- Please send us an MT52x when instructing us to deposit your holdings of recorded bonds into book entry. (MT522 for delivery from your LT account and MT520 for receipt into your Book entry account.) Only JGB’s that are recorded in your name at BOJ can be deposited into book entry. (Street name bonds must be first registered. If you do not hold an account with BOJ, it is not possible to register JGB or to deposit them into book entry. It is suggested that you contact your broker to sell your street name holdings and buy back book entry JGB’s.)

- When the final investor is a taxable client, JGB’s can only be deposited into ‘Taxable Account’ at Bank of Japan. - In order for the coupon on JGB to be tax-exempt , they must be deposited into book entry on coupon date or the

day after the coupon payment date. Therefore, we ask you to send us your instructions for deposit based on the coupon dates, for example, please instruct us to deposit your holdings of September coupon bonds on 20th September, and October coupon bonds on 20th October, and so on.

- If deposited on any other dates, JGB’s can only be deposited into ‘Temporary Taxable account’ at BOJ, even if the final investor is a tax-exempt client. They will remain taxable (dirty) position until the next coupon payment date.

- JGB’s in ‘Temporary Taxable account’ with BOJ are automatically transferred to ‘Tax Exempt Account with BOJ’ on the coupon date. Under BTM’s system the status of the holdings are automatically changed from taxable to non-taxable.

If you have segregated accounts for your taxable holdings and non-taxable holdings, MT52x is necessary, when transferring your position between these accounts .

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(3) Application form for WithholdingTax-Exemption - Tax-Exemption starts from the day QFI accepts the Application form from the final investor, or from the day QFI

completes the form on behalf of the client. We must transfer the holdings from taxable account to non-taxable on the same day, so that we can recognize the client as tax-exempt. Therefore, it is very important that you inform us on the same day you confirm their eligibility.

- When your account was opened by a taxable client, and is later confirmed as tax-exempt, it is necessary that you inform us by SWIFT or Fax on the day you have confirmed their eligibility for tax-exemption. Please send us the original application immediately after you have checked them. We must transfer the holdings from taxable account to non-taxable on the same day, so that we can recognize the client as tax-exempt. Therefore, it is very important that you inform us on the same day you confirm their eligibility.

- We must present ‘Application form for withholding tax-exemption’ to the Nihombashi Tax Office through Bank of Japan by 15th of the month after the first deposit of JGB into the investor’s account. (Deposit can be by deposit of recorded bonds or by purchase or receipt through book entry.)

(4) Report on Change of name or address of the final investor

-When there is a change In the name or address of the final investor, for whom you have presented the ‘Application form for withholding tax Exemption’, it is necessary to complete a ‘Report on the change in application form for withholding tax exemption’. (The English form has not yet been released.) -Please send us MT599 amending the final investor name, confirming that you will send us the form immediately.

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5. Matching and Settlement instructions for JGB’s in Book-Entry form (1) Settlement Instruction for Book entry JGB’s

It is necessary to match the final investor’s names. Following information is necessary in your instruction (MT52X). a. Final Investor depositing JGB’s to a QFI on your side As segregated accounts are opened for final investor, this information is not necessary on MT52x. When

segregated accounts are not opened, the name or any other specific code of the final investor on your side must be present at Tag72 in your instruction MT52x.

b. Final Investor depositing JGBs to a QFI on your counter party side When there is a final investor depositing JGB’s to a QFI on your counter party side, the name or any other specific

code of the final investor on your counter side must be present at Tag72 in your instructions by MT52x. c. Dirty or Clean When you wish to override the default tax status in particular transaction, the indication of Dirty or Clean must be

present at Tag 72 in your instruction MT52x. Even if you put the additional information listed above, such information are not present in our confirmation.

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(2) Market practice in Japan Items to be matched at the pre-settlement matching between sub-custodians are as follows a. Issue of JGB b. Face Amount c. Settlement Amount d. Settlement Date e. Form of JGB <Book-entry form (Furiketsu) or Registered form (LT) >

f . Method of Cash Settlement < DVP or Non-DVP> g. Tax Status <Clean or Dirty> h. Direct Client of Delivering Sub-custodian

i. Direct Client of Receiving Sub-custodian j. Final Investor on Delivering Side (seller) * k. Final Investor on Receiving Side (buyer) * * In case the provisions of Article 5-2 of the Special Taxation Measures Law is applicable to a final investor depositing JGBs

to a QFI , these items must be matched.

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6. Eligibility of UK Pension Fund There was a verbal disclosure (note: no written explanation) from the National Tax Administration Agency (NTA) in May 2001 regarding the treatment of Pension Fund in the United Kingdom (UK The explanation from NTA as follows.

Pension Fund in UK is categorized mainly into (1) Pension Fund with Trust Structure, and (2) Pension Fund with Life Insurance Structure, among which (1) shares the majority. The necessary condition for such (1) Pension Fund with Trust Structure to be eligible for tax exemption under the QFI scheme shall be: (a) Necessary documents (Application Form for Withholding Tax Exemption, Statement of Holding Period and the other

taxation documents if any) shall be made and submitted in the name of the Sponsor which established the Fund, not the name of Fund.

(b) Identification documents shall be for the Sponsor, not for the Fund. (c) The Fund must be "a pension fund approved to obtain exempts from tax on the income and capital gains form the

fund's investments" by Pension Schemes Office (PSO) of Inland Revenue. (d) To fill in "Remarks" of the Application Form that "The Fund is approved to obtain exempts from tax on the income and

capital gains form the fund's investments by PSO", and to attach the Certificate issued by PSO. For such (1) Pension Fund with Trust Structure, as up above, the name of Sponsor is required for taxation documents, whereas the bookkeeping of records and investor-by-investor information with BOJ Net is required to be managed in the name of the Fund (opinion from BOJ). Accordingly, for this same investor, the subject in terms of taxation is "the Sponsor", although the JGB owner is recognized as "the Fund".

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As for (2) Pension Fund with Life Insurance Structure, the "Life Insurance Company" with which the Sponsor has life insurance contract shall be the taxation subject as well as the JGB owner. Accordingly, the procedure shall be as same as for the other foreign institutions. (Documents shall be in the name of the Life Insurance Company.) For Unit Trust in UK, still the opinion appears not yet uniformed within Tax Bureau of MOF and NTA, and it seems to have another certain terms until their final treatment becomes definite and settled.

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7. Tax Adjustment for JGBs in BOJ Net Book-entry system

(1) Required documents for Tax Adjustment I. Statement of the Holding Period (attachment)

To be exempted from15% (or 10%) withholding tax during the period deposited with Non-taxable account with BOJ Net.

II. Application form for Income Tax Convention (attachment) For treaty clients (to whom double taxation treaty is applicable) to enjoy 5% withholding tax reduction (or other rate according to its treaty) during the whole calculation period of holding JGBs (regardless of LT or Furiketsu).

[Example] JGB that pays interest semiannually (June 20 & December 20) The client that holds that JGB in LT form on June 20. The client gives instruction to deposit the bonds on August 10 to the taxable account. (under Classification

"Account without Classifications"). On November 20, QFI determines the eligibility of the client for tax exemption and completes the application form

for withholding tax exemption, to be deposited with the taxable account. (under Classification "Nonresident etc. Account")

On December 20, QFI instructs BTM to deposit the bonds to the non-taxable account. . (under Classification "Nonresident etc. Account")

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[Possible Reclamation] (1) For the period between November 20 and December 20, the client may be exempted from 15% withholding tax,

PROVIDED THAT the client (or QFI) submits “Statement of the Holding Period”. (2) On the premise that double taxation treaty is applicable to the client, the client may enjoy reduced tax rate of 5%

(15% - 10%) for the period between June 21 and December 20 (or November 19), PROVIDED THAT "Application Form for Income Tax Convention" is submitted (1) by the client, or (2)by QFI. In case of (2), QFI should attach a copy of Power of Attorney (*) or Custody Agreement between QFI and the client with its Japanese translation.

(*) Sample of Power of Attorney (PoA) and its Japanese translation is as attached. This PoA is required to be prepared by the first time of coupon payment. Once prepared, the copy of PoA is enough to be attached for future coupon payments and there is no need to obtain PoA every time of coupon payment.

(interest amount) 100%

15%

(2) 10% (1)

0%

(LT) Taxable (A) A/C

Taxable (B) A/C

Non- Taxable A/C (Date)

Jun-20 Aug-10 Nov -20 Dec -20

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(1) “Statement of the Holding Period” applicable for the period held with non-taxable account with BOJ Net. [Blue Part] (2) “Application form for Income Tax Convention”, if arranged properly, applicable throughout the interest calculation period

including the period held in LT form (not deposited with BOJ Net). [Yellow Part]

[note] (1) In the above example, BTM as a sub custodian must receive transfer instruction on November 20, to transfer between Taxable Accounts. From (A) Taxable Account under Classification "Account without Classifications" (Taxable A/C for taxable clients) Into (B) Taxable Account under Classification "Nonresident etc. Account" (Taxable A/C for clients who is eligible for tax exemption, to hold temporal taxable JGBs until the next coupon date.)

Therefore, when condition is arranged for the client to enjoy tax exemption, QFI will be required to complete and send us the Application Form for Withholding Tax Exemption, as well as to give us an instruction to transfer the related JGBs from Taxable Account (A) to Taxable Account (B).

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(3) Tax Adjustment Procedure

Date ActionCPD-3 Entitlement is fixed as of the closing balance of this date.

(Last possible settlement date.) CPD-2 This is the starting date of suspension period.

Book-transfer of Furiketsu JGB has been suspended as from this date. CPD (Coupon Payment Date)

Interest of JGBs is credited with net of withholding tax. 15% withholding tax is automatically deducted by BOJ for JGB’s in Taxable Account.

CPD-2 - CPD+7

FIP clients send either “Statement of the Holding Period” (for tax exempt clients) or “Application Form for Income Tax Convention” (for treaty taxable clients) to BTM. Upon receipt, BTM produces necessary Application Forms for tax adjustment. As BTM needs some proceeding time to check your Statement and prepare for Application Forms, we consider it necessary for us to receive your Statement by CPD+5 at latest for the time being, to be in time for the deadline of X+7.

CPD+7 This is the last day BOJ accepts the Application Form for tax adjustment.

Several days after the request date.

Adjusted (reclaimed) tax amount (i.e. 15% of interest for tax exempt clients or 5% for treaty taxable clients) is credited to BTM from BOJ. Upon receipt, BTM credits the amount to FIP cash account.

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(4) Statement of the Holding Period (1) Role of the Statement It is the required condition to be eligible for tax exemption to complete and submit "the Statement of the Holding

Period". (hereafter "the Statement") Only for the period mentioned in the Statement can be the period to enjoy tax exemption. (Without submitting the

Statement by one day prior to the interest payment date, interest will be taxable.) It is initially the responsibility of final beneficiary to make this Statement, but QFI, which has a direct custodial

relationship with the client, can make it on their behalf. The Statement shall be completed only for JGBs toward which Article 5-2 of the Special Taxation Measures Law shall

be applied, i.e. only for JGBs which can enjoy tax exemption. (Accordingly, it is not necessary to complete the Statement for JGB that is held in Taxable account by Taxable clients, i.e. during the period when JGB is in (A) Taxable Account under Classification "Account without Classifications")

(2) The first day of holding period "Aggregating the holding periods", i.e. to sum up the former holder's holding period with the new holder's period, is

admitted in case the receiving agent is notified of the holding period of the former owner by document at the time of settlement by the delivering agent.

For JGBs in non-taxable account with BOJ net, it is stipulated in BOJ Furiketsu Rules that the documents output from the device of BOJ net system at the receiving agent at the time of settlement can be treated as above notification, so in practice all the holding period of former owners is aggregated automatically and the last holder as of the coupon payment date can enjoy tax exemption on the whole coupon calculation period.

(Since it is not admitted to deposit taxable JGB into non-taxable account during

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the interest calculation period, JGBs in non-taxable account must be held and traded between non-taxable clients throughout the period.)

For JGBs in taxable account with BOJ net, if we receive above notification from our counterparty on the specific transaction, we inform you of “the first date of holding period “after aggregation in our confirmation (MT52x).

In case there is no aggregation, the actual settlement date (the date when the client purchases the JGB in BOJ Net) is recognized as "the first day of holding period".

[Note]

I. For JGBs in non-taxable account, “the first day” shall be “the first day of coupon calculation period (i.e. next day of previous interest payment date)”, since holding period of all the former owners in that calculation period is aggregated for non- taxable account and the client can enjoy tax exemption throughout the period.

II. For JGBs in taxable account, it may happen that there exists multiple "first day"s for the same line of JGB. (For example, if the client purchases JPY 2 million JGB on July 1, then re-purchase

JPY 1 million JGB on August 1.) In such case, the Statement shall reflect each 2 lines of purchases indicating both purchase days as “the first day”.

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