Tax Panel To Back Japanese Corporate Tax Cut

by Mary Swire, Tax-News.com, Hong Kong

30 May 2014

A panel of tax experts established by Japan's ruling Liberal Democratic Party is expected to accept Prime Minister Shinzo Abe's plan to reduce Japan's corporate tax rate, from about 36 percent, as long as the Government continues to reduce the country's fiscal deficit.

The Government's Tax Commission has recently indicated that Japan's effective corporate tax rate should eventually be reduced to 25 percent, with an initial cut of two to three percent expected to be made next year. It is intended that a more internationally competitive corporate tax rate would immediately encourage investment by both domestic and foreign companies, and thereby boost growth in the economy.

With the LDP's tax panel warning of the effect of such a corporate tax cut on Japan's fiscal situation, the Government has replied by indicating that it would look to broaden the tax base by removing existing tax breaks to cover the consequent fall in tax revenue from a lower rate, and to avoid worsening Japan's fiscal deficit position.

As a consequence, it is now expected that the panel will be prepared to endorse the Government's tax cut in return for the re-confirmation of its target of a primary fiscal balance (not including debt-servicing costs) for Japan in 2020.

In addition, with only some 30 percent of Japanese firms actually paying corporate tax due to previous losses, the panel is thought to be considering a novel recommendation that the country's corporate tax should be changed from a profit-based system to a size-based system. Both profitable and loss-making companies would then pay tax based on factors measuring the scale of their operations, such as the size of their workforce and capital.

It is thought that the size-based tax could increase and then help stabilize tax revenues, mitigating the effect on corporate tax revenues of economic fluctuations.