Japan’s ruling coalition has approved a tax reform plan that cuts corporate taxes beginning in April next year and pledges further reductions in coming years in a bid by Japanese Prime Minister Shinzo Abe to boost profitability and bolster economic growth.
The plan approved by Abe’s Liberal Democratic Party and its coalition partner Komeito on Tuesday would cut the overall effective corporate tax rate by 2.51 percentage points to 32.1 percent beginning in April and to 31.3 percent the following year.
Abe pledged in June to lower the corporate tax rate to below 30 percent over the coming years, intending to help pull Japan out of nearly two decades of deflation. Earlier this year, he eliminated a levy on companies imposed in 2012 to help fund disaster relief.
Photo: Reuters
Takeshi Noda, chairman of the LDP’s tax panel, estimated that the corporate tax cut would amount to about ￥400 billion (US$3.32 billion) over the next two fiscal years.
Abe hopes the tax cuts will encourage companies to raise wages, which would spur consumer spending, and to invest some of the US$1.9 trillion in cash held by companies outside the financial sector.
Japan’s top effective corporate tax rate is 34.6 percent, among the highest among major economies. The average corporate tax rate stands at about 25 percent among Organisation for Economic Co-operation and Development economies.
However, after a decade of slow growth, just about 30 percent of companies actually pay taxes. The rest are either unprofitable or have been able to apply credits from prior losses.
In a change aimed at broadening the tax base, established companies would be able to apply losses to write off only half of reported income beginning 2017. That limit is currently 80 percent.
The ruling coalition estimates that it will be budget-neutral in the third year, as steps such as broadening the tax base are expected to help cover shortfalls caused by diminished tax revenues.
“The focus is whether companies will pass funds arising from the tax cuts to capital spending and wage increases, which will lead to economic recovery,” Daiwa Institute of Research economist Satoshi Osanai said. “We think it will be difficult to achieve budget neutrality in the third year. And in a long-term perspective, it will be an issue how the government will secure revenues and manage fiscal reconstruction.”
Japan’s economy unexpectedly slipped into recession this year after an increase in the national sales tax in April hit consumer spending.
The tax plan recommits to a further increase in that consumption tax to 10 percent beginning in 2017.
It also expands the Nippon Individual Saving Account program launched earlier this year, which allows individual investors to invest up to ￥5 million in stocks without being subject to taxes.
The changes will allow larger annual investments and allow for investments on behalf of children. There were 7 million such accounts as of June.
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