Japan May Cut Corporate Tax Rate

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

16 December 2010

Japan’s Prime Minister Naoto Kan has decided that a 5% reduction to the country’s corporate tax rate should be included in his government’s tax proposals for the next fiscal year starting on April 1.

A cut in the corporate tax rate, to make it more comparable with competitors, has been in the government’s sights for some time. Its tax commission, which is headed by Finance Minister Yoshihiko Noda, has been focusing on ways of reducing the high Japanese corporate tax rate of close to 40% to an effective rate of 25-30% within five years, aiming to be competitive with China, Korea and other countries in the Asia region.

It is also thought that such a policy would be an effective way to increase investment and revive Japanese economic activity, and it is for that reason that Kan has said that he has now ordered that the proposed 5% corporate tax reduction should definitely be included in the government’s 2011 tax package, which should be announced in the next few days.

However, Kan made no mention of how such a tax cut, the reduction of revenue from which would be at least JPY1 trillion (USD12bn), would be financed; as it would have to be, given the present size of Japan’s fiscal deficit and public debt.

There still appears to be a split in views between the government and the ruling Democratic Party of Japan (DPJ). While the latter agrees that corporate tax cuts are necessary in Japan, it disagrees with other countervailing measures being considered by the government. In particular, the DPJ opposes reduced income tax deductions and the removal of the tax exemption on naptha, and believes that, if too much of the fiscal effect of the corporate tax cut is taken away through other measures, the recovery of economic growth will also be reduced.

The business sector, itself, has also been less than effusive about the 5% rate cut, saying that it is only a first step in the right direction and that further reductions, plus tax incentives for research and development, will be necessary.

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