Japan Mulls Corporate Tax Cut Under 3-Part Tax Reform Proposals

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

09 June 2006

A corporate tax cut could come as early as 2007, and a wider review of the income tax system could follow in 2008, under a plan being considered by the Japanese government's advisory panel on tax reform, according to a national media report.

Nihon Keizai Shimbun reported that the tax panel is mulling a plan to reform Japan's tax system in three phases, the first of which would attempt to stimulate economic activity through lower corporate tax.

Under the second phase, the government would review income tax deductions and seek to lessen the impact of an ageing population on the country's economic resources by exploring new tax incentives designed to encourage families to have more children.

The third stage of the reforms - and likely the most controversial - would include an increase in consumption tax, possibly in 2009.

The last time consumption tax was increased, from 3% to 5% in 1997, Japan fell into a recession which ultimately cost then-Prime Minister Ryutaro Hashimoto his job, and the present government has been reluctant to make the same mistake.

Earlier in the year, economists suggested that a dramatic increase in Japan's consumption tax to help fund the country's growing social security bill will not be necessary if the government concentrates on measures to promote economic growth.

However, the government's fiscal advisors have consistently argued that the consumption tax must be increased, perhaps to 10% or more, if future administrations are to meet the challenges of an ageing society.

The new proposals are to be included in a summary of tax reforms that the tax commission is due to complete later this month, according to the report.

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