Japan To Eliminate Business-Friendly Tax Incentives

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

01 October 2001

The Liberal Democratic Party's Tax System Research Commission, which is known to have been reluctant to discuss a review of the securities-related taxation system in order to boost the stock market on the grounds that it is to revise the overall taxation system next year, has nonetheless bestirred itself to plan the abolition of a raft of business-related tax incentives.

The reason appears to be that the government has committed itself to keeping the issuance of bonds below 30 trillion yen in fiscal 2002, and must therefore find new sources of revenue if it is to be able to afford the massive support packages it is offering to the stricken banking sector.

According to the Yomiuri Shimbun, the Commission has approved a government plan to eliminate or reduce 79 corporate tax-related incentives, which are estimated to have resulted in a total of 490 billion yen in tax deductions in fiscal 2001.

The newspaper says that government offices and lawmakers lobbying for the interests of particular industries and groups are expected to strongly oppose the plan, possibly making it difficult for the special tax incentive reduction plan to come through.

Guidelines issued by the Commission target the following incentives:

• those for policies that are not effectively functioning and whose purposes are no longer clear due to economic and social changes since their introduction;
• those that are not effectively used and most likely will not be used;
• those that have long functioned to protect assets of specific industries and companies;
• those that generate significant tax deductions.

That would be funny if it weren't sad. Tax incentives are there to minimise tax, and the more they achieve their goals, presumably the more successful they have been in helping business. Worse yet, the Finance Ministry has compiled a report of tax deductions resulted from such incentives in fiscal 2001, showing that the incentive which generated the largest tax deduction (of 145 billion yen) was aimed to stimulate investments by small and medium-sized companies. Runner-up is a deduction designed to stimulate investment by small and medium-sized firms in new technologies, which is estimated to have resulted in 57 billion yen in tax deductions.

All this to save the banks, who are largely to blame for Japan's woes in the first place. Perhaps it's not yet time to buy the Nikkei.

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