Japanese Policy Panel Calls For Corporate Tax Cut

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

21 May 2008

A key Japanese economic policy panel has urged the Japanese government to cut the rate of corporate tax and relax foreign investment restrictions to prevent a slide in the nation's business competitiveness.

In its recently completed report on the Japanese investment environment, the panel noted that Japan's corporate tax, at almost 40%, remains the highest in the thirty-member Organisation for Economic Cooperation and Development (OECD), and stands as a major hurdle to investment.

The report, which was due to be submitted to the government on Tuesday, also implored the government to remove legal and tax barriers that prevent higher levels of foreign investment in Japan, for example by clarifying and simplifying M&A rules.

Current law allows domestic firms to adopt defensive measures such as a so-called "poison pill" to prevent foreign takeovers. This tactic was recently upheld by the Japanese Supreme Court in the case of sauce maker Bull-Dog, which was the subject of a takeover bid from US hedge fund Steel Partners.

The report also highlighted laws which prevent foreign investment in certain enterprises on grounds of national defence as damaging to interests of the economy. Such laws were recently invoked when the British hedge fund The Children's Investment Fund Management (TCI) recently attempted to double its stake in Electric Power Development Co. (also known as J-Power).

According to data compiled by the OECD, Japan lags way behind its major competitors in terms of attracting foreign investment, with FDI accounting for just 3% of its GDP last year, compared with almost 45% in the UK, 33% in France and 13.5% in the US at the end of 2006.

The Japanese government is aiming to boost FDI as a percentage of the economy to 5% by the end of 2010, and has charged the council, which was launched in January, with studying ways in which foreign investment can be boosted.

The panel's chairman, Haruo Shimada, the president of Chiba University of Commerce near Tokyo, believes that some of the proposals could be incorporated in the government's next set of annual policy guidelines, due to be compiled next month.

But with the government heavily in debt and looking at ways to raise rather than cut revenues, it remains doubtful that a cut in corporate tax will feature highly on its agenda.

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