Japanese Tax Panel Finalises Tax Package

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

29 September 2011

The tax committee of the ruling Democratic Party of Japan (DPJ) has, after a prolonged discussion, agreed its proposals for taxation increases, to be presented to the opposition parties and then parliament, for the financing of reconstruction costs in the earthquake and tsunami-hit north-east of Japan.

Previous policies recommended, earlier this month, by a government tax panel, for funding the further JPY11.2 trillion (USD146.5bn) reconstruction budget planned for mid-October, envisaged various tax-raising options – in particular, increases to individual and corporate income tax rates, hikes to excise taxes on tobacco, and/or the raising Japan’s consumption tax rate.

However, Japan’s new Prime Minister Yoshihiko Noda ruled out the option of raising the current 5% consumption tax rate without an electoral mandate. In any case, gradual consumption tax rate rises, probably in the period after the general election due in 2013, have already been allocated as part of the government’s subsequent policy priority to reduce the country’s fiscal deficit and finance increasing welfare costs.

Consequently the DPJ’s tax committee has concentrated on proposals to raise direct taxes within the JPY9.2 trillion it is said they will provide for reconstruction. The government will, initially, issue reconstruction bonds to be repaid from the increased tax revenues.

It is believed that higher individual income tax rates could be implemented for a period of ten years from January 2013. That rise has been delayed from 2012 so as to recognise the concern of some DPJ members that an earlier hike could dampen any nascent economic recovery.

In addition, from April 2012, there would be a three-year corporate surtax, and a tobacco tax rise would start in October next year and last for up to ten years. The package also includes an increase in individual residential tax.

The JPY2 trillion balance of this budget should be obtained from non-tax sources; perhaps from further reductions in government spending, but also from the sale of state-owned assets. Mention has been made, in particular, of the government’s shareholding in Japan Tobacco which, over time, and in addition to public spending cuts, could yield up to JPY7 trillion for the reconstruction effort.

It is hoped that the inclusion of non-tax resources might also make less difficult the upcoming talks with the opposition parties, whose support will be necessary if the budget is to be approved. After those talks, it is planned that the supplementary budget will be presented in parliament for approval by the middle of next month.

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