Rift Over Income Tax Cut Stalls Plans For Economy Package In Japan

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

29 August 2008

Japan has hit a stumbling block in its plans to implement an important economic reform package.

The package, which has been under discussion by Japan's coalition government for some time now, would offer relief to both individuals and businesses struggling to cope with the current high prices of food and fuel.

However, conflict reportedly emerged after the New Komeito party, the junior member of the ruling coalition, campaigned for the introduction of a flat income tax cut to benefit low income earners - an idea not favoured by its Liberal Democratic Party coalition partner.

Natsuo Yamaguchi, the New Komeito policy chief announced, according to Reuters, that:

"We will seek to reach an agreement on this with grave resolution."

Tax has been uppermost in the government's mind for some time now, and last month the country's recently appointed minister for the financial services industry, Toshimitsu Motegi, stated that a cut in corporate tax is vital if Tokyo is to compete with other financial centres such as London and New York for foreign investment.

With a current corporate tax rate of about 40%, Japan has become uncompetitive in tax terms compared with other major trading nations, which, with the exception of the United States, have been cutting corporate taxes in recent years. For example, both Germany and the UK have brought their headline rates below 30%, and the average corporate tax rate across the member states of the OECD now stands in the mid-20s.

Furthermore, Japan is finding itself increasingly marginalised regionally, with the financial hubs of Hong Kong and Singapore continuing to boom thanks in large part to their lighter tax burdens.

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