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Japan May Cut Corporate Tax

by Mary Swire,, Hong Kong

08 July 2010

Japan’s Prime Minister Naoto Kan has announced his desire to cut corporate tax but to widen the range of companies who pay the full rate. This could threaten the preferential rates paid by some industry sectors. There is already concern over hints that the government will increase sales tax from 5% to 10%.

Japan’s combined corporate tax rate of 40.69% is one of the highest in the G20. The average rate for Organization for Economic Cooperation and Development countries is 26%. Prime Minister Kan’s Democratic Party of Japan (DPJ) would like to reduce corporate tax rates, especially for small and medium-sized businesses.

The Japanese government announced its growth strategy last month, announcing targets of gradually reducing the rate of corporate tax from 40% to 25% and achieving a 3% growth rate. Politically, it is believed that the statement about corporate tax cuts was made to counter fears over the earlier announcement of a possible doubling of the rate of sales tax. But it is far from certain whether the corporate tax cut will actually be carried through.

The high rate of corporate tax does nothing to encourage foreign investment at a time when Japan is competing against neighbours China and South Korea, notably in the construction of nuclear plants and high-speed railway systems.

The Prime Minister’s poll ratings have fallen and the upcoming election is seen as crucial if Mr Kan is to receive clear backing from the electorate to take the measures necessary to boost the economy. He has already said that he would call a lower house election before moving to double sales tax.

TAGS: tax | business | sales tax | tax incentives | corporation tax | small and medium-sized enterprises (SME) | tax rates | Japan

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