CONTINUEThis site uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Find out more.
  1. Front Page
  2. News By Topic
  3. Japan Must Deliver On Sales Tax Pledge, Says IMF

Japan Must Deliver On Sales Tax Pledge, Says IMF

by Mary Swire,, Hong Kong

02 June 2014

Following the conclusion of its 2014 Article IV Consultation with Japan, the International Monetary Fund (IMF) stated that, while the economy is expected to weather well the recent consumption tax increase, greater fiscal reform efforts will be required over the medium term, especially to avoid undermining confidence in the sustainability of government debt.

Japan, the IMF noted, appears to have shrugged off the negative effects of the recent three percent consumption tax increase to eight percent. While preliminary gross domestic product (GDP) data for the first three months of this year suggest that demand ahead of the consumption tax increase was stronger than anticipated, and the consumption payback in the second quarter will lead to a sharp growth contraction, it is expected that the recovery will resume in the second half of the year.

Although the growth aspects of 'Abenomics' are therefore gaining traction, the IMF found that "medium-term risks remain substantial," and said that "fiscal policy can support the recovery by focusing on medium-term sustainability."

In particular, the IMF concluded that "successive consumption tax increases are critical to establish a track record of fiscal discipline."

It said: "The first increase in April was a major achievement and going ahead with the increase to ten percent (in October 2015) would strike the right balance between establishing fiscal policy credibility and preserving the recovery."

If there are valid concerns that the increase next year could harm low-income households, the IMF said that these would be "best addressed through targeted subsidies instead of reducing tax rates on essential items as this would hurt efficiency, increase compliance and administrative costs, and result in permanent revenue losses."

The Government had earlier suggested that it would consider a lower rate or exemptions for certain items next year.

The IMF recommended that further concrete steps to restore debt sustainability will also be required after 2015 as, despite the consecutive consumption tax increases, the gross debt-to-GDP ratio will remain above 240 percent and it has been estimated that fiscal consolidation of at least 10 percent of GDP will be needed over the next decade to put the debt-to-GDP ratio on a downward path.

The necessary steps, it is suggested, "should be as growth friendly and equitable as possible and would allow more near-term flexibility to respond to downside risks."

According to the IMF, such options could include gradually increasing the consumption tax to at least 15 percent, broadening the personal income tax base, and taking measures to contain pension and health care spending.

It also stressed that reducing the corporate income tax (CIT) rate, as is currently being considered by the Government, "would likely have economic benefits, but would require offsetting fiscal measures to prevent a further rise in fiscal risks. A CIT cut raises investment and growth, but not sufficiently to make them self-financing, adding further to fiscal consolidation needs."

Compensating revenue and expenditure measures would therefore need to be identified. In this regard, "there is some scope for CIT base broadening, but it is limited, and the removal of some allowances (such as for accelerated depreciation) and incentives (research and development) could actually weaken the positive investment effects of a rate cut. The rise in fiscal risks could be limited by announcing the new tax schedule and identifying offsetting revenue sources upfront, but phasing in the rate reductions over time."

As an alternative to a CIT rate cut, the IMF concluded that consideration could be given "to opt for an Allowance for Corporate Equity (ACE) system, which would be a more cost effective way of encouraging investment. An ACE treats debt and equity financing in the same manner and has recently been adopted in some advanced and emerging economies."

TAGS: VAT rates | tax | economics | business | value added tax (VAT) | fiscal policy | International Monetary Fund (IMF) | corporation tax | tax rates | tax breaks | Japan | research and development

To see today's news, click here.


Tax-News Reviews

Cyprus Review

A review and forecast of Cyprus's international business, legal and investment climate.

Visit Cyprus Review »

Malta Review

A review and forecast of Malta's international business, legal and investment climate.

Visit Malta Review »

Jersey Review

A review and forecast of Jersey's international business, legal and investment climate.

Visit Jersey Review »

Budget Review

A review of the latest budget news and government financial statements from around the world.

Visit Budget Review »

Stay Updated

Please enter your email address to join the mailing list. View previous newsletters.

By subscribing to our newsletter service, you agree to our Terms and Conditions and Privacy Policy.

To manage your mailing list preferences, please click here »