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Japanese Tax Panel Looks For Corporate Tax Cut Offsets

by Mary Swire,, Hong Kong

02 July 2014

The Government's Tax Commission has produced its proposals on how Japan should replace the fall in revenue that will occur if the country's corporate tax rate of up to 36 percent begins to be reduced next year.

Gradual corporate tax cuts, to below 30 percent, now form a major part of the Government's 2015 policy framework, which concentrates on Prime Minister Shinzo Abe's promised growth strategies. It is intended that a more internationally competitive corporate tax rate would immediately encourage investment by both domestic and foreign companies, and thereby boost growth in the economy.

However, it has also been agreed that the cuts may begin only if stable future funding can be found to cover the consequent fall in tax collections, so as not to worsen Japan's fiscal deficit and public debt position. The Government still aims to return to a primary fiscal balance (not including debt-servicing costs) in 2020.

In order to provide the necessary revenue replacement, the tax panel decided, in particular, on policies to broaden the corporate tax base by restructuring existing tax breaks.

Firstly, the panel looked for a revision to the present tax system so that more revenue can be found from small- and medium-sized enterprises (SMEs), which currently pay tax at reduced rates or are tax-exempt. For example, SMEs, with a share capital of not more than JPY100m (USD987,000), currently pay an effective national corporate tax rate of only 16.5 percent on their taxable profits up to JPY8m, and are also not subject to the 80 percent restriction on offsetting taxable profits with net operating losses.

As only around 30 percent of Japan's companies presently pay corporate tax, because of previous losses, one of the ways it is thought that revenue can be collected over both small and large businesses is by changing Japan's corporate tax code, at least in part, from a profit-based system to a size-based system, possibly based on employee numbers, capital utilization or other measurements of the scale of a company's operations.

Finally, the panel called for the imposition of consumption tax, as soon as next year, on foreign firms for online sales of e-books and music to Japanese customers, in the same way as domestic online transactions are taxed at present. Foreign businesses with sales of JPY10m or less would be exempt from the tax, as is the case with Japanese firms.

The Government will now study the panel's proposals and is expected to announce its final corporate tax reform details by the end of this year.

TAGS: tax | economics | business | value added tax (VAT) | fiscal policy | commerce | corporation tax | internet | e-commerce | tax rates | tax breaks | tax reform | Japan | Tax

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