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Japan's Cabinet Approves Tax Policy Package

by Mary Swire,, Hong Kong

20 December 2010

The Japanese government has approved the framework for the next fiscal year of its tax policies, which include the much-heralded cut in corporate tax and increased taxes on the wealthy.

Prime Minister Naoto Kan had already announced his decision that a 5% reduction to the country’s corporate tax rate should be included in his government’s tax proposals for the 2011/12 fiscal year starting on April 1. A cut in Japan’s high 40% corporate tax rate has been in the government’s sights for some time, as a policy that could be a way to increase investment and revive Japanese economic activity.

However, the business sector has been less than effusive about the 5% rate cut, saying that it is only a first step in the right direction and that further reductions will be necessary to reach a level more comparable with its international competitors. While it was said that rate reduction will cost the government at least JPY1.4 trillion (USD16.7bn) in lost revenue, more than half of that could be clawed back from changes to, for example, depreciation and loss carry-forward rules.

It has also been confirmed that the present reduced 10% tax rate on capital gains and dividends from stock investments, that was first cut from 20% in 2003 and was due to expire at the end of next year, will be extended for a further two years.

Other business incentive measures will provide tax credits for those smaller companies that increase their employee numbers by certain minimum amounts. Small companies will also be given a reduction in their effective corporate tax rate from 18% to 15%.

On the other hand, it is proposed to increase income taxes for the highest earners by capping personal income tax exemptions. Income tax exemptions given to families with adult dependants, except where those dependants are elderly or disabled, would be cancelled, and maximum inheritance tax rates would be increased.

In addition, the government proposes to impose a tax on carbon emissions from October 2011. The levy, on consumers of primary fuels, such as oil, natural gas and coal, will be phased in over the period to 2015.

No estimates were given of the total tax revenues forecast for 2011/12, but the proposals will need to be presented to parliament early next year. However, their passage is not guaranteed due to the need for the minority government to obtain some support from opposition parties.

The government will now proceed to produce its full 2011/12 budget, expected by December 24. There is much interest in seeing whether it will have adequate revenue from its tax proposals to be able to preserve its spending, and therefore its public bond issuance, at promised levels.

TAGS: capital gains tax (CGT) | inheritance tax | environment | tax | small business | economics | business | fiscal policy | budget | corporation tax | tax rates | individual income tax | Japan

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