The administration is considering a reduction in corporate income taxes as part of a stimulus package to cushion the economy from the first of two planned increases in the consumption tax, according to three sources briefed on the matter.
Prime Minister Shinzo Abe has instructed officials to discuss a cut in the tax on company profits as he weighs whether to proceed with an increase in the consumption tax in April, according to the sources, who asked not to be identified as the discussions aren’t public.
Lowering the effective corporate tax rate, which is more than double that of Singapore’s, would boost Japan’s competitiveness while helping to offset the economic blow from a consumption tax increase. While a reduction is backed by industry chiefs, Abe may run into opposition at the Finance Ministry, which may be reluctant to lose revenue.
Economy minister Akira Amari said Friday that corporate tax reduction is an option as part of a planned package to reduce the economic blow from raising the sales tax. The Cabinet Office and the Finance Ministry see differently on cutting the corporate levy, Amari said.
The corporate tax rate of 35.6 percent includes local and national components and compares with 25 percent in China and 17 percent in Singapore, according to the Finance Ministry. Organization for Economic Cooperation and Development data show Japan has the second-highest rate of member nations, after the U.S. The rate is now 38 percent because of a three-year increase to fund Tohoku reconstruction.
“Our main scenario envisages a supplementary budget of the order of ¥5 trillion or so, and although a reduction in the corporate tax rate has surfaced as a topic, our view is that any major cut will have to wait until fiscal year 2015 or beyond,” Daiju Aoki, senior economist for Japan at UBS AG in Tokyo, wrote in a research note Monday.
The Nikkei newspaper Friday reported that the government may cut corporate taxes in the fiscal year starting April 1.
Abe will decide on Oct. 1 whether to increase the sales tax to 8 percent in April from 5 percent now. He has said he wants to take into account the strength of the economy before making the decision.
The Cabinet Office on Sept. 9 revised up its estimate of second-quarter economic growth to 3.8 percent from the previous quarter, after initially reporting a 2.6 percent expansion.