A government task force said Friday that the corporate tax rate should be cut but that the number of paying companies should be expanded, emphasizing that the current system is limited only to some profitable firms.
The group, set up under the Tax Commission to discuss corporate tax issues, also said broadening the tax base would help secure financial resources to cover a “potential decline” in tax revenue.
The proposal was released a day after Prime Minister Shinzo Abe said he was eager to repeat his vow to cut the corporate tax rate when his administration issues its new blueprint for economic and fiscal policy over the longer term.
The advisory body plans to finalize and incorporated it in the policy blueprint, scheduled to be compiled in June.
Some administration officials and politicians are reluctant to reduce the corporate tax rate as it would hamper efforts to improve Japan’s precarious fiscal health — the worst in the Group of Eight.
Finance Minister Taro Aso on Friday said discussions should take into account whether the government can achieve its goal of turning the primary balance — annual tax revenues and nontax revenues minus outlays other than debt-servicing costs — into a surplus by fiscal 2020.
In the proposal, the group said corporate tax cuts are necessary to boost foreign investment in Japan, with business leaders arguing that a higher corporate tax rate makes foreign companies reluctant to operate here, curtailing economic growth.
To cover any “potential decline” in tax revenues, the government should scale back tax breaks to smaller firms and expand the corporate tax base according to “external standards,” such as number of employees, capital and other indicators of a company’s scale of operations, it said.
But more discussion will be needed to decide on the details of the reforms, Hiroko Ota, head of the group, said.
It is believed that a size-based tax would help stabilize revenues because it is imposed on both profit-making and loss-making enterprises, regardless of economic fluctuations.
Currently only around 30 percent of Japan’s companies pay corporate tax. The rest are exempt due to poor business performance.
Japan’s effective corporate income tax rate — consisting of national and local taxes — is around 35 percent, much higher than China’s 25 percent, South Korea’s 24 percent and Singapore’s 17 percent, according to Finance Ministry data.