Prime Minister Shinzo Abe and his ruling Liberal Democratic Party’s tax panel agreed Tuesday to cut Japan’s corporate tax rate from fiscal 2015 on the condition that the government continues efforts to restore the country’s precarious public finances.
Earlier in the day, Finance Minister Taro Aso voiced his support for cutting corporate taxes for the first time, with the caveat that financial resources can be secured to cover a possible decline in tax revenues.
The focus will likely turn now to how fast the government will cut Japan’s relatively heavy corporate tax rate and whether it can come up with alternative tax revenues.
Following a meeting between Abe and executives of the LDP’s Research Commission on the Tax System, its chairman Takeshi Noda said Abe urged the panel to decide with economic and fiscal policy minister Akira Amari to propose a corporate tax change the government can include in its policy blueprint for fiscal 2015, which will be released later this month.
Noda also told reporters after the meeting that he put pressure on Abe to consider how to make up for a decrease in tax revenues, hinting at his reluctance to reduce Japan’s corporate tax rate unless the government pledges to promote fiscal rehabilitation.
“We shouldn’t give priority to corporate tax cuts if they provide only short-term benefits,” Noda said.
At a press conference on Tuesday morning, Aso said he would support the move “if stable financial resources are found,” reversing his opposition to the corporate tax cuts on the grounds they would thwart the government’s attempt to rebuild Japan’s fiscal health — which is the worst among developed economies.
The LDP tax panel finalized its corporate tax reform proposal later in the day, asking the Abe administration to keep pursuing its goal of turning the primary balance — annual tax and nontax revenues minus outlays other than debt-servicing costs — into a surplus by fiscal 2020.
The LDP also called on Abe to expand corporate taxation based on “external standards” such as payrolls, capital and other measures to scale operations, aimed at stabilizing tax revenues, as it covers both profitable and money-losing companies.
Japan’s effective corporate income tax rate — consisting of national and local taxes — stands at around 35 percent, compared with 25 percent in China, 24 percent in South Korea and 17 percent in Singapore, according to Finance Ministry data.
Currently, only around 30 percent of Japanese companies pay corporate taxes, with the rest exempt due to poor business performance.
Abe has reiterated that corporate tax cuts are necessary to boost foreign investment in Japan, with many business leaders and experts saying a higher corporate tax rate makes foreign companies reluctant to operate in the country, curtailing economic growth.
Japan’s public debt is more than 200 percent of gross domestic product. Central government debt has topped ¥1 quadrillion.