The Tax Commission says small and midsize firms should pay more taxes to offset the loss in revenue from Prime Minister Shinzo Abe’s promised corporate tax cut, it said in its reform plan Friday.
Analysts said that will no doubt draw fire for giving preferential treatment to big firms at the expense of small businesses, which play a vital role in the economy.
The tax panel said the Abe administration should review tax breaks for small and midsize firms and expand the targeting of corporate income tax based on “external standards,” such as payroll size, capital and other ways of measuring the scale of firms’ operations.
The size-based tax has been eyed as one way to help stabilize revenue because it is imposed on both profitable and unprofitable companies, regardless of economic fluctuations. Only around 30 percent of Japan’s companies pay the corporate tax now because the rest are struggling to keep their heads above water.
The Tax Commission said the Abe administration “needs to strictly review” the current system, which imposes a tax rate of 19 percent on firms capitalized at ¥100 million or less and making no more than ¥8 million in income.
Big companies are taxed at a rate of 25.5 percent.
“We will take the reform plan into consideration when we start full-fledged discussions on corporate tax matters toward the end of this year,” Finance Minister Taro Aso said at a news conference Friday.
Minoru Nakazato, a University of Tokyo professor who chairs the Tax Commission, said later that final arrangements on how to change the corporate tax system will be made “during the political process.”
The administration has pledged to cut Japan’s effective corporate tax rate, which stands at 35 percent, to under 30 percent in the next few years, but has yet to decide how fast to make the cuts and how to make up for the resulting drop in revenue.
Abe’s ruling Liberal Democratic Party and the Finance Ministry have called for securing additional financial resources by broadening the tax base to ensure that Japan’s precarious fiscal health — the worst among major industrialized economies — is being properly addressed at the same time.
But some officials have said tax revenues are likely to be larger than initially projected due to Abe’s economic stimulus, and that additional revenue should be used to finance the proposed corporate tax cut from next fiscal year.
The effective corporate income tax rate — consisting of both national and local taxes — is much higher than China’s 25 percent, South Korea’s roughly 24 percent and Singapore’s 17 percent, according to Finance Ministry data.
Abe is eager to make aggressive cuts in the tax to boost direct investment from abroad, believing it will help achieve his goal of ending nearly two decades of deflation.
It also confirmed that it believes that a sales tax must be levied on digital books and music purchased from overseas vendors, such as Amazon.com, as soon as next fiscal year.