The Liberal Democratic Party tax panel plans to cut more than 3 percentage points off Japan’s effective corporate tax rate of 35 percent in fiscal 2015 and 2016, members of the party said.
The idea is to make a 2.51-point cut in fiscal 2015, which starts in April, and the additional cut the following year. The plan was largely approved by Prime Minister Shinzo Abe, who heads the LDP, during talks Friday with Takeshi Noda, chairman of the party’s Research Commission on the Tax System.
Afterward, Noda told reporters that Abe gave the nod to the panel’s reform proposals.
The ruling coalition, which comprises the LDP and junior partner Komeito, is expected to craft its fiscal 2015 tax reform policies Tuesday.
Some government officials urged a more drastic corporate tax cut to bolster an economy that’s been in retreat since the consumption tax was hiked to 8 percent from 5 percent on April 1.
Economic and fiscal policy minister Akira Amari said Friday morning that the corporate tax “must” be cut by “more than 2.5 percentage points” next fiscal year despite budgetary constraints.
Amari, a close Abe ally, also said at a press conference that he hopes the LDP will make every effort to achieve the tax cut, which the government thinks can play a vital role in the recovery.
To offset the tax cut, Amari said Abe’s administration will use tax revenues boosted by the improvement in corporate profits led by Abe’s deflation-busting “Abenomics” policy based on thre three “arrows” of drastic monetary easing, massive fiscal spending and structural reform vows.
Japan’s effective corporate tax rate is relatively high by international standards, and Abe’s team has pledged to bring it below 30 percent over the next several years. But it is opposed by the powerful Finance Ministry, which wants it to find alternative streams of income before reducing the tax.
Japan’s effective corporate income tax rate — consisting of national and local taxes — is higher than China’s 25 percent, South Korea’s roughly 24 percent and Singapore’s 17 percent, according to Finance Ministry data.
Business leaders and some experts have argued that a heavier corporate tax rate makes foreign firms reluctant to operate in protected Japan, curtailing economic growth.
To cover a possible decline in tax revenues, the ruling camp is considering expanding the scope of corporate tax based on “external standards,” such as number of employees, capital and other ways of measuring the scale of operations.
The size-based tax has been eyed as one way to help stabilize tax revenues because it is imposed on both profitable and unprofitable companies, regardless of economic fluctuations.
Currently, only around 30 percent of Japanese firms pay corporate tax, with the rest exempt due to poor business performance.