Japanese Prime Minister Shinzo Abe unveiled a plan on Friday to cut the corporate tax rate below 30 per cent in stages over a few years from the next fiscal year to help pull the economy out of two decades of sluggish growth and deflation.
Investors have been scrutinizing whether Japan can substantially lower the corporate tax rate – among the highest in the world – to spur growth in the world’s third-largest economy. Abe also needs to strike a delicate balance between stimulating growth and reining in snowballing public debt, twice the size of its $5-trillion economy.
The corporate tax cut is seen as a major issue to be included in the government’s key fiscal and economic policy outline, which will be finalized around June 27 along with a detailed “growth strategy” of structural reforms.
“Japan’s corporate tax rate will change into one that promotes (economic) growth,” Abe told reporters, adding that he hoped the lower burden on companies would lead to job creation and an improvement also for private citizens.
He also said the government would make sure that alternative revenue sources are secured to offset a decline in corporate tax revenue, but did not elaborate.
The government said later on Friday, in its draft economic and fiscal policy outline, it would decide on a concrete plan by the year’s end to secure a “permanent revenue source” needed for corporate tax cuts, such as by broadening the tax base.
An alternative revenue source must be secured permanently so that Japan can achieve its aim of bringing its primary budget balance – excluding new bond sales and debt servicing – into the black in the fiscal year to March 2021, it said in the draft.
The government reiterated it would decide by the year-end whether to go ahead with its plan to raise the sales tax to 10 per cent in October 2015. The national sales tax rose to 8 per cent from 5 per cent on April 1 in a bid to fix the public debt.
Japan’s corporate tax rate is nearly 36 per cent for large companies operating in Tokyo, among the highest in the industrialized world.
Private-sector members of the government’s top economic and fiscal council have proposed cutting the rate to 25 per cent eventually to put it in line with international standards.
The finance ministry and ruling party tax panel counter that any revenue lost in the tax rate cut should be offset by bringing in alternative fixed revenues, rather than counting on any increase in tax revenue brought by higher economic growth.
Each percentage point of tax cuts would reduce government revenue by about 470 billion yen ($4.61-billion) a year, according to the finance ministry.
At the same time, only 30 per cent of all Japanese firms pay corporate income tax, so fiscal hawks want many more brought onto the tax rolls to offset a cut in the tax rate. Most loss-making firms in Japan are exempted from paying corporate tax and companies can defer losses over several years, making it easier for them to avoid paying taxes.
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