Statement on Japan's corporate tax cuts remains ambiguous

Statement on Japan's corporate tax cuts remains ambiguous
Japan will slash one of the world's highest corporate tax rates as part of a wider bid to shake up the economy and drive growth, prime minister Shinzo Abe said on June 13.

The government's draft policies released last week called for cutting the effective corporate tax rate but failed to make specific suggestions on important issues such as what the eventual tax rate would be and how to find revenue to make up for lost tax income.

Reducing the corporate tax rate is a goal of Prime Minister Shinzo Abe, and the draft called for a cut from the current level of about 35 per cent to less than 30 per cent, though the specifics were left to the tax system reform to be carried out at year's end.

While some progress was made on regulatory reform for health care and agriculture, the ideas for employment seemed only to go halfway.

The economic and fiscal policy guideline was introduced by a Liberal Democratic Party administration in 2001, and are considered emblematic of policy management led by the Prime Minister's Office.

Scrapped during the Democratic Party of Japan-led administration, the practice has been revived by the second Abe Cabinet.

Abe sought to incorporate a reduced corporate tax rate in the draft, hoping to make this an engine of his "Abenomics" economic policies. He announced his intention to seek the tax cut at a summit meeting of Group of Seven nations in June.

Since a course was already set for cutting the corporate tax rate, observers were waiting to see how far the draft would go in laying out specifics.

Treasure hunt

However, the draft only stated the rate should be reduced "to less than 30 per cent over several years."

This wording can be interpreted to please both those enthusiastic about a tax cut and those more wary of the idea.

Private-sector members of the Council on Economic and Fiscal Policy, which released the draft, proposed in January to cut the effective tax rate to around 25 per cent, which is consistent with the desires of the prime minister's circle.

However, cutting the rate by 10 percentage points would reduce tax revenue by almost ¥5 trillion, which raised objections from the Finance Ministry and others.

As a compromise, the council settled on the "less than 30 per cent" expression.

The draft was also vague regarding how many years it would take to reduce the tax rate. Abe and his advisers envision around three years, while the Finance Ministry and others think five years is necessary.

The draft, by saying it would take "several years," showed there is still daylight between the two sides.

Arguments over specifically how many percentage points each reduction would be and how to fill the hole left by lost tax revenue were kicked down the road to the tax system reform to be carried out at the end of the year.

"The draft only gave a sense of direction that the tax rate would start being cut from next fiscal year," a person with ties to the government said.

The search for revenue to make up for cutting the corporate tax rate could affect the debate over raising the consumption, income and other taxes.

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