Japan Urged to Start Cutting Corporate Tax Next Year: Economy

Photographer: Akio Kon/Bloomberg

Pedestrians walk past residential and commercial buildings in the Toyosu area of Tokyo, Japan. Japan’s effective corporate tax rate of about 36 percent in Tokyo is the second-highest in the Group of Seven after the U.S. and compares with rates of about 24 percent in South Korea and 23 percent in the U.K. Close

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Photographer: Akio Kon/Bloomberg

Pedestrians walk past residential and commercial buildings in the Toyosu area of Tokyo, Japan. Japan’s effective corporate tax rate of about 36 percent in Tokyo is the second-highest in the Group of Seven after the U.S. and compares with rates of about 24 percent in South Korea and 23 percent in the U.K.

Japan could cut its corporate tax rate as early as next fiscal year by 2 to 3 percentage points, gradually lowering the levy toward 25 percent in later years to boost the nation’s competitiveness, a tax panel member said.

“The first step will make businesses inside and outside the country believe Japan is serious,” said Norio Sasaki, Toshiba Corp. vice chairman and member of a government panel subcommittee on corporate tax reform. Cuts can be “gradual” as long as “the direction is clearly set toward levels around 25 percent -- matching those in Asia.”

Japan’s effective tax rate of about 36 percent is the second-highest in the Group of Seven after the U.S. and compares with levies of about 24 percent in South Korea and 23 percent in the U.K. Sasaki said it’s important to begin cuts in the year starting April 2015 even if any initial reduction is less than the 5 to 10 points sought by other members of panels working on Prime Minister Shinzo Abe’s economic policy.

Japan's Economic Shock Therapy

Finance Minister Taro Aso said any cut in the levy must be accompanied by a rise in revenue from other sources to avoid worsening the fiscal position of a government with the world’s heaviest debt burden.

Abe pledged to pursue corporate tax reforms earlier this year, part of his Abenomics drive to revive the world’s third-largest economy. He is set to outline in June further details of measures to make it easier to do business in Japan.

Growth Strategy

Investors are watching to see how firm a commitment he makes to corporate tax cuts to sustain a recovery started by government spending and monetary stimulus. The Bank of Japan’s unprecedented stimulus helped weaken the yen about 18 percent against the dollar last year, boosting earnings of exporters such as Toyota Motor Corp.

The Japanese currency was little changed at 102.65 per dollar at 1:36 p.m. in Tokyo. The Topix index was also little changed, after losing 10 percent this year after a 51 percent gain in 2013.

The size and timing of reductions in the corporate levy will be points to watch in Abe’s growth strategy, UBS AG economist Daiju Aoki wrote in an April 18 e-mailed note.

“We would regard a clearly stated 10 percentage point cut as positive, even if it is implemented over several years starting in FY15,” Aoki said.

Sasaki, who is also a vice chairman of Japan’s biggest business group Keidanren, said government revenue appears set to exceed an initial projection by about 2 trillion yen ($19.5 billion) in the year ended March, making room to lower the rate by 2 to 3 percentage points next fiscal year.

Attract Investment

A reduction in corporate taxes, combined with other steps to reduce regulation, could help to attract more investment to the country from overseas, said Sasaki.

Private-sector members of the Council on Economic and Fiscal Policy -- an advisory body to Abe -- in January called for quick consideration of a cut in the levy to about 25 percent.

Takero Doi, an economics professor at Keio University and also a member of the tax panel with Sasaki, last month said in an interview cutting the rate by 10 percentage points at once was “impossible” and said Japan can find revenues for a cut of 5 points to a level similar to that of countries in Europe.

Tokyo’s 35.64 percent effective corporate tax rate -- which includes a national and local levy -- compares to Germany’s average of 29.59 percent, China’s 25 percent and Seoul’s 24.20 percent, according to a document from Japan’s Ministry of Finance.

To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net; Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net Arran Scott, Andy Sharp

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