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Japan Should Cut Levy on Corporate Profit, Tax Panel Member Says

Japan should reduce its corporate tax rate by at least 5 percentage points to compete with Asian neighbors in attracting companies, a member of the government’s tax commission said.

“Japan should house regional headquarters like Hong Kong or Singapore,” Eiji Tajika, 63, an economics professor at Hitotsubashi University, said in an interview in Tokyo yesterday. Failure to cut corporate taxes would leave Japan on an unequal footing with overseas rivals, he said.

Prime Minister Shinzo Abe said this month he wants to discuss cutting the corporate tax rate, which at 35.6 percent is one of the highest among developed nations. The issue may come to prominence when Abe gets a mandate to push through his so-called third arrow of structural reforms after a projected victory for his party in an upper house election on July 21.

“Abe needs to slash corporate tax rates if he wants to send a message that he’s seriously committed to his growth strategy,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “Simply putting corporate tax cuts onto the political agenda will have a psychological impact on firms and help to spur their growth expectations and encourage investment.”

Japan’s corporate tax rate compares with 25 percent in China and 17 percent in Singapore, according to the Ministry of Finance. Organization for Economic Cooperation and Development data show Japan has the second-highest rate of its member nations, after the U.S.

Implement Cut

Deputy Economy Minister Yasutoshi Nishimura said in an interview today in Singapore that while the ruling party is trying to reduce Japan’s corporate levy, it may take about two years to implement any cut.

National Tax Agency data show that about 25 percent of companies filing tax returns declared a surplus in the fiscal year ended March 2011.

Finance Minister Taro Aso said last month that corporate tax cuts are not effective as many companies don’t pay the levy, saying later in the month that tax relief for capital investment would be more beneficial for them. Tajika disagrees with Aso on this issue.

“Accelerated cost recovery of investments is ineffective under the current low interest rates,” Tajika said, referring to tax breaks on capital spending. “Tax cuts shouldn’t just be for the manufacturing industry, they should be shared by every industry.”

The government tax commission examines the tax system from a medium-to-long-term perspective and reports directly to the prime minister. A separate ruling party tax panel looks more closely at specific tax measures in terms of the government’s growth strategy.

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