Debate On Growth Turns To Corporate Tax

TOKYO (Nikkei)--A battle over corporate taxation is heating up in the government, pitting Ministry of Finance budget minders favoring targeted incentives against economic bureaucrats urging an outright tax cut.

The issue will likely dominate the debate on a second round of growth-promoting policies due out this fall.

"More than 70% of companies don't pay any corporate tax," Finance Minister Taro Aso told reporters Friday after the cabinet approved the main growth strategy.

"Lowering the tax rate would have absolutely no effect," Aso said.

Japan has one of the world's highest effective corporate tax rates: 35.64% in Tokyo. (An earthquake reconstruction surtax will keep it at around 38% until the end of fiscal 2014.) Companies say this puts them at a disadvantage against rivals taxed at 15-20% in Singapore, South Korea and other Asian neighbors.

But lowering the nominal rate will mean nothing to the mostly small and midsize businesses that pay no corporate tax because they are not earning profits. For firms that do make money, "there's no guarantee they will apply the reduction in their tax burden to capital spending or increasing employment," a senior MOF official says. If they simply pocket the savings, the tax cut will not benefit the economy, this official adds.

Moreover, an across-the-board rate reduction would cost hundreds of billions of yen to around 1 trillion yen in revenue -- a difficult proposition for a country that needs to balance growth and fiscal health.

Prime Minister Shinzo Abe and his economic and fiscal policy minister, Akira Amari, have thus far talked mostly about tax incentives for companies that invest more. One proposal is to let firms deduct the full amount of new-equipment purchases immediately instead of over five to 10 years. This is supposed to help capital spending recover to 70 trillion yen, one of the growth strategy's goals.

At the behest of the Prime Minister's Office, the ruling Liberal Democratic Party's tax committee plans to start discussing tax code revisions in September, two months earlier than usual. Any new corporate tax breaks might even go into effect this fiscal year, according to a senior MOF official. Tax code changes typically go before the Diet in January and take effect at the start of the new fiscal year in April, but they could be made retroactive to the fall, giving firms a reason to invest early.

But the business community wants both tax breaks for investment and a lower effective tax rate. Officials from Keidanren, a powerful corporate lobby, appealed Thursday for a tax cut to Chief Cabinet Secretary Yoshihide Suga.

"The nearly 30% of companies that do pay the tax are the ones battling in fierce international competition," says a senior member of the Japan Association of Corporate Executives, or Keizai Doyukai.

A lower tax rate is also vital for attracting foreign direct investment, Chairman Yasuchika Hasegawa told a news conference Friday. The growth strategy aims to double the stock of foreign direct investment to 35 trillion yen by 2020. Relative to the size of its economy, Japan's FDI stock is far smaller than those of the U.S. or European countries.

(The Nikkei, June 15 morning edition)

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