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e-Magazine (For the Japanese version of this article)

Series: Understanding Japan through Key Words (Part 8) Corporate Tax Reform [Date of Issue: 31/March/2015 No.0241-0967]

Date of Issue: 31/March/2015

Series: Understanding Japan through Key Words (Part 8)
Corporate Tax Reform

A government initiative to revisit the effective corporate tax rate and the taxation framework. The government's new growth strategy sets the target of reducing Japan's effective corporate tax rate, currently around 35 percent, to within the 20 percent range within the next several years. The FY2015 tax reforms lay out a tax cut of 2.51 percent for FY2015, 3.29 percent in two years' time (FY2016). The government will secure revenues from other sources over the next three years, but these tax reductions will be frontloaded to encourage companies to raise wages.

The effective corporate tax rate indicates how much tax is actually levied on company earnings, and is calculated by adding the corporate enterprise tax rate and the corporate inhabitant tax rate to the national corporate tax rate. Japan's standard tax rate is 34.62 percent. This is high compared to countries like Singapore and Korea, and the business world has been pushing for a reduction.

The revised growth strategy adopted by Cabinet decision in June last year called for the effective tax rate to be reduced to an "internationally-comparable level" in order to improve Japan's business environment, setting out the concrete target of lowering it to "within the 20 percent range" over the next several years as of FY2015. Based on the FY2015 tax reforms, positioned as the first stage toward realizing this goal, the tax rate will be cut to 32.11 percent in FY2015 and 31.33 percent in FY2016.

To secure revenues to cover the lost tax income, the government will expand its size-based taxation, levied even if the company is in deficit, with a focus on large companies. The tax loss carry-forward system, whereby a tax loss in a given tax year may be carried forward for use in sheltering the taxable profits of a future tax year, will be reduced in scope, and more taxes levied on the dividends which companies receive from subsidiaries. Companies that lift their wages to a certain extent, as well as medium-ranked companies, will have their size-based levy reduced. The corporate tax break given to small and medium enterprises as a special exception following the Lehman shock will be extended by two years until the end of FY2016.

Through the above, the government plans to balance out lost tax revenue across corporate tax as a whole in the three years through to FY2017. However, for the two years over FY2015-2016, the frontloaded tax cuts will outweigh tax increases elsewhere, creating an effective tax cut totalling around 420 billion yen for companies over those years.

The lower effective tax rate and frontloaded tax cut have been driven by the priority which the Prime Minister's Office places on economic growth. Having decided on early elimination of the special corporate recovery tax used to help fund the Great East Japan Earthquake recovery process as part of the FY2014 tax reforms, the Prime Minister's Office has again overruled the Ministry of Finance, which emphasizes fiscal consolidation. In both the FY2014 and FY2015 spring labor negotiations, Prime Minister Shinzo Abe has emphasized reducing the corporate tax burden and called on business to raise wages. The question will be whether the wage hikes broaden from large companies to small and medium enterprises and stimulate consumption to create a virtuous economic cycle.

The ruling coalition's "Outline of the 2015 Tax Reform Proposals" states that, as the second stage of reform, the size of the tax rate cut will be expanded still further in FY2016 by securing tax revenue through enlargement of the tax base, with reform to continue thereafter. Careful consideration of the scope of those companies subject to size-based taxation will continue, factoring in the impact on local economies and business management. However, given strong resistance to greater taxation of small and medium enterprises, the debate may well become fraught, and it is still unclear whether the government will achieve an effective tax rate in the 20 percent range as targeted.

(original article : Japanese)

*This article was written by a specialist journalist.
(For the Japanese version of this article)


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