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Exclusive: Japan ruling camp mulling corporate tax hike

  • May 18, 2022
  • , Jiji Press , 8:13 p.m.
  • English Press

Tokyo, May 18 (Jiji Press)–Japanese ruling parties’ tax commissions are discussing the idea of raising the corporate tax rate while expanding tax cuts to promote capital investment, Jiji Press learned Wednesday.

The Liberal Democratic Party and its coalition partner, Komeito, aim to facilitate structural transformation of the Japanese economy by strongly encouraging companies to shift from savings to investment through the combination of a tax hike and tax cuts, sources said.

Senior members of the tax commissions hope to discuss such tax measures with the government ahead of the adoption of a fiscal 2023 tax system reform package expected for winter, according to the sources.

But the corporate tax hike, which would boost the country’s effective tax rate for the first time since 1984, could meet with opposition from the business world amid heightened uncertainty over corporate earnings.

Last year, an agreement led by the Organization for Economic Cooperation and Development was reached to introduce a global minimum corporate tax rate of 15 pct, putting a stop to the escalating international race to lower corporate taxes.

There have been moves to raise corporate taxes in some countries where fiscal deficits expanded due to vigorous spending to deal with the COVID-19 pandemic. U.S. President Joe Biden has proposed a tax hike.

Japan’s effective corporate tax rate stands at 29.74 pct, down from 34.62 pct in fiscal 2014. The country lowered the rate in stages in hopes that companies would increase wages and spend more on capital investment.

In its fiscal 2022 tax system reform package adopted in December last year, the ruling coalition noted that the corporate tax cut has led to an increase in retained earnings at companies but has not produced the desired results, such as growth in investment.

Cash equivalents at nonfinancial companies totaled 259 trillion yen at the end of fiscal 2020, up from 185 trillion yen six years before, according to Finance Ministry data.

Meanwhile, corporate capital spending amounted to 40 trillion yen in fiscal 2020, against 39 trillion yen in fiscal 2014, the data also showed.

In the fiscal 2022 package, the ruling camp hinted the need to create a framework to promote private-sector investment, saying that it would consider various ways to encourage spending-shy companies to change their behavior.

The ruling parties expect to propose a corporate tax hike on the same scale as tax reduction measures to promote investment.

“While we won’t be able to drastically raise (the corporate tax), we need to implement a structural transformation that suits the current situation of Japan,” a tax commission source said.

Amid raw materials price surges accelerated by Russia’s invasion of Ukraine, however, Japanese corporate earnings may deteriorate.

In addition, some business sectors, such as the service industry, may see an overall increase in tax payments even if the envisioned tax hike and cuts are balanced, given that the size of capital investment differs significantly from industry to industry.

As the ruling parties’ proposal is expected to draw opposition from profitable companies, especially large enterprises, it is unclear whether Japan will be able to raise the effective tax rate.

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