Japan Cuts Corporate Tax To Spur Growth, Investments

Japan Prime Minister Shinzo Abe has been cutting corporate taxrates since taking office in 2012. The tax ratehas come downto29.97% today compared to 38% then.

Japan approved new carrot-and-stick tax measures to bring corporate taxes down to 25% for companies that raise wages by 3%, and to as low as 20% for those that invest in new technologies, communications and internet-of-things for example, on Thursday. Japan’s corporate tax cut was included in the policy package approved by the ruling coalition and will come into force at the start of fiscal 2018 in April.

Japan Prime Minister Shinzo Abe has been cutting corporate taxes since taking office in 2012.

Japan’s Prime Minister Shinzo Abe has taken the axe to corporate taxes more than once over the course of his tenure. When Abe took office in 2012, Japan’s corporate tax rate stood at 38%. Today, it stands at 29.97%, with plans to trim it further to 29.74% next year. 

Whether these cuts have had the desired impact so far is not clear. On one hand, they have boosted corporate earnings. On the other, instead of profits going into much-needed wage growth and capital expenditure, as the government had hoped, they have stayed in company coffers or gone to shareholders. 

Tax Logic

Many, like Rajiv Biswas, Asia-Pacific chief economist for IHS Markit, expect the cuts to have a positive effect. “These conditional additional corporate tax cuts should be positive for the economy as they will contribute to improving competitiveness and productivity,” said Biswas.

The decision to up the ante on corporate tax cuts is partly driven by similar policies introduced elsewhere in the world. Akinaga Murayama, managing partner at Tokyo-based consultancy RSM Japan Tax, notes that since some countries maintain an effective corporate tax rate of 20% or less, Japan is under pressure to reduce its tax rate to at least less than 29%.

“This includes national and local taxes — some countries such as UK have no local corporate tax,” says Murayama. “By reducing the tax rate, more investment into R&D, training and development is expected on a long-term basis.”

Japan hopes to tackle the rising income inequality and spur investments into technology with the new tax measures.

Taxes For Individuals

The move to cut corporate tax coincides with plans to raise income taxes for high earners in a bid to tackle income equality. The government plans to cut tax concessions for workers earning over 8 million yen ($70,800). The basic annual deduction for all taxpayers is also to be raised to 480,000 yen from 380,000 yen now. At the same time, the powerful Keidanren (the Japanese Business Federation), has suggested that its members raise salaries by 3%, in line with similar wage increase calls made by Prime Minister Abe earlier in the year. 

Murayama points out that in recent years, income and consumer taxes have supplied a larger portion of overall tax revenue compared to corporate taxes, “10 years ago, income tax was 32%, corporate tax was 29% and VAT was 20% of the total tax revenue,” he said. “While income tax has stayed at 32%, corporate tax has decreased to 20% [for companies that comply with new tax measures] and VAT increased to 30% in 2016.”

Trump Tax Effect

“Japanese firms are facing significant competition from other industrial countries that have been lowering corporate taxes,” says Biswas. “Notably the latest US tax reform legislation which will lower US corporate income tax from 35% to 20%.”  

However, the US tax reforms currently under consideration are in stark contrast to Japan. The corporate tax rate reduction to 20% does not come with mandates. Meanwhile, there will be a top 25% tax rate for pass-through entities such as limited liability corporations. The US tax reforms also do not propose a reduction in tax concessions availble to higher earners. In comparison, Japan plans to cut tax deductions available to workers earning over 8 million yen.