TOKYO: Japan’s corporate tax rate is among the highest in the world and getting companies to use more of their earnings to invest and hire is crucial to the economic renaissance promised by Prime Minister, Shinzo Abe, Reuters reported on Wednesday.
Yet the idea of slashing the corporate tax, floated by the government earlier this month, has received a lukewarm reception from analysts and policymakers, because of doubts over whether it would unleash enough investment to justify the loss of revenue.
To offset the economic impact of a politically unpopular plan to double the sales tax from five per cent, Abe is considering, according to a Nikkei newspaper report on August 13, cutting the corporate tax rate to between 25 and 30 per cent.
Corporate leaders have long called for lower taxes as a measure to shore up Japan’s waning economic competitiveness.
Set at 38 per cent for a large Tokyo-based corporation, Japan’s corporate tax rate is well above the global average of 24 per cent, as tracked by KPMG.
Keizai Doyukai, a leading business lobby, has urged lowering the rate to 25 per cent.
But, critics, including Finance Minister Taro Aso, question whether a tax cut would provide much of an economic boost, while others warn that it could worsen Japan’s fiscal position.
SMBC Nikko estimates that lowering the corporate tax rate by 10 percentage points would cost the government some 2.5 trillion yen ($25.74bn) in lost tax revenue, more than double the forecast 1 trillion yen boost to economic output.
Tomo Kinoshita, chief economist at Nomura Securities, said a corporate tax cut would help make Japan more competitive over the longer haul. “However, we need to recognize that it’s costly,” he said.
Keidanren, the lobby group considered the voice of big business in Japan, wants the Abe administration to consider reducing the tax as it begins work next month on a package of measures intended to spur growth.
Currently, the only planned cut in the corporate tax will come when a surcharge for rebuilding earthquake hit areas expires in 2015, which would bring it down to 35.6 per cent.
Cutting corporate tax could prove politically controversial as Abe would effectively be asking consumers, paying a higher sales tax, to subsidise corporate earnings.
“If you lower the corporate tax rate on top of increasing fiscal spending you are eroding the meaning of raising the sales tax,” said Masahiro Nishikawa, a fiscal policy expert in the securities division of Goldman Sachs in Japan.
Moreover, there is no guarantee that a tax cut would convince companies to invest more, given how much cash they have been hoarding.
Taken as a whole, Japan’s corporations outside the financial sector had 225 trillion yen — almost $2.3tn — in cash as of the end of March, according to data from the Bank of Japan.
They have been building that surplus steadily since the 2008 credit crisis, suggesting a deep-seated caution about whether Japan’s current recovery will be sustained.
For comparison, corporations in the much larger US economy had liquid assets of just $1.8tn, according to the Federal Reserve.
After a decade of slow growth and deflation, fewer than 30 per cent of companies actually pay corporate tax.
The rest are either unprofitable, or they are able to apply tax credits accumulated from losses incurred during the lean years.
The overhang of cumulative losses, which companies can use to defray future tax obligations, currently totals around 76 trillion yen ($776bn), according to National Tax Agency data, having come down from a peak of 90 trillion yen in 2008.
Japan Airlines (9201.T), for example, is holding on to 348 billion yen in cumulative losses stemming from its bankruptcy in 2010.
Firms used 9.7 trillion yen of tax credits against those losses to lower their tax burden in the fiscal year that ended in March 2012, roughly equal to the total amount of corporate income tax that went into the state coffers.
Lowering the tax rate would require companies that have booked losses as deferred tax assets to write down the value of those assets to reflect expectations that income taxes will be lower in the future.