Tax rate reduction
The Nikkei Newspaper reported that reduction in corporate tax rates was recognised as an issue that had to be addressed in order to preserve business competitiveness in Japan. The Finance and Economic Ministry was pressing for a straigtforward reduction in corporate tax rates anticipated to be 5 per cent, while the Tax Commission was looking to find alternatives to preseve the tax base and had established a project team to report on these alternatives by the end of the year.
Expanding the tax base
Alternatives proposed to help preserve the tax base included the following items:
Removing the tax exemption applied to naphtha. Specifically the Tax Committee was considering removing the exemption for naphtha “off gas” which was used as fuel in chemical production processes. This was consistent with environmental objectives for taxation. The exemption for naphtha used in the chemical production process itself may remain.
Carried forward losses
The Tax Committee was considering extending the period to allow carry forward losses (from the current seven year carry forward period) but instead introducing a restriction each year on the amount of the loss that could be set off. The Nikkei reported that this move was strongly opposed by Japan’s six major banks, none of whom had paid taxes owing to carry forward losses in the previous year.
The Tax Committe noted that the Japanese tax system for accelerated depreciation of investment in plant and equipment was probably the most generous to business in the developed world. Accordingly the system was a target for review, as was credit for R&D expenditure. Changes may involve targetting the benefits at growth areas.
Other areas for review would include dividends between companies and the taxation of dividends in general plus the system allowing tax deductible reserves.
Tax preference zones
As part of Japan’s growth strategy the government is also considering the introduction of tax preference zones to promote both domestic and international investment. The intention would be to compete with similar zones in China and Korea by allowing a corresponding range of tax benefits.
Lowering the Japanese effective corporate tax rate by 5 per cent from the highest effective tax rate in the developed world to a level where it remains the highest effective tax rate in the developed world may do little to promote foreign investment, especially if combined with measures to raise taxes to pay for such a reduction.
Tax measures to target foreign companies established in Japan or to develop investment zones, however, show that the government may finally be serious about promoting foreign investment into the country. Japan has good infrastructure, a well educated population and, not withstanding the frequent change in Prime Minister, is politically stability relative to other countries in the region, but to date Japan has failed to use these advantages.
Let us hope that the current economic climate does not mean that these measures are too late to make a real difference.