June 3, 2014 9:00 pm JST

Abe, LDP agree to cut Japan's corporate tax rate from FY 2015

TOKYO (Kyodo) -- Prime Minister Shinzo Abe and his ruling Liberal Democratic Party's tax panel agreed Tuesday to cut Japan's corporate tax rate from fiscal 2015 on condition the government continues making efforts to restore the country's precarious public finances.

     Earlier in the day, Finance Minister Taro Aso also voiced his acceptance for the first time of implementing corporate tax cuts from the fiscal year starting next April if financial resources can be secured to cover a possible decline in tax revenues.

     With Japan's relatively heavy corporate tax rate by international standards becoming virtually certain to be reduced, the focus will turn to how fast the government will cut the rate down the road and whether it can really come up with alternative tax revenues.

     After a meeting between Abe and executives of the LDP's Research Commission on the Tax System, its chairman, Takeshi Noda, said the premier urged the panel to decide with economic and fiscal policy minister Akira Amari how to describe the corporate tax change in the government's policy blueprint for fiscal 2015 to be released this month.

     Noda also told reporters after the meeting that he put pressure on Abe to consider how to make up for a decrease in tax revenues, apparently suggesting his reluctance in reducing Japan's corporate tax rate unless the government pledges to promote fiscal rehabilitation.

     "We shouldn't give priority to corporate tax cuts if they provide only short-term benefits," Noda said.

     Aso, meanwhile, said at a press conference in the morning, "It's OK if stable financial resources are found," reversing his opposition to the corporate tax cuts on the grounds they would thwart the government's attempt to rebuild Japan's fiscal health -- the worst among developed economies.

     Later in the day, the LDP tax panel finalized its corporate tax reform proposal.

     The proposal asked the Abe administration to keep pursuing its goal of turning the primary balance -- annual tax and nontax revenues minus outlays other than debt-servicing costs -- into a surplus by fiscal 2020.

     The LDP also called on Abe to expand corporate taxation based on "external standards" such as payrolls, capital and other measures to scale operations, aimed at stabilizing tax revenues, as it covers both profitable and money-losing companies.

     Japan's effective corporate income tax rate -- consisting of national and local taxes -- stands at around 35 percent, compared with 25 percent in China, about 24 percent in South Korea and 17 percent in Singapore, according to Finance Ministry data.

     Currently, only around 30 percent of Japanese companies pay corporate taxes, with the rest exempt due to poor business performances.

     Abe has reiterated that corporate tax cuts are necessary to boost foreign investment in Japan, with many business leaders and experts saying a higher corporate tax rate makes foreign companies reluctant to operate in the country, curtailing economic growth.

     Japan's public debt is more than 200 percent of gross domestic product. Central government debt has topped 1,000 trillion yen.