August 17, 2014 7:00 am JST

Japan plans tax cuts for big capital spenders

TOKYO -- Japan is planning to increase tax breaks for companies that spend more on research and development projects as part of a fiscal 2015 taxation reform proposal.

     The government currently allows companies to claim corporate tax deductions for R&D spending in two ways. One is to deduct certain amounts of gross R&D spending from the corporate tax. The other is to grant higher corporate tax deductions to companies that increased R&D spending.

     Tokyo plans to scale back the former scheme and give preferential treatment to companies that increase spending. The change aims to encourage companies to ramp up their capital spending and secure finance for lowering the effective corporate tax rate, a key reform the government is expected to implement in fiscal 2015.

     Overall tax deductions related to R&D spending are expected to be cut back.

     Under the current system, if companies increase R&D spending over 5% from the average in the immediate past three years, they can deduct up to 30% of the increased amount from their corporate tax. The proposed change calls for allowing companies to claim tax deductions even if increases in their R&D spending are smaller than 5%. Raising the maximum deduction rate to 60% is also under discussion.

     The government sees capital spending as essential to fighting deflation. It expects the money spent by companies will help boost the economy and lift wages. The tax reform proposal is designed to encourage companies to increase their R&D outlays for bigger tax breaks.

     The proposal, meanwhile, calls for cutting down the amount of gross R&D spending companies can deduct from their corporate tax payments. Large companies, for example, deduct 8-10% of their gross R&D spending from the corporate tax, with the deduction rate set up to 30%. The rate may be lowered to 6 to 8%, with the ceiling to be reduced to 20%.