June 13, 2014 5:26 am JST

Japan to pledge cutting corporate tax rate below 30%

TOKYO -- Japan's government will stipulate plans to slash the nation's effective corporate tax rate to below 30% in economic policy guidelines due out this month, making a public pledge to start the reduction next fiscal year.

     Akira Amari, minister of state for economic policy, and Takeshi Noda, head of the Liberal Democratic Party's tax commission, reached an overall agreement Thursday to bring down the top effective rate of 35.64% in Tokyo to the 20% level within several years.

     After discussions with Finance Minister Taro Aso on Friday morning, the proposal will be included in draft policy guidelines to be presented at a meeting of the Council on Economic and Fiscal Policy later that day.

     The business community wants to see the rate go down by 10 percentage points, bringing it in line with those of such countries as China and South Korea. The LDP's tax commission and Finance Ministry contend that the cut should be limited to around 5 percentage points. The final rate has been left vague for now.

     The agreement is also ambiguous about funding for the cut, which has been a point of contention. It will state that the government "will secure permanent funding sources in light of the effects of Abenomics," but will not offer details.

     Each 1-percentage-point decrease in corporate taxes will reduce revenue by some 500 billion yen ($4.85 billion). A 5-percentage-point cut would require 2.5 trillion yen in funding, while a 10-point cut would need 5 trillion yen.

     The LDP tax commission and government tax authorities, concerned about Japan's fiscal health, have argued for a revenue-neutral plan that would make up the difference through such steps as repealing targeted tax breaks and imposing levies on money-losing companies.

     While Amari and the business community agree that government finances must be considered, they have sought to allow the increase in tax revenue from the economic recovery to be used as a funding source.

     The agreement is expected to include language acknowledging the government's goal of eliminating the primary balance deficit by fiscal 2020, serving as a deterrent against an unfunded cut. Meanwhile, the phrase "in light of the effects of Abenomics" leaves room to use revenue increases for making up for the loss.

     The government's corporate tax reform efforts are aimed at reducing a rate that is higher than those of major Asian and European countries in hopes of making Japan more competitive and attracting foreign investment. The agreement marks a step toward this goal but puts off the details until tax revisions are discussed at year's end.

     How low the tax will go, and over what period of time, will depend on how much funding can be found.

     Size-based corporate taxes face heavy opposition, chiefly from small and midsize companies, and reductions to industry-specific tax breaks have been resisted by the business community. If the government implements an unfunded tax cut of several trillion yen, it will be forced to slash annual expenditures or issue more bonds.