TOKYO -- The Japanese government is considering a timetable of gradually reducing corporate taxes beginning next fiscal year as part of its basic policy for economic and fiscal management.
The effective corporate tax rate now stands at 35.64% for businesses in Tokyo, compared with the 20% range in many other countries. The government began discussions Thursday on whether to stipulate the timing of the reduction in the policy guidelines, due out in June.
Chief Cabinet Secretary Yoshihide Suga has already suggested that the rate should be lowered starting next fiscal year.
A senior government official has called for a 2 percentage point reduction in each of the next three fiscal years. Some have even proposed that the guidelines should include a medium-term target of bringing the rate down to around 25% -- close to the rates in other key Asian nations -- by 2020.
The three-year time frame would signal a commitment to make progress during the tenure of Prime Minister Shinzo Abe and potentially encourage overseas investors to pour more money into Japan. Under the rules of his Liberal Democratic Party, Abe's term will end in the autumn of 2018 even if he wins re-election as party president next year.
Meanwhile, the LDP's tax panel apparently supports including the corporate tax cuts in the policy guidelines but has reservations about stating that they would start "next fiscal year."
Each percentage point of the corporate tax rate represents 470 billion yen ($4.5 billion) in revenue, according to the Finance Ministry. A relatively modest cut of 2 points in fiscal 2015 would push down tax revenues by nearly 1 trillion yen. The government is expected to decide the scope of the reduction in accordance with economic trends and fiscal 2013 tax revenues.
To cut corporate taxes while restoring the nation's fiscal health, the government needs to cover the revenue shortfall through such steps as expanding the tax base. This holds true even if higher tax revenues due to economic growth are taken into account.
The government's tax panel is expected to recommend alternative revenue sources in a corporate tax reform proposal due out this month. Ideas on the table include reducing tax breaks that benefit specific industries and scaling down provisions that let corporations lower tax payments by carrying over losses to offset profits.