Japan’s Prime Minister Spurs Tax Cut Decision

September 10, 2010 Taxation in Japan

Angel Gurría, OECD Secretary-General, Official Visit to Tokyo, JapanJapan’s comparatively large corporate tax rate could soon edge towards levels seen in other developed economies if the Prime Minister’s economic acceleration and job creation plans are enacted.

On September 9th Prime Minister Naoto Kan instructed the Japanese Cabinet to make a decision on the possibility of cutting the national corporate tax rate cut by the end of the year. He also instructed a panel at the Tax Commission to begin a new investigations into tax system rebalances which could be used to fund the rate drop.

Currently the country’s effective corporate tax rate exceeds 40 percent, compared to an average of 26.3 percent across the countries of the Organization of Economic Cooperation and Development (OECD). Both the Ministry of Economy, Trade and Industry and the Prime Minister are suggesting that a 5 percent drop in the tax rate be instated in 2011. However, such a decrease would result in an immediate tax collections losses of approximately JPY 1 trillion (approx. USD 11.92 billion), necessitating increased reliance on other revenue streams, and possible rate increases to other taxes.

On the same day Naoto Kan encouraged investigation into additional measures for national job creation. Specifically, the Prime Minister has requested an inquiry into the feasibility of using tax incentives to increase the number of jobs in the health-care and environmental sectors, raise employment levels of disabled workers, and raise the overall employment rate in Japan. He also stipulated that debate needs to be held on whether tax incentives could play a role in improving the levels of both capital investments into businesses, and research and development in environmental fields.

However, Naoto Kan’s intentions are already viewed by some experts with a level of uncertainty. If the Prime Minister loses his position in the upcoming election for leadership of the Democratic Party of Japan (DPJ), the tax cuts will almost certainly be disregarded, as Kan’s primary election rival Ichiro Ozawa has repeatedly stated that the national corporate tax rate is already at an appropriate level and does not need to be changed. Local political analysts have also pointed to the fact that the DPJ currently does not hold majority in the country’s upper house, meaning that any tax reform bill could potentially be voted down.

Photo by OECD