Japan May Drop Tax Surcharge

December 3, 2013 Taxation in Japan

TOKYO – Businesses in Japan will soon be paying less income tax, although it has already been suggested that the reduction will slow down the recovery of the country’s earthquake damaged areas.

In an effort to bolster economic growth in Japan prior to the introduction of a hike to sales tax next April, the leadership of the country’s coalition parties agreed on December 2nd that tax obligations need to be reduced, and the currently levied temporary 10 percent tax surcharge on corporate should be dropped in March 2014, one year ahead of schedule.

In real terms, removing the surcharge will reduce the effective tax burden faced by companies from 38.01 percent to 35.64 percent.

It is believed that dropping the tax surcharge may provide employers with enough financial leeway to offer wage increases to employees, making a tangible improvement to the financial situations of workers prior to the 3 percent hike to sales taxes scheduled for next April.

Removing the surcharge, a move which is estimated to be worth JPY 800 billion, is an integral aspect of a JPY 5 trillion stimulus package which is expected to be unveiled by Prime Minister Shinzo Abe this week.

Concerns have already been raised that dropping the tax surcharge may not have the intended consequences, employers may not increase wages in line with the tax reduction, serving only to lower government revenues.

The surcharge was originally enacted at the same time as a 2.1 percent tax surcharge on individual incomes, but while the corporate surcharge my removed early, the tax on personal incomes will remain for the originally scheduled time of 25 years.

Photo by: Chris Gladis