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 While the headline tax rate will fall, Tokyo, under pressure to
shore up its finances with a public debt twice its annual GDP, is
seeking to offset the tax cut by scaling back exemptions and
deductions favoring small and loss-making companies.
That regime - in which fewer than a third of firms shoulder the
entire corporate tax burden - has been seen as essentially
subsidizing inefficiency and punishing profitability.
"Corporate tax cuts and broadening the tax base would make Japan's
taxation fairer and more stable, even though it would impose a
burden on unprofitable companies that are not paying corporate tax,
many of which are small and unlisted," said Hiroshi Watanabe, senior
economist at SMBC Nikko Securities.
"If the government continues to levy high tax on profitable firms,
that would drive more firms out of Japan."
The changes, part of the latest instalment of Abe's "Third Arrow" of
growth-promoting structural reforms, will mean short-term pain for
the 70 percent of Japanese firms that pay no corporate tax,
especially among the small firms that employ seven out of 10
Japanese workers.
In other developed economies such as the United States and Britain,
by contrast, more than half of firms pay corporate tax.
But in the longer term, the changes are expected to nurture more
profitable firms, while it is hoped the lower tax rates will
encourage foreign direct investment and capital spending to spur
growth under the reflationary policies dubbed "Abenomics".
A number of foreign companies with Japan-listed units, including
Oracle Corp <ORCL.N> and The Coca-Cola Co <KO.N>, will also be among
the main beneficiaries of the tax cut, according to SMBC Nikko
Securities.
CARRYING FORWARD LOSSES
Abe's cabinet approved on June 24 the plan to cut Japan's corporate
tax rate - among the highest in the world at above 35 percent - to
less than 30 percent over several years.
Decisions on how to offset revenue losses and other details were
deferred, but a government tax panel has issued proposals that
included expanding taxation to companies with less capital, meaning
that even loss-making firms will have to pay local corporate tax.
The panel also proposed changes to deferral provisions, which let
companies carry forward losses to offset future taxes.
Those generous carry-forward provisions resulted, for example, in
Toyota Motor Corp <7203.T> - one of Japan's most profitable
manufacturers and its most valuable by market capitalization -
paying no corporate tax for the five tax years from the onset of the
global financial crisis in 2008.
The Ministry of Finance estimates that each percentage point of tax
cuts would reduce government revenue by about 470 billion yen ($4.6
billion) a year. Cutting the tax rate below 30 percent would cost
some 2.8 trillion yen in terms of lost revenue.
Nomura Securities estimates that a 6 percentage point cut in
corporate tax could boost GDP by around 0.3 percent over time,
although the effect would be smaller if revenue losses were financed
by alternative sources.
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"The immediate impact of the tax cut may be small. But in the long
run, lower corporate tax rates would encourage foreign direct
investment and boost cash flow at profitable firms and encourage
them to raise capital spending and wages," said Minor Nogimori,
economist at Nomura Securities.
Among the 34-member OECD economies - whose average rate is around 25
percent - Japan's corporate tax rate ranks second after the United
States. In Britain, Germany and Canada, the rate is below 30
percent.
In Asia, China and South Korea impose a corporate tax around 25
percent and Singapore at 17 percent.
TIMING RIGHT
Some observers believe the effort to encourage foreign direct
investment is coming just as Japanese small and medium size
enterprises (SMEs) are looking attractive to foreign buyers.
"Many foreign companies want to buy mid-cap Japanese firms. We are
at the crest of a good wave of interest, possibly the first and
last," said Takashi Mitachi, Co-Chairman Japan at Boston Consulting
Group.
"The 2011 Fukushima disaster was an unfortunate event, but the
resulting supply chain disruption also showed the world that there
are many lucrative SMEs in Japan that boast large global shares."
He added, however, that a tax cut would not be effective unless
coupled with eased visa restrictions and steps to encourage
entrepreneurship.
Broadening the tax base would be crucial for Abe to keep his aim of
balancing the primary budget - excluding new bond sales and debt
servicing - in fiscal 2020/21 to fix the public finances. Japan's
public debt is twice the size of its $5 trillion economy, by far the
highest in the industrialized world.
Analysts say the government should also find ways to spread out the
corporate tax burden, which they say could help streamline
businesses and sharpen competitiveness.
"If the corporate tax is imposed on loss-making firms, that would
bring about a realignment of businesses and it could also encourage
them to make better use of their capital to raise profits," Nogimori
at Nomura Securities said. ($1 = 101.3700 Japanese Yen)
(Editing by Alex Richardson)
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