TAX NEWS - June 2010

Japan Tax: Japan's Finance Minister To Consider Doubling Sales Tax

Japan's finance minister said Friday he will take the prime minister's suggestion that the nation's sales tax be doubled from 5% to 10% into consideration while working on an overhaul of the tax system.

Finance Minister Yoshihiko Noda made the comments following surprise remarks by Prime Minister Naoto Kan on Thursday suggesting he would hike the consumption tax rate to 10% in the coming years--a politically risky proposal ahead of an Upper House election scheduled for July 11.

"From the very beginning, the government had a plan to carry out a tax system overhaul that will cover, among other things, corporate, assets, income taxes," Noda said at a news conference. "I want to begin preparations while taking into consideration remarks made by the prime minister."

Kan said Thursday the government and the ruling Democratic Party of Japan will compile tax change proposals, including those on the sensitive issue of how high the sales tax rate should be, by March 2011.

He added that the campaign proposal by the opposition Liberal Democratic Party for a 10% consumption tax rate can be a "reference for the time being." The remark has sparked a flurry of speculation that he wants to at least double the current rate.

Kan said he first seeks a broad, bipartisan agreement on when and how much to lift the consumption tax rate. He has indicated he would then call an election of the Parliament's more powerful lower chamber to give voters a chance to express their views on the increase.

Noda said the Tax Commission, a key government panel that he leads, will clarify planned tax policy changes in an annual reform guideline expected to be released near the end of the year. Decisions on the consumption tax could be made earlier if a cross-party consensus is formed, he said, declining to predict when the tax would actually go up.

Kan's challenge is now to explain why he thinks a doubling in the tax rate is needed, and how he intends to spend the revenues. Analysts say a failure to answer such questions could hurt his credibility and cost his party votes in the upper chamber poll.

In February 1994, then Prime Minister Morihiro Hosokawa suddenly announced plans to push the rate up to 7% from 3%. But Hosokawa dropped the plan the next day after his failure to explain the rationale for the increase set off a public backlash.