TAX NEWS - June 2010

Japan Tax: Tokyo eyes tax cut to escape sand trap

The decline in golf membership prices is as illustrative as many other statistics in showing the continued malaise affecting corporate Japan.

Memberships that sold for more than Y=10 million 20 years ago at the height of the Japanese "bubble" are now averaging Y1.55m ($19,700), according to recent reports.

Japan's Nikkei financial newspaper this month said membership prices had already fallen a further 4 per cent on average during this year.

The memberships, which are readily tradeable, are being offloaded by cash-strapped companies that can no longer justify the expense despite the passion for golf among Japan's salarymen and corporate chiefs.

But with hints of a corporate tax cut in the offing, help could be at hand for the nation's businesses, many of which are struggling to compete internationally under the current 40 per cent effective rate of corporate tax in an environment of deflating prices.

As early as this week, new Prime Minister Naoto Kan is expected to unveil plans for a corporate tax cut of perhaps up to five percentage points. The tax cut is just one of what's likely to be a sequence of measures implemented by the Kan government and Japan's central bank to shake its economy from two decades of stagnation.

Yesterday, the Bank of Japan announced it would lend Y=3 trillion to commercial banks for them to offer loans to certain growth industries.

The sectors range from the environment and energy, nursing home care and tourism to investment projects in other Asian countries, and the money will begin to flow from the end of August.

A plan to decrease corporate tax rates for small companies was part of the ruling Democratic Party of Japan's campaign manifesto when it won office last year, but local media reports and the consensus in Tokyo financial circles suggest the government will cut the rates for companies of all sizes. With Japan's massive borrowings pushing its net public sector financial liabilities to at least 100 per cent of GDP, the government must either hope the corporate tax cut is revenue-neutral or choose to expand the tax base or rates in other areas.

Minoru Nogimori, an economist for Tokyo-based Nomura Securities, said he believed the government would gradually reduce the rate to an internationally competitive 30 per cent, with perhaps a 5 per cent cut next year.

"We don't think the government will cut the corporate tax rate (to international levels immediately), because of the revenue problem," Mr Nogimori told The Australian.

"So I would say a gradual cut from 40 per cent to 30 per cent, in the long term."

Mr Nogimori said Nomura had not modelled the likely revenue impact of a corporate tax cut on Japan's public finances, but he said similar cuts in other nations had been accomplished without revenue loss thanks to increased economic activity.

"What I can say about the corporate tax is, if you see European countries as an example, if you reduce the corporate tax the final tax revenue actually increases," he said.

"It's because the corporate tax cut helps create higher corporate competitive power and profitability. A rapid cut in corporate tax would result in lower tax revenue, but gradual reduction can help boost corporate competitive power so that tax revenue does not go down."

Richard Jerram, the chief economist for Macquarie Securities Japan, agreed a corporate tax cut was on the cards but it would be balanced by a likely rise in consumption tax.

"They (the Japanese government) seem to be pretty aware of the fact that Japan corporate rates are higher than most places and Korea and Taiwan have been cutting their rates," he said.

"The interesting thing about it is whether they can make it revenue neutral or not."

Mr Jerram said that because of the economic conditions and creative accounting, a large proportion of the Japanese sector, particularly smaller firms, did not pay tax. "Seventy per cent of companies don't pay corporate tax," Mr Jerram said.

"A lot of them are genuinely loss-making, but a lot are able to hide a lot of their revenue so that they can show a loss."

Boosting tax compliance and resolving Japan's immense debt overhang are just two of the problem's facing Mr Kan and his team.

There's the country's dwindling birth rate and ageing demographics to tackle too.

It's enough to drive anyone to the golf course.