Japan tax overhaul key for corporate tax cut: LDP

TOKYO Wed Jul 2, 2008 5:05am EDT

Japan's ruling Liberal Democratic Party's chairman of tax panel Yuji Tsushima speaks at the Reuters Japan Investment Summit in Tokyo July 2, 2008. REUTERS/Toru Hanai

Japan's ruling Liberal Democratic Party's chairman of tax panel Yuji Tsushima speaks at the Reuters Japan Investment Summit in Tokyo July 2, 2008.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - Any cut in Japan's corporate tax, which is one of the highest among major economies and is seen as discouraging foreign investment, should be debated along with how low its consumption tax is, the head of the ruling party's powerful tax panel said on Wednesday.

Yuji Tsushima told the Reuters Japan Investment Summit that raising the politically sensitive consumption tax is only possible if the public recognizes the need for such a hike to finance rising social welfare costs in an ageing society.

Tsushima backed an idea of creating an international tax to help poor countries, including addressing their climate change-related problems, but said the idea needed to be studied further and it was impossible for Japan to do it alone.

"How much of a tax burden companies face is a very important issue for boosting foreign investment in Japan, but we should not jump to a conclusion on how high the corporate tax rate should be," said Tsushima, chairman of the Liberal Democratic Party's tax panel.

"We have to look at the overall picture. Our corporate tax is relatively high compared with other major countries, but not particularly high," he added.

Japan's corporate tax rate of around 40 percent is higher than in other major economies -- it is around 30 percent in Britain, Germany and France -- making it less attractive for foreigners to invest here.

A Japanese government advisory panel in May called on the government to cut corporate taxes and implement more transparent rules for mergers and acquisitions so as to boost foreign investment.

But Japan may struggle to cut corporate taxes in the face of a mountain of public debt and as voters are being told they will probably face a higher consumption tax, now at 5 percent, as an ageing population raises pension and welfare spending.

"Japan's consumption tax, which is equivalent to a value-added tax, is so much lower than those in other industrialized nations," Tsushima said.

"In Germany, they would talk about lowering its corporate tax even if that means raising the value added tax. There are economic grounds for that debate. In Japan, any debate on whether the corporate tax is low or high would lack balance if we don't talk about it in the context of the overall tax system."

Prime Minister Yasuo Fukuda said last month that debate on whether to raise the nation's consumption tax could take 2-3 years, playing down speculation the tax rise could come as early as next year.

Tsushima said whether his tax panel can decide the timing of the tax hike during this year's annual tax reform negotiation that ends in December will depend on the level of public support for the idea.

(Additional reporting by Tokyo Policy Team; editing by Sophie Hardach)

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