* Abe aims to lower corp tax rates below 30 pct from 35 pct
* Eyes taxing small firms to help offset revenue loss
* Tax cuts needed to spur growth, immediate impact limited
* Abe faces need to balance growth and fiscal consolidation
By Tetsushi Kajimoto and Shinichi Saoshiro
TOKYO, June 30 For corporate Japan, burdened by
one of the industrialised world's steepest tax rates, a tax cut
at the centre of Prime Minister Shinzo Abe's latest growth
strategy will end up giving with one hand - and taking back with
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 favouring 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
subsidising 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 and The Coca-Cola Co, 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
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 - one of Japan's most
profitable manufacturers and its most valuable by market
capitalisation - 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.
"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 Minoru
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.
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
"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
He added, however, that a tax cut would not be effective
unless coupled with eased visa restrictions and steps to
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 industrialised
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)