Recommendations Concerning Corporate Taxation
September 16, 1997|
(Japan Federation of Economic Organizations)
The government and ruling parties are working valiantly on six major sets of reform. A fundamental overhaul of the tax system has an extremely important role to play in giving concrete shape to these reforms.
By comparison with other countries, Japan's present tax system is heavily dependent on the direct taxes imposed on personal and corporate income. Aggravating the high-cost structure for corporations and for the economy as a whole, this tax system weakens international competitiveness and accelerates the process of "hollowing out" by encouraging domestic corporations to shift operations overseas and discouraging foreign corporations from entering Japan. It is a major barrier to the maintenance and enhancement of economic vigor.
Furthermore, Japan's population is now aging at a speed unparalleled anywhere else in the world. If Japan allows itself to focus entirely on the immediate fiscal issues at hand, and fails to address the need for appropriate changes in the tax system for the long term, it will not be able to avoid the lowering of the economy's capacity for growth. This slowdown in growth will be caused by the fast-rising burden of taxes and social insurance premiums.
Tax reform is also extremely important for achieving greater effectiveness of the economy's structural reform. In other words, the basic principle for the tax system reform should be to correct the heavy dependence on personal and corporate income taxes. It should redress the imbalance between direct and indirect taxation in such a way that the entire nation shares the burden. Based on these assumptions, corporate taxes, taxes on individual income, and other forms of taxation need to be reformed.
Reforming the corporate tax system is an urgent task. The burden of taxes on corporations is heavier in Japan than in all the other major industrial nations. It needs to be lowered to the level prevailing in these other nations. The lowering of the tax burden is an extremely important measure. Not only will less taxes strengthen Japan's international competitive position as a site for industry and prevent "hollowing out", but also this change contribute to the maintenance and enhancement of corporate energy and invigorate the entire Japanese economy.
In line with this perception, Keidanren offers the following urgent recommendations for reform of the tax system. The main focus is on corporate taxation.
- A 10% Cut of the Effective Corporate Tax
Since corporate tax rates are much higher in Japan than in other major industrial nations, the tax burden placed on corporations should be lessened by lowering the effective tax rate from the present approximate figure of 50% to the standard international level of 40%. In the context of the ongoing process of internationalization, this lessening will make it possible for corporations to maintain their international competitiveness. It will also enhance the corporate energy, while strengthening the economy.
In order to accomplish the 10% cut of the effective corporate tax, it is essential to lighten the total burden of corporate taxes. This would include cutting the corporate business tax and corporate inhabitant's tax at the local level. A comprehensive schedule should be drawn up for the entire reform at both the national and local levels as well.
The reduction of the effective corporate tax rate is outlined in the following items.
- Revision of the corporate tax
As part of the fiscal 1998 tax revisions, the present 37.5% corporate tax rate should be lowered by at least 5%,with the tax base being rectified at the same time. This should be done, however, not in a revenue-neutral fashion, but in a way that will produce an effective tax cut. To ensure that the rectification of the tax base does not increase the burden on small and medium-sized enterprises, both the lower tax rate on small and medium-sized enterprises (currently 28%) and the maximum limits for its application (currently 8,000,000 yen per annum) should be reviewed.
- Revision of local taxes
In the fiscal 1998 revisions of the tax system, the effective tax burden on corporations should also be lowered at the local level. There is a particular need for the lowering of the corporation tax rate to be accompanied by a cut in the corporate business tax rate.
Some feel that the corporate business tax should be turned into an external-standard tax by using value added as the standard for its assessment. Such a move, however, would fail to produce an effective lessening of the corporate tax burden. Since the external-standard tax would be imposed regardless of performance and would apply to value added, which consists mainly of labor costs, it would cause hardships to corporations striving to maintain their employment levels, small and medium-sized enterprises, and new businesses in the process of growing. In essence it would act as a drag on the revitalization of the economy. Furthermore, it would go against the goal of simplifying the tax system. It is due to these reasons Keidanren cannot accept this idea.
One possibility to widely and fairly even out the burden of paying for local government services would be to combine a reduction of the corporate business tax or corporate inhabitant's tax with tax rate increase of the per capita levy for corporations.
- The need for urgent revisions
Even if the 10% cut in the effective corporate tax rate is to be implemented in stages, it should be fully implemented within two years. In fact, the schedule for the entire reduction package should be an explicit part of the fiscal 1998 tax revisions.
In the second stage, the major reduction in corporate business taxes should be done with further lowering of the corporate tax rate. In order to cover for the loss in revenues of local government, it will be necessary to correct the balance between direct and indirect taxation as well as to move forward with administrative and fiscal reform in local government. The natural increase in tax revenues brought about by the invigoration of the economy should also be considered.
- Rectification of the Tax Base
The tax base has not been subjected to a major review for over 30 years. Serious moves must be implemented to rectify this situation in line with international trends of achieving fairness, neutrality, and simplicity in taxation.
Rectification should be carried out for the entire tax base, including the various allowances and other measures that affect the measurement of taxable income in certain periods. It should also be applied in areas where the Japanese tax system is unduly stringent by international standards, such as the carrying forward or back of losses and depreciation periods.
- Consolidated Corporate Taxation
One basic area that Japan has lagged with respect to corporate taxation is that of consolidated taxation and other corporate group taxation. In view of the recent trends toward the reorganization of corporate operations, the development of group business management by lifting the ban on holding companies, and the emphasis on consolidated results in corporate accounting, a full-fledged system of consolidated taxation should be promptly introduced. To match their operating environments, the tax system should be neutral with respect to the corporations' choices of organizational arrangements. It is believed that the introduction of consolidated taxation will lead to greater corporate energy and overall economic vigor.
There is also an urgent need to establish provisions that relate to the splitting of corporations and the creation of holding companies. These include 100% compressed entry in cases where land or other real assets are invested, exemption of registration and license taxes on transferred real estate, tax exemption for real property acquisition, and the transfer of stocks at current book value.
- Review of Related Taxes
- Taxes on land (abolition of the land-value tax and the surcharge on capital gains on land)
Now that land prices have fallen, the land-value tax has lost its original purpose. This tax, which overlaps the fixed property tax, places an excessive burden on land that is being used effectively. Given the shift in policy from price control to the promotion of effective use, it should be abolished immediately.
The surcharge on capital gains on land also needs to be abolished promptly because it hinders corporate restructuring and deals with bad debts. Thus it acts as a drag on economic revitalization.
- Pension-related taxes (abolition of the special corporate tax and other measures)
In the context of Japan's aging population, the present public pension system faces financial problems of a structural nature. In the years ahead, private pensions, particularly corporate pension plans, will have an increasingly important role to play. The special corporate tax applied to approved pension funds should be abolished immediately due to its hindrance of pension finances. In conjunction with the major overhaul of the public pension system scheduled for fiscal 1999, there is also an urgent need for consideration of the introduction of fixed-contribution pensions.
- Finance-related taxes (abolition of the securities transaction tax and the establishment of provisions for stock options)
To deal with the system of finance-related taxes in connection with the serious moves involved with financial system reform, it is necessary to take timely measures. In particular, the securities transaction tax and the bourse transaction tax should be abolished, since they hinder the revitalization of Japan's securities markets. Also, the double taxation of dividends (corporate tax and personal income tax) should be eliminated.
In order to achieve effective functioning of the stock options system that was introduced in the last revision of the Commercial Code, taxation of capital gains needs to be applied only when stocks and bonds are sold. There is also a need to turn the suspension of constructive dividends taxes for retired stocks into a permanent provision.
In addition to the reforms of corporate and corporate-related taxes touched on above, there is also a need to undertake reform of personal income taxes.
In order to correct the excessive tendency toward incorporation of personal businesses and to maintain fairness in the taxation of corporations and individuals, the maximum tax rate on personal income should be lowered. It should work to prevent divergence between corporate and personal income tax rates. For the time being the maximum total rate of national and local taxes on income also should be lowered to 50% to make the graduated structure of income taxes less steep. This was recommended by the Tax Commission in November 1993.
In order to achieve fairness in taxation, consideration must also be given to switch to total income taxation and to the adoption of taxpayer identification numbers.
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