Japan has one of the highest corporate tax rates in the world. The government had planned to reduce the corporate tax rate by five percentage points from April 1 2011. The tax cut, which would have reduced tax revenue by about $5.3 billion, was a key ...
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Japan has one of the highest corporate tax rates in the world. The government had planned to reduce the corporate tax rate by five percentage points from April 1 2011. The tax cut, which would have reduced tax revenue by about $5.3 billion, was a key measure aimed at increasing the nation's competitiveness.
However, one of the costliest natural disasters of all time meant that the government had to readdress its plan. The devastating earthquake and tsunami in March 2011 caused great physical and economic harm and means that extra revenue is required to finance the reconstruction costs, estimated to be more than $300 billion.
"The earthquake has had a huge impact on the Japanese economy and industry. M&A and financial transactions are not so active, and the number of deals have decreased," says Atsushi Oishi of Mori Hamada & Matsumoto.
"As a result of the earthquake, we expect much more work in dispute resolution and less M&A work, except for restructuring work, possibly," added another practitioner.
Despite this blow to industry, Japanese corporations are still making investments in other countries, particularly other Asian countries.
"Before the earthquake, the government was planning on cutting the corporate tax rate, but the government had to give it up because of the earthquake," said Eiki Kawakami of Kojima Law – Taxand. "The government will try and increase the consumption tax rate from 5% to 7%, and later to 9%. This will give more importance to indirect tax planning."
Increasing the consumption tax rate has been the government's intention for some time. In 2010 Prime Minister Naoto Kan, who was succeeded by Yoshihiko Noda on August 30 2011, proposed to double the rate from 5% to 10%.
In its 2011 economic survey of Japan, the OECD suggested that the reconstruction costs associated with the earthquake means that the country needs to prioritise tax reform and implement tax increases as soon as possible. Consumption tax was highlighted as a key source of additional revenue.
The survey suggested an increase of five to nine percentage points to balance the primary budget. This is considered the first step towards achieving a sustainable fiscal position. To create the 3% of GDP surplus that is necessary to stabilise Japan's debt ratio, the OECD suggested that actually an 11 percentage-point increase is required. If implemented, this would push Japan towards the 20% consumption tax average in Europe.
"The consumption tax rate should be raised, and it should happen soon," says Ryutaro Uchiyama of Tokyo Kyodo Accounting. "A 10% consumption tax rate is not adequate. It should increase to between 15% and 20%."
In its survey, the OECD also suggested that the use of environmental taxes could be a useful tool in generating revenue for fiscal consolidation. The organisation is keen on the idea of introducing a carbon tax in countries or regions not covered by the emissions trading system (ETS).
"I don't think it is a good idea", said Yushi Hegawa of Nagashima Ohno & Tsunematsu. "[A carbon tax] will significantly decrease Japan's international competitiveness. Corporate taxpayers engaged in the manufacturing industry will heavily oppose this."
The budget deficit coupled with the increasing pressure to find additional sources of revenue to finance reconstruction means that the tax authorities have become more aggressive, challenging many transactions.
The introduction of transfer pricing documentation requirements in Japan in 2010 has imposed significant and potentially costly compliance burdens on domestic and foreign companies.
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