(Bloomberg) -- Japan’s parliament approved a corporate income tax cut to help spur economic growth by encouraging companies to increase investment and raise wages.
Legislation approved on Tuesday will cut the levy by 3.29 percentage points over two years from an effective rate of about 35 percent, according to the finance ministry. The changes will reduce the burden on companies by 210 billion yen ($1.8 billion) in each of the next two fiscal years, estimates from the ministry show.
With more than 70 percent of Japan’s companies not paying income tax, the government aims to boost profitable companies while it finds ways to set more effective levies for businesses that report losses. The cut in corporate income tax comes after the sales tax rose last April to address the national debt.
“Corporate tax cuts will help make Japanese companies become more competitive,” said Minoru Nogimori, an economist at Nomura Holdings Inc. “It would be ideal to reduce the tax rate down to below 25 percent in order to compete with other Asian rivals for investment.”
While earnings swell at Japan’s largest corporations, business spending fell in the nine months through December.
Prime Minister Shinzo Abe’s administration plans to continue lowering the levy over about five years to under 30 percent. The finance ministry estimates it is currently the second highest among Group of Seven nations, according to the finance ministry.
“We aim to stem the flow of Japanese companies leaving the country and promote foreign companies investing here, and as a result, the economy will grow steadily and tax revenue will increase,” Abe said earlier in March in parliament.
To secure replacement revenue, the government will reduce the amount of company income that can be written off to cover previous losses. The rate for some local government levies, which are paid by all companies regardless of whether they make a profit or loss, will also be raised.
Cash holdings at all Japanese companies combined was at a near record high of 231 trillion yen at the end of December, according to the Bank of Japan.
Profits are forecast to rise 8.3 percent from last year to a total 21.1 trillion yen at 218 of the companies in the Nikkei 225 Index for which Bloomberg has data.
Workers are starting to see some benefits from those profits, with early results of this year’s spring wage talks showing an average rise in monthly pay of about 2.4 percent, the biggest in 17 years, according to the Japanese Trade Union Confederation.
The legislation also provides for tax-free investment accounts for children and an expansion of tax-free real-estate donations to relatives.
SOURCE: Bloomberg, March 31st, 2015, http://www.bloomberg.com/news/articles/2015-03-31/japan-s-parliament-pas...