TOKYO: Japan’s ruling coalition has approved a tax reform plan that will cut corporate taxes from April and pledges further reductions in coming years in a bid by Prime Minister Shinzo Abe to boost profitability and bolster economic growth.

The plan approved by Abe’s Liberal Democratic Party and its coalition partner Komeito on Tuesday would cut the overall effective corporate tax rate by 2.51 percentage points to 32.1 per cent from April and then to 31.3pc the following year.

Abe pledged in June to lower the corporate tax rate to below 30pc over the coming years to help pull Japan out of nearly two decades of deflation. Earlier this year, he eliminated a levy on companies imposed in 2012 to help fund disaster relief.

Takeshi Noda, chairman of the LDP’s tax panel, estimated that the corporate tax cut would amount to about 400 billion yen ($3.32bn) over the next two fiscal years.

Abe hopes the tax cuts will encourage companies to raise wages, which would spur consumer spending, and to invest some of the $1.9 trillion in cash held by companies outside the financial sector.

Japan’s top effective corporate tax rate is 34.6pc, among the highest in the major economies. The average corporate tax rate stands around 25pc among OECD economies.

But after a decade of slow growth only about 30pc of companies actually pay taxes. The rest are either unprofitable or have been able to apply credits from prior losses.

In a change aimed to broaden the tax base, established companies would only be able to apply losses to write off half of reported income from 2017. That limit is currently 80pc.

The ruling coalition estimates it will be budget neutral in the third year as steps such as broadening the tax base will help cover shortfalls caused by the tax cut.

“The focus is whether companies will pass funds arising from the tax cuts to capital spending and wage increases, which will lead to economic recovery,” said Satoshi Osanai, economist at Daiwa Institute of Research.

“We think it will be difficult to achieve budget neutral in the third year. And in a long-term perspective, it will be an issue how the government will secure revenues and manage fiscal reconstruction.”

Japan’s economy unexpectedly slipped into recession this year after an increase in the national sales tax in April hit consumer spending.

The tax plan recommits to a further increase in that consumption tax to 10pc from 2017.

It also expands the Nippon Individual Saving Account programme, which launched this year. That programme allows individual investors to invest up to 5 million yen in stocks without being subject to taxes.

The changes will allow larger annual investments and allow for investments on behalf of children. There were 7m NISA accounts as of June.

Published in Dawn, December 31st, 2014