Japan's Corporate Tax-Cut Plan Could Sting Smaller Businesses

Some 99% of Japan's 2.76 million corporations are small firms capitalised at or below £579,000, and about 73% are not making enough profits to pay corporate taxes, according to government data.

Prime Minister Shinzo Abe's attempts to lower Japan's corporate tax rate could potentially kill several small to midsize businesses -- a tax cut could force more businesses to pay some levies and the move threatens their survival.

Abe, who increased political pressure for a corporate tax rate cut in a January speech in Davos, Switzerland, faces opposition to the move – a cut will hit fiscal revenue in a nation with the world's biggest debt burden.

Government advisers are considering asking companies pay taxes on capital and salaries, in addition to profits – a rule applicable at present to firms with capital exceeding 100m yen ($980,000 / €704,900 / £578,587), Bloomberg reported.

The compromise could help reduce the impact of reduction in the effective corporate tax rate, which Deputy Economy Minister Yasutoshi Nishimura this week said Tokyo wants to roll out next year.

The government believes a tax cut will encourage Japanese industry to invest more at home and raise salaries.

The administration needs to convince tax-policy experts in Abe's ruling Liberal Democratic Party (LDP) worried about the fiscal impact of lower levies, Nomura Holdings economists Shuichi Obata, Minoru Nogimori and Tomo Kinoshita said in a 30 April note to clients.

"It is likely to have its work cut out for it in terms of persuading the LDP tax commission to drop its objections," they added.

Firms May Hoard Gains

Japanese companies held a near-historic 222tn yen in cash as of December 2013, the Bank of Japan has estimated.

Japanese firms, plagued by two decades of sluggish growth and deflation, put aside cash for several years.

A sizeable number of Japanese companies are expected to save, and not spend, the funds generated by the planned cut in the corporate tax rate, an October 2013 Reuters survey of 400 companies showed, moves that could derail Abe's growth strategy.

The 73% of Japanese firms that do not pay taxes contrasts with about 56% in Germany, 48% in the UK and 46% in the US, according to Japanese government data.