The government of Prime Minister Shinzo Abe has broadly agreed to end a special corporate tax surcharge -- imposed to finance reconstruction in areas hit by the March 2011 earthquake and tsunami -- at the end of this fiscal year in March, one year earlier than planned, sources familiar with the matter said Thursday.
Withdrawal of the surcharge, which will reduce the current overall tax rate of about 38 percent on Tokyo-based firms by about 2 percentage points, is expected to be part of an economic stimulus package to be finalized by the end of this month, they said.
The move is apparently aimed at cushioning the impact of a planned sales tax hike next April, they added.
The Finance Ministry was reluctant to support the move out of concern an earlier end to the three-year 10 percent surcharge could negatively affect reconstruction efforts.
But the ministry was persuaded by Abe, who has put emphasis on pulling the Japanese economy out of a nearly two-decade-long economic funk since taking office last December, the sources added.
Major attention is now focused on how the government stipulates its mid- to long-term policy of corporate tax reductions, as Cabinet ministers remain at odds over the issue.
The government is set to hammer out an outline of the package on Friday, as Abe is slated to visit Canada and the United States from Monday to Friday next week.
Finance Minister Taro Aso has expressed fear that aggressive corporate tax cuts may hamper efforts to restore the country's fiscal health, the worst among industrialized economies. But the Ministry of Economy, Trade and Industry has been calling for further corporate tax cuts over time.
A 1-point cut in the corporate tax rate is estimated to reduce government revenue by around 400 billion yen.
Some experts say Japanese corporate tax rates are high by international standards, making foreign companies unwilling to operate in the country.
Without the surcharge, the effective corporate tax rate, consisting of national and local taxes, would have stood at 35.64 percent as of January for Tokyo-based companies. That is still higher than the approximately 30 percent rate in Germany, 25 percent in China and 17 percent in Singapore, according to data released by the Finance Ministry.
Abe is expected to announce on Oct. 1 whether to raise the 5 percent consumption tax rate to 8 percent in April, as the first round of a planned two-stage increase to 10 percent in October 2015. The sales tax hike is aimed at raising money needed to cover swelling social security costs for Japan's greying population.
To avoid an economic slowdown following the tax hike, Abe is expected to also unveil in October a 5 trillion yen stimulus package, sources said earlier.
Cabinet members have already agreed to carry out tax cuts to bolster private-sector capital spending, which Abe views as a pillar of economic growth.
"We'll implement tax cuts to boost investment in a drastic manner. A mission of Abe's government is to make people feel economic recovery all over the nation," Abe told reporters in Fukushima Prefecture, where he inspected the crippled Fukushima Daiichi nuclear power plant.