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The government of Japan has pledged to lower its corporate income tax rate in order to attract more foreign investment to Japanese shores. However, it has a long way way to go before it can begin competing with tax friendly Singapore.

Japan has one of the highest tax rates in the world, currently around 40%. The government of Japan has proposed to cut the corporate income tax rate to around 25% in a bid to spur economic growth. The government also plans to introduce incentives to attract overseas companies such as simplifying immigration procedures and setting up specialized economic zones. Furthermore, sales tax is likely to be increased from 5% to 10%. The sales tax hike is aimed at addressing Japan s ballooning public debt that currently stands at around 950 trillion yen (over $US10 trillion). While Japan’s business community has welcomed the corporate tax rate cut, some economists remain skeptical of the long-term impact that it would have on the economy. Commenting on the proposed company tax cut, Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo said,

“It would have only a limited ability to stimulate capital investment and therefore a limited ability to push overall economic growth.”

The government’s new growth strategy to transform Japan into a key business hub in Asia appears impressive but not very convincing, given that economies such as Singapore and Hong Kong are matured business hubs in the region with competitive tax rates, open immigration policies, and business friendly environments. Singapore in particular has gone all out to woo foreign investors and entrepreneurs. For instance, Singapore company formation takes as little as a day’s time with no restrictions on foreign ownership of Singapore companies. Foreign entrepreneurs do not require any special approvals from authorities for setting up a company in Singapore. Singapore’s tax system places it at a competitive advantage over other economies. Singapore’s effective corporate tax rate on profits up to S$300,000 is <9%, while profits above S$300,000 are taxed at a flat rate of 17%. Furthermore, startups enjoy a 0% tax rate on the first S$100,000 of profits for each of their first three consecutive tax filing years. Moreover, a number of industry-specific tax incentives lure foreign firms from various sectors to incorporate a company in Singapore. It is Singapore’s visionary policies and business friendly regime that has made it a formidable regional business and economic hub.

Even if Japan lowers its tax rate from 40% to 25% it remains far behind Singapore’s company tax rate of 17%. The bottom line is that Japan will have to ensure that its investment environment remains conducive and competitive to be back on the radar of foreign investors.

The following diagram that shows the tax rates for certain industrialized economies reveals that Japan’s current corporate tax rate is one of the highest in the world.

Image Source: Wall Street Journal

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