Jiji Press TOKYO (Jiji Press) — The large internal reserves held by companies is one of the major issues for the Oct. 22 general election, amid a debate on whether to impose a tax on retained earnings or encourage firms to promote investments using the reserves.
As of the end of March 2017, the internal reserves of businesses had swollen to a total of ¥406 trillion, marking the largest-ever level, after the yen’s depreciation and higher stock prices boosted their earnings.
In campaign pledges for the upcoming House of Representatives election, parties such as Tokyo Governor Yuriko Koike’s Party of Hope and the Social Democratic Party are calling for taxation of large companies’ internal reserves.
By contrast, Prime Minister Shinzo Abe, also president of the Liberal Democratic Party, has stressed that “what is important is to promote wage hikes and investments.”
The proposed taxation would involve a levy on the remainder of after-tax profits following dividend and other payments. Taxation of 1 percent on some ¥200 trillion in cash and deposits, out of total corporate internal reserves, is seen generating ¥2 trillion in tax revenue.
The government of the former Democratic Party of Japan, as well as some members of the ruling LDP, previously discussed introducing such taxation. But this debate was intended only to “put a pressure on major firms that are reluctant to carry out wage hikes and facilities investments,” according to a senior official of the LDP.
At a news conference on Friday, Koike proposed direct taxation on internal reserves.
While calling for freezing the planned consumption tax increase from 8 percent to 10 percent in October 2019, she proposed a cut on remuneration paid to lawmakers and sales of government assets, together with taxation on internal reserves, as ways to create alternative sources of revenue to make up for some ¥5 trillion of projected gains from the consumption tax hike.
A government official suggested that the taxation on internal reserves would “fail to make a stable source of revenue to cover social security costs, as the amount of such reserves is affected by economic conditions.”
The ruling coalition of the LDP and Komeito plans to discuss extending or expanding the existing system of reducing corporate tax for companies working to raise wages.
In response to criticism in the business community that the proposed levy is a form of double taxation, and may prompt businesses to reduce capital spending, Koike is now looking to correct course by showing an intention to leave decisions on how to use internal reserves to initiatives by respective companies.Speech