Encourage Enterprises to Invest actively through Tax System Reform

It is necessary to draw positive investment from companies, leading to a transformation of the economic structure and robust growth.

The Liberal Democratic Party and its ruling coalition partner Komeito have decided on an outline of tax system reform for fiscal 2021. For businesses, the two pillars are tax cuts that encourage decarbonization to prevent global warming, and digitization.

Due to the spread of the novel coronavirus, corporate capital investment in the July-September period decreased by 10.6% from a year earlier. However, there are not a few companies that are improving their business performance in response to changes in society.

If the government clarifies its policies on decarbonization and digitization, it will be easier for companies to invest. It is important to accelerate these policies through taxation measures.

Concerning decarbonization, to achieve the government’s goal of reducing greenhouse gas emissions to virtually zero by 2050, the tax reform outline calls for a tax cut for companies that invest in equipment that helps with environmental measures.

The tax cut is supposed to be applied mainly to the production of high-performance batteries for electric vehicles and the introduction of energy-saving production equipment, with deductions on corporate tax of up to 10% of the investment amount.

Europe has come up with a strategy to vitalize its economy through environmental investment. U.S. President-elect Joe Biden also intends to promote measures to counter global warming.

The government has set up a ¥2 trillion fund to support priority areas for decarbonization in the additional economic stimulus package. It is important to increase the competitiveness of Japanese companies by attracting effective investment.

The coronavirus pandemic has made it evident that Japan is lagging behind other countries in digitization. The outline calls for preferential treatment for companies that invest in information technology, deducting up to 5% of the investment amount from their corporate tax.

The tax break is targeting investment in software and other products necessary for the introduction of cloud computing, in which data is managed online.

Support for research and development is also essential. Since the collapse of U.S. investment bank Lehman Brothers in 2008, European and U.S. companies have actively invested in R&D for digitization and other fields. But Japanese companies are said to have been reluctant to invest in these areas while accumulating internal reserves.

The outline calls for expanding tax breaks for R&D and raising the upper limit for the amount of investment that can be deducted from corporate taxes from 45% to 50%.

The government has tried to promote the introduction of information technology through various tax cuts, but businesses have been slow to take it up. It must examine past problems and ensure that new measures take root steadily in the industrial sphere.

Attention should be paid to strengthening the management foundations of small and midsize companies. The outline includes a new tax system to support mergers and acquisitions in order to help transform businesses and find successors. It is hoped that the new tax system will be effective in improving their productivity, which is a challenge that needs to be addressed.

— The original Japanese article appeared in The Yomiuri Shimbun on Dec. 11, 2020.