Panel proposes tax breaks for Japan Inc.

The government's tax panel recommended a package of measures Friday for tax reform in fiscal 2007 centering on corporate tax breaks to spur investment and international competitiveness in line with Prime Minister Shinzo Abe's progrowth policy.

The package calls for allowing companies in Japan to treat the full amount of depreciation costs as tax-exempt expenses, as is the case in the United States and Europe.

Under the current asset-depreciation system, companies are permitted to treat 95 percent of their capital investments as tax-exempt expenses. The proposed reform will reduce firms' tax payments.

The Tax Commission, an advisory body to the prime minister, submitted the recommendations to Abe following endorsement at a plenary session.

The recommendations, subtitled "aiming for economic revitalization," are filled with preferential treatment for the corporate sector.

The panel called for shortening the depreciation periods -- now 10 years -- for production facilities of cutting-edge products such as plasma televisions. In South Korea, the period is four years.

It also called for other tax breaks to help smaller businesses, including firms that invest in venture businesses and for internal reserves by family-owned companies.

Business circles call for cutting the effective rate of corporate tax to 30 percent from around 40 percent at present. In some European countries, the rates are around 35 percent.

The panel said it will make a comparative analysis of the effective rates of corporate taxes in other countries and study the impact of possible corporate tax cuts on employment and individual income.

The panel said invigorating the corporate sector will benefit the economy as it will have a spillover effect on the household sector through distribution of added value.

Masaaki Homma, chairman of the government's tax panel, has long argued that it is necessary to lower the rates to allow firms in Japan to be on equal terms with foreign rivals.

But some panel members questioned the direction of the debate.

One member said the government cannot obtain public acceptance if it offers preferential treatment to corporations while raising the consumption tax after the Upper House election next summer.

The panel failed to raise the consumption tax issue in its recommendations, because the ruling coalition has already decided to shelve debate on the matter until next fall in consideration of its political impact on the Upper House poll.

The panel also called for reviews of the tax system to address so-called triangular mergers introduced under new corporate law to stimulate mergers and acquisitions.

Under the triangular merger framework, a Japanese subsidiary of a foreign corporation will be able to take over a target Japanese firm by swapping some of the parents' shares for all or a sizable portion of the target's shares, without using any cash to fund the acquisition.

The following is a summary of the package of recommendations submitted Friday by the government's Tax Commission to Prime Minister Shinzo Abe:

* Firms should be allowed to treat the full amount of capital investment as tax-exempt expenses.

* Depreciation periods should be shortened for facilities making high-tech products.

* The tax breaks on capital gains from stock sales and on dividend income should be abolished as scheduled, but steps will be needed to alleviate its negative impact on the stock market.

* The panel will debate whether to cut the effective corporate tax rates in a medium- and long-term perspective.

* Road-use revenues should be transformed into general revenues with current tax rates being maintained.