Abe picks corporate tax fight Shinzo Abe has wasted no time picking his next tax battle. The Japanese prime minister has not yet formally announced his decision to raise Japan's national sales tax - that is expected to happen on October 1 - but he is already embroiled in a new and similarly contentious debate, this time over corporate income taxes. Mr Abe has made it clear since he campaigned for office late last year that he favours a "bold" reduction of Japan's corporate tax rate, which at close to 40 per cent is the second-highest among countries in the Organisation for Economic Co-operation and Development, after the US. "This is a campaign promise," Mr Abe said on television this week. Lower business taxes, he argues, would stimulate investment and wage growth and lure more foreign companies to Japan. His proposal is in tune with the broader expansionary principles of "Abenomics," his stimulus-heavy campaign to accelerate growth and pull Japan out of deflation. Mr Abe looks to be in a good position to get his way, with high personal approval ratings and a solid majority in parliament for his Liberal Democratic party-led coalition. But there is division within the government about the political and fiscal merits of his plans. "From a common sense perspective, I think it would be difficult," Taro Aso, Mr Abe's more fiscally conservative finance minister, told reporters on Tuesday. On Friday he said economic conditions would determine the extent of any cuts. Mr Aso's reservations appear aimed at the most ambitious element of Mr Abe's plan: a sharp cut in the base central-government corporate tax rate, which at 30 per cent comprises the biggest portion of business income tax. Local taxes and surcharges push the rate up to 38 per cent or more, depending on where a business is located. Cutting taxes on corporations while raising them on consumers would be a treacherous political leap, even for the popular Mr Abe. "We would be accused of favouring big business over the common people," says a senior LDP lawmaker. A finance ministry official said a significant loss of corporate tax revenue would make it "difficult" for the government to meet a commitment to cut its primary budget deficit in half by 2015. And since only three in 10 Japanese companies report any taxable income - the rest are either losing money or offsetting their profits with tax credits - the benefits would be narrowly shared. However the debate about the base rate is settled, business looks certain to get more limited tax relief under a Y5tn ($50bn) stimulus package that people close to Mr Abe say he is planning to help offset the economic impact of the sales tax rise. That increase would take effect in April 2014 and lift the value-added consumption tax to 8 per cent from 5 per cent. While a tax rate cut would be positive news overall for the market, we note that there may be some negative impact for certain companies Hiromi Suzuki, analyst at Goldman Sachs The Nikkei business daily reported on Friday that the stimulus would include Y1.4tn in business tax relief. About Y900bn of that would come from the early lifting of a corporate income tax surcharge that was levied after the 2011 earthquake. Intended to fund rebuilding in the devastated Tohoku region, the surcharge of about 2.5 percentage points would be eliminated next year instead of in 2015. The rest of the tax reductions would come in the form of incentives for capital investment, something Mr Abe has already promised. Business groups have been pressing hard for lower taxes but the performance of some companies could look worse after a cut, at least in the short term. That is due to the widespread use of deferred tax assets - credits earned during lossmaking years that accountants can add to a company's reported earnings later on. The less tax a company would normally be obliged to pay, the less such credits would be worth. "While a tax rate cut would be positive news overall for the market, we note that there may be some negative impact for certain companies," Hiromi Suzuki, an analyst at Goldman Sachs, said in a report to clients. Paradoxically, "from an accounting standpoint, a lower corporate tax rate may result in a temporary rise in taxes [and lower net profits] in the current fiscal year for firms with a high level of deferred tax assets."