TOKYO: Japan’s fiscal 2016 tax revenue came in around 2.1 trillion yen ($18.5 billion) below the initial forecast, casting doubt over Prime Minister Shinzo Abe’s plan to replenish government coffers by spurring growth in the corporate sector.
This was the country’s first drop in tax revenue in seven years, falling by 800 billion yen from the previous year to roughly 55.4 trillion yen, the Ministry of Finance announced Wednesday. When the government drew up the budget in December 2015, it estimated fiscal 2016 tax revenue at 57.6 trillion yen. In January 2017, that figure was revised down by 1.7 trillion yen and again later by 400 billion. The ministry has blamed the decline largely on special factors. But critics say the government’s projections were overly optimistic.
Corporate tax revenue, in particular, fell short, falling 1 trillion yen below projections. The economy is doing well, and corporate earnings are not falling. But Japan Inc.’s earnings structure has changed drastically, making it unlikely that strong company performance translates into higher tax receipts.
When a Japanese parent company receives dividends from a subsidiary overseas, the foreign dividend is almost entirely tax-exempt in order to avoid taxation by authorities from both countries. When treated as taxable income, 95% of dividends are taxed.
In fiscal 2015, the amount excluded from taxable income, including foreign dividends and other revenues, rose 5% to 6.17 trillion yen. That is a 57% increase since fiscal 2011, rising at a faster pace than listed companies’ pretax profit. Improved earnings at Japan Inc. will unlikely be reflected in tax revenue should companies continue to expand their presence abroad.
“This is not a situation where economic recovery will continue for a while and many companies start reporting profits,” said Takero Doi, professor at Keio University. “We cannot expect much tax revenue growth.”
On the other hand, “If you take into account the growth rate and special factors, fiscal 2017 tax revenue could reach the lower 57 trillion range,” said Masahiro Nishikawa at Nomura Securities.
Lower tax revenue will complicate the Abe government’s fiscal management because the only way to maintain expenditure on the same scale is by raising taxes or issuing more deficit-covering government bonds. The government will have less freedom to increase expenditures as long as the economic diagnosis is weak and the tax base keeps falling.
With 1.5 trillion yen in unused funds for interest payments and other expenses for the year, the government reduced the issuance of deficit covering bonds by 1 trillion yen and ended up with a surplus of 374.3 billion yen. More than half the surplus will be applied to repaying national bonds.
The Abe government had used previous surpluses to finance policy measures through supplementary budgets. But it may be forced to increase offerings of deficit-covering bonds if it wants to resort to large-scale fiscal stimulus.