Global Outlook: A lower rate of corporation tax – that’s what Japanese companies will get for not paying it

 

Japan has joined the global race to the bottom of the corporate tax league.

Japan’s Prime Minister, Shinzo Abe, yesterday pledged to slash the company tax rate to below 30 per cent from next year in the hope of helping businesses out of their decades-long slumber. The move sends a positive message to the outside world that Mr Abe is taking drastic action to shore up his stricken country. Big businesses in Tokyo, where most multinational corporations with a Japanese presence operate, are taxed at nearly 36 per cent – one of the highest levels in the industrialised world.

But will Mr Abe’s move really boost jobs and growth? Unlikely: tax avoidance in Japan is endemic. It’s mostly done legally, of course, but the international Tax Justice Network says its relaxed rules on company reporting make it easy for firms to run opaque accounts and make profits disappear to reduce the tax burden.

Such a lack of transparency has made it equally easy for fraud and mismanagement to blossom, as a flurry of scandals has shown lately. Olympus’s accounting fraud went on for years before being exposed by the new boss Michael Woodford; the grandson of the founder of Daio Paper allegedly got staff to transfer company money to his personal bank account to fund his gambling habit; Nomura had a massive insider trading scandal. And that disgraceful trio all happened in one year.

So it is that 70 per cent of all Japanese firms pay no corporation tax. This surely makes it seem absurd when the business lobby demands, as it does, that the rate should be cut to about 25 per cent. But, given the enormous influence of Japan’s corporations over the state, expect them to get their way.

Reducing a tax band is far easier than implementing the reform that the indebted country really needs – a total overhaul of a sclerotic, inward-looking corporate system that breeds inaction, discourages foreign talent and fends off new ideas. South Korea, Silicon Valley and China hope that change never happens.

Beware the middlemen if  Iranian oil flows again

 The world’s oil and gas companies have been focused in recent days on the chaos of Iraq. But potentially as important to their fortunes will be international talks in Vienna next week over that other key actor in the region, Iran.

These are the negotiations between China, Russia and the West and Iran where sights are set on persuading the new regime in Tehran to dismantle its suspected nuclear weapons programme.

Under the current EU and US sanctions, member states are banned from buying Iran’s oil, in essence putting the country’s economy in the deep freeze. However, if Iran’s President Hassan Rouhani provides adequate concessions this week, that situation could come to an end, giving the West access once more to some of the world’s biggest oil and gas reserves.

I’m told by an official close to the talks that this is a “very big if”, but even so, it’s not completely out of the question that sanctions could be lifted in the coming months.

With oil-producing Iraq, Syria and Libya all in turmoil, and Russia seeking to export east rather than west, renewed gas and oil supplies from Iran could not come a moment too soon.  

Companies, particularly from the UK, France and Italy, have already begun reheating those old pre-sanctions contact books.  They’re not too dusty, either: the trade curbs only came into effect in mid-2012.

Excitement started to build at the turn of the year, when the Western powers known as the E3+3 – the UK, China, France, Germany, Russia and the US – agreed a six-month partial lifting of sanctions in return for nuclear concessions. That six months ends on 20 July, so the pressure is on to strike a new deal.

But in the rush among Western executives to pile back in, lawyers have a warning: beware who you’re dealing with. Pinsent Masons’ Tom Stocker points out that staying on the right side of the US and UK bribery rules poses a serious challenge.

Contracts in the Middle East are still largely brokered by agents and middlemen who, in many cases, will bribe their way to getting the deal done. Mr Stocker and his fellow lawyers are still extremely busy with clients who fell foul of international anti- corruption rules in Libya in the rush to win contracts after relations with Colonel Gaddafi were normalised. He is convinced the same problems will crop up in Iran, too. After all, a lot of Iranian middlemen have been making no money for the past two years – hunger can breed temptation.

Big companies are confident enough to insist on drawing up watertight anti-bribery contracts with their fixers, and will be keep a lid on the huge success-based commissions that can encourage shortcuts. They will carry out proper background checks on intermediaries and their associates, looking out for red flags such as kinship with senior government officials. But smaller players may be more eager and reckless, only to regret it when the FBI come knocking. “Iran represents huge potential rewards,” Mr Stocker says. “But with that comes even bigger risks. They’re just not worth it.”

 

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