1 Comparative study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom Abstract This paper examines corporate income tax rate as a main source of tax burden causality in Japan and Indonesia from fiscal policy and macroeconomic perspective. It employs data from the Tax Misery Index and the Index of Economic Freedom to compare the tax burden between Japan and Indonesia. It then creates a mixture index comparison, which provides more representative look at relative tax burdens from investor s’and policy maker viewpoint. I. Introduction 1.Corporate income tax by definition According to A Dictionary of Economics (Black, 2002) definition of corporate income tax is: “A tax on the profits of firms, as distinct from taxation of the incomes oftheir owners. There are strong arguments for having separate income tax schemes for firms and individuals: the system of allowances and progressive tax rates appropriate for a t ax on individual incomes is quite different from a sensible scheme for taxing firms. ” 1 . However, in terms of application, the definition of corporate income tax may slightly differ regarding the prevailing circumstances in each country. 2.Overview of corporate income tax rat e in Japan In Japan, corporate income tax is levied on the taxable income of corporations which taxable income itself defined as the excess of gross revenue over the total of its costs and business expenses for each accounting period 2 . Corporate tax rates in Japan from April 1 1999 are shown below. Table 1, Tax Rates for Ordinary Corporate Income in Japan Ordinary corporations Annual Income Tax Rate Corporations with capital ofmore than 100 million yen 30% Corporations with capital ofno more than 100 million yen For annual income of more than 8 million yen 30% For annual income of no more than 8 million yen 22% Cooperativ e associations and public service corporations 22% 1 A def initi on of "corporate income tax" from A Dictionary of Economics. 2 MOF of Japan, Comprehensive Handbook of Japanese Taxes 2006[Electronic version] pp. 76-89
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Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom
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8/7/2019 Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom
For additional information, company not only responsible for corporation tax rate
however they also have obligation for enterprise tax and inhabitants tax which attributesas local tax refer to where they are domicile
3.
3. Overview of corporate income tax rate in Indonesia
In Indonesia, a corporation for tax purposes is classified as “resident” or “non-
resident”. Residency is determined on the basis of place of incorporation 4. Resident
corporations are taxed on their worldwide income. Tax credits are allowed for incomethat was taxed outside the country. Non-residents are taxed only on income derived from
Indonesian sources, subject to any relief available under double taxation agreements
Taxable income is defined as any increase in economic prosperity received or
accrued by taxpayer, whether originating from within or outside Indonesia, which may
used for consumption or to increase the recipient’s wealth in whatever name and form5.
Tax Rate
Income tax in Indonesia is progressive and a self-assessment method is used to
compute the tax. Since January 1, 2001 corporate tax rate are shown below6
:
Table 2
Tax Rates for General Corporate Income in Indonesia
Taxable Annual Income Tax Rate
Up to 50 million rupiah 10%
Over 50 million rupiah to 100 million rupiah 15%
8/7/2019 Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom
investments financed by debt and by equity are taxed, and the various ways
in which taxable income may be defined and calculated.
Therefore, comparisons that do not fully account for such differences and
intricacies must be interpreted with full-care. Since the exact comparison is difficult to beaccomplished, then the analysis is conducted in another perspective. The analysis here
take a micro approach to public finance by examining certain aspects of taxation andpublic finance from the perspective of taxpayer and policy maker, using the Forbes Tax
Misery Index and Index of Economic Freedom.
2. Tax Misery Index
Each year, Forbes magazine releases a study on tax misery. The Forbes Global
Misery & Reform Index is a proxy for evaluating whether tax policy attracts or repels
capital and talent. It is computed by adding the top marginal tax rate for the corporate
income tax, individual income tax, wealth tax, employers’ and employee’s social security
tax and value added tax. The higher number of the total, the more the misery, because tax
burden which carried out by taxpayers become higher8
.The 2005 tax misery index was used for this comparative study. Several countries
are ranked. Table 3 contains selected countries that were included in the Index from
selected developed and developing countries in term of comparison purposes.
Table 3
Tax Misery for 2005, selected countries9
Rank Country Corp.
I
Indiv.
I
Wealth Employer
S S
Employee
S S
VAT Misery
2005
8/7/2019 Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom
Which index is provides better measurement of competitiveness especially from
the investors’ point of view? When speaking of competitiveness, one usually thinks of the attractiveness of investing or setting up a business in a particular country. Thus, the
corporate income tax is an essential component of getting that decision. However, thecorporate income tax is not the only measure that investors considers when deciding
where to invest. They consider other costs of doing business, such as employee payrolltaxes or property taxes. These taxes are including in Tax Misery Index variables
assumptions, whereas the Index of Economic Freedom did not. Nevertheless, Tax Misery
Index also includes some taxes that probably do not affect directly a corporation’s cost of
doing business, such as the wealth tax and the individual income tax. These differences in
assumption and construction variable of terms as a consequence will lead to different
result.
A better index to use probably should including the corporate income tax, the
employer portion of social security taxes and the Value Added Taxes (VAT) or
consumption tax. Those taxes are the most affecting consideration of cost of performingbusiness. Therefore, if the aim is to determine which countries are the best to set up
business, perhaps only the taxes that affect the cost of doing business should be included
in the index. For the side of policy making Tax Misery Index perhaps provides better
information, otherwise for outside investors, perhaps Index of Economic Freedom
provides better overview.
For the case of Japan and Indonesia, during period of year 2002 until 2005 there
is increasing tax misery for Indonesia (8.3 point) and on the other hand there isd i t i f J ( 0 3 i t) It i th i d I d i
8/7/2019 Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom
The Tax Misery Index and Index of economic freedom (tax burden index) revealthe relative degree of tax burden aspect between Japan and Indonesia. Regarding
different methodologies, both indexes are ensuing in different results. In policymakerpoints of view, Tax Misery index provide better arguments to decide a new policy. On
the other hand, from investors’ perspective, Index of Economic Freedom offers obviousguidelines in where to invest.
Absolutely, there are many other factors that investors need to consider beforedeciding whether to invest in a country. A strong rule of law is ultimately very important,
which includes strong protection of property rights and enforcement of contracts.
Corruption level and the extent of the underground economy, effectiveness of monetary
policy, trade policy and the skill level of the labor are fundamental factors as well.
8/7/2019 Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom