Big biz keen to skirt tax hike

Special investigators tasked to ensure small firms avoid squeeze

Kyodo

The government has hired around 600 special investigators to prevent big businesses from passing the latest consumption tax increase on to their suppliers and contractors, but many small businesses are facing increasingly subtle billing and payment schemes from clients.

In Tokyo’s Ota Ward, home to a cluster of small factories and workshops, the owner of a machine parts company recently said he experienced a request from a client, a major manufacturing company.

The parts maker was asked to “accept a 10 percent price reduction across the board,” the president of the company said. If not, the client would switch suppliers, he was told.

Refusing the request would threaten the company’s survival, but accommodating it would mean a revenue loss of several dozen million yen a year and make it hard to pay salaries.

The president eventually declined the proposal and brought the matter to a government investigator who visited his company in March.

Ahead of the April 1 increase in the consumption tax to 8 percent from 5 percent, the government put into force a law banning big corporations from using their superior bargaining position to force contractors and suppliers to cover the tax hike.

Under the law that took effect in October, they are not allowed, for instance, to demand a price cut or other quid pro quo conditions in exchange for accommodating increased prices. The consumption tax is charged uniformly on almost all products and services.

The law was introduced based on lessons learned from the 1997 tax rate hike from 3 percent to 5 percent. Many small businesses later complained that they could not charge their corporate clients for the tax increase.

Domestically, small businesses account for 99.7 percent of all companies. If many of them are forced to shoulder the tax hike burden as a result of being unable to charge it to their clients, that could pose a risk to the economic recovery.

The government is required to publish the names of serious offenders who try to work around the law and has hired special investigators from a broad range of backgrounds.

Tax accountants and police officers and others such as former procurement officers at companies versed in business practices are among them.

By the end of March, the investigators had issued orders to 1,199 companies, including 489 in the manufacturing sector, 233 in wholesale and retail businesses and 145 in the transport industry.

Among them was a hotelier who received a bill from a supplier but made a payment after subtracting the tax hike portion. A major retailer requested a food supplier pay for preparing the price tags used in its outlets after the tax increase.

These and other cases that were brought to the investigators’ attention are believed to be the tip of the iceberg.

“Many companies won’t talk (to government investigators), fearing their business partners will find out,” said Nobuchika Shimizu, 61, a senior investigator. “The first step in the investigation is to build trust.”

Zentoren, a national association of about 2,000 small businesses in the tofu industry, said it has heard from members that have been asked by their business partners to keep the price of their products at pre-tax hike levels.

“It’s evidently illegal,” a federation official said of the pressure on suppliers.

The tofu industry is already faced with a tough business environment as a result of the weak yen, which increases the cost of imported soybeans.

The Tokyo-based group is planning to investigate the situation of their member businesses and formulate an appropriate response.

Meanwhile, big businesses are apparently eager to find whatever ways they can to skirt the law. Some are said to avoid, for instance, using the words “consumption tax” when asking for price reductions, and tell investigators that their moves are “part of normal cost-cutting efforts.”

It is thus indispensable for special investigators to do their homework thoroughly by listening to multiple subcontractors and gathering sufficient evidence before bringing a case against an offender.

Major corporations could step up pressure on their contractors in price negotiations in April because consumer spending is widely projected to slow down and weaken demand for products and services as a result of the last-minute surge in purchases ahead of the tax hike.

“We are concerned they could bargain for price reductions illegally around the time the government’s oversight and public interest weaken,” a food industry executive said.

At a press conference on April 8, Economy, Trade and Industry Minister Toshimitsu Motegi noted the importance of protecting small businesses in their fight to secure tax hike charges. “We will continue to diligently monitor the situation,” the minister said.

The government plans to conduct an extensive survey on all small and medium-sized enterprises, about 3.85 million companies, to see if they have been hit with unreasonable demands.