The Finance Ministry recommended Wednesday that tax breaks firms receive on five reserve funds be abolished or reduced so their taxable income base can be expanded and overall corporate tax rates reduced beginning in fiscal 1998.
The ruling Liberal Democratic Party’s Research Commission on the Tax System was also told that a small levy of less than 1 percent should applied to indebted firms’ total annual wages so that they, too, will have a minimum tax burden. Companies in the red are not currently obliged to pay corporate taxes.
But ministry officials said they do not know how much revenue can be expected from the proposed steps, and said the subject would need further debate in political and business circles. The ministry broadly agrees with the business community’s position that the basic corporate tax rate — 37.5 percent — is relatively high compared to other developed nations, but the two sides differ on the degree to which rates can be cut.
Citing fiscal constraints, the ministry has said a rate cut of roughly 2.5 percentage points — or about 1 trillion yen — in conjunction with a broadened taxable income base is the best that can be done at the moment. Businesses, however, are asking for a 5 percentage point cut.
Finance Minister Hiroshi Mitsuzuka told a news conference later in the day that while a cut to bring rates down to international levels might not be achievable in the initial year, he hopes reductions can be continued so that parity will be reached over a period of two to three years.
Wednesday’s proposals included such measures as abolishing reserve funds companies use for bonuses, product guarantees and special repairs, all of which have been criticized because the tax breaks are only offered to large firms or those that deal in certain products.
Ministry figures show the outstanding reserves companies held for bonus payments alone came to roughly 8.87 trillion yen as of the year that ended Jan. 31, 1996. The ministry also said preferential tax treatment for the other two funds — reserve funds for retirement payments and losses on loans — should be trimmed.