The Home Affairs Ministry on Tuesday proposed a dual corporate tax system that would force businesses to pay local taxes, even if they are operating in the red.

The tax proposal, unveiled by Home Affairs Minister Mamoru Nishida at a news conference, features a reduction in the existing prefectural corporate tax and the creation of a new local tax to be levied regardless of whether a company posts a profit.

While the ministry insists the new formula will provide tax relief to the nation's hard-pressed small businesses, the plan is designed to collect taxes even from money-losing businesses on the grounds that they all benefit from public services.

According to fiscal 1998 government figures, only one-third of the 2.45 million companies in Japan paid local taxes during that fiscal year.

The ministry's plan, which will be submitted to the ruling Liberal Democratic Party for approval, involves halving the current profits-based corporate tax rate, from 9.6 percent to 4.8 percent.

The new local tax -- 1 percent for companies capitalized at up to 100 million yen and 1.6 percent for companies with higher capitalization -- would then be additionally levied.

The ministry says it wants to introduce the new tax system in two phases: The first beginning April 1, 2002, for about 30,000 companies capitalized at over 100 million yen; and the second beginning April 1, 2004, for the 2.4 million companies with lower capitalization.

Despite government assurances that the new formula will translate into lower tax obligations, the proposal will probably get the cold shoulder from a private sector that fears the new tax will fetter the nation's fragile economic recovery.

According to the ministry, the new tax would be assessed on two major variables, one covering the total payroll, interest-rate payments and other corporate outlays, which will be adjusted by the profit or loss incurred in the tax year.

The proposal calls for implementation of the new assessment at 25 percent for the first three years and 50 percent from the fourth year.

For firms capitalized at under 10 million yen, a simplified method of calculation would be adopted, limiting the tax burden on the size-based assessment to a maximum of 48,000 yen annually, the ministry said.