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The Finance Ministry has decided to introduce a consolidated taxation system for companies and their wholly owned subsidiaries in fiscal 2002, ministry sources said Sunday.

The consolidated system is expected to reduce a company’s tax burden by allowing it to base tax payments on the combined profits and losses of its entire group. It is also expected to promote corporate restructuring, including spinoffs of unprofitable divisions and the establishment of holding companies.

The new system will also allow companies to treat philanthropic and entertainment expenses as group losses.

The combined taxes will then be paid by the parent and its wholly owned subsidiaries in proportion to the revenues earned by each. However, once a company decides to adopt the new system, it cannot return to an individual taxation system, the sources said.

The new system will not be applicable to local taxation because that would greatly increase the amount of clerical work involved.

The consolidated taxation system is part of a tax reform package being considered by the Finance Ministry for fiscal 2002. The ministry will present the draft package to the government’s Tax Commission in September so it can be implemented in the spring of 2002.

The reform package also includes measures to prevent abuse of the consolidated taxation system for tax savings, including prohibiting a company from acquiring a loss-making business to reduce its group tax payments.

The Finance Ministry is considering introducing a new tax or reducing existing corporate tax breaks in order to make up for an expected decline in the central government’s tax revenues following the introduction of the new system, the sources said.

Consolidated taxation has been implemented in the United States since 1917, and in Germany and Britain since the 1960s. Japanese businesses have been calling for an early adoption of such a system given the accelerated corporate restructuring that took place in these countries.

The system has been considered by the government as part of its measures to promote corporate restructuring, which is hoped to pave the way for the creation of holding companies and corporate spinoffs.

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