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The Cabinet approved a bill Friday to revise the tax code for the introduction of a consolidated tax system aimed at reducing companies’ tax burdens and boosting competitiveness.

The bill was sent to the Diet, and the revisions necessary to launch the system are scheduled to be approved during the current legislative session. The government hopes to enact the consolidated taxation system on Aug. 1. The revisions will be made retroactive to April 1.

Under the consolidated tax system, taxes are calculated based on the combined profits or losses made by a group. Thus, losses from one company can be set against the profits of another group company for tax purposes, reducing the burden on the corporate group as a whole.

The system affects companies and their wholly owned subsidiaries, with parent firms declaring and paying corporate taxes on the combined income of the group.

Application to join the new tax system is optional and subject to approval by tax authorities.

The Finance Ministry estimates that the system will result in an 800 billion yen reduction in tax revenues in fiscal 2002, compared with its original projections.

To cover potential losses, companies that choose to adopt the system will be charged a 2 percent surtax for two years in addition to their regular corporate tax, the rate of which is set at 30 percent.

The Japan Federation of Economic Organizations (Keidanren) has argued that the additional levy will wipe out the benefits of shifting to the consolidated system.

Consolidated taxation is already in place in many industrialized countries and is seen as a vital tool for corporate restructuring.

Tax decision late 2002

Heizo Takenaka, minister of economic and fiscal policy, said Friday that he thinks the government should decide whether to conduct tax cuts midway through fiscal 2002 after the release of economic data beginning in June.

“I think the decision should be made after judging the state of the economy using economic data such as gross domestic product for the January-March quarter,” Takenaka said.

He also said he does not see an immediate need for tax cuts because the economy seems to be enjoying a slight cyclical upturn.

The Council on Economic and Fiscal Policy plans to unveil an outline for comprehensive tax reform in June, aimed at reinvigorating the economy and accelerating economic reforms.

Takenaka added that the council, chaired by Prime Minister Junichiro Koizumi, will not consult with the ruling bloc parties before drawing up the outline of the tax reforms later this month but will discuss the matter with them later, when mapping out practical tax policy.

Meanwhile, Takenaka indicated the government will upgrade its economic assessment for the third straight month in May.

“In the past month, there have been steady moves (indicating) the economy is bottoming out,” he said. “We will make a final decision (on the assessment) taking into consideration such developments.”

‘Windfall profit’ target

The government’s Tax Commission agreed Friday to take steps to slash called “windfall profits” pocketed by businesses that take advantage of the consumption tax they collect from consumers.

Under the current system to calculate the 5 percent consumption tax that should be turned in to tax offices, businesses that have annual sales of 200 million yen or less are allowed to use simplified calculation methods, which, in many cases, result in them paying less than they collect.

These simpler calculations are designed to ease the burden of clerical complications for relatively small businesses, but tax authorities are now seeking to review the system to crack down on the windfall benefits.

Although specific proposals have yet to be made, the panel will discuss reducing the number of firms that are eligible to apply the simplified calculations by half, panel head Hiromitsu Ishi said.

The tax panel agreed to lower the threshold for consumption tax exemption for small businesses from the current 30 million yen in annual sales, Ishi said.

The proposals are expected to be incorporated into a package of tax system modification proposals to be put together by the government in June. The plans, however, are likely to be strongly criticized by small and midsize businesses.

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