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HIROKO NAKATA
Staff writer

A government plan to restrict the tax breaks enjoyed by so-called public-interest corporations has sparked a flurry of protests from some nonprofit organizations that fear it would dampen their civic activities.

A schism has developed even among members of a government panel over the advisability of imposing taxes on corporations of a highly public nature, although there is agreement on the need to tax the groups’ undertakings that turn a profit.

There are roughly 26,000 public-interest corporations in Japan, many of which have obtained legal corporate status to gain official approval of their activities, including those promoting social welfare, education and global cooperation.

The legal status also helps them to get tax breaks.

However, there are some public-interest corporations with this status that are not necessarily civic-oriented and are fully or partially exempt from the 30 percent corporate tax rate because they claim that their businesses are not for profit.

Some of these protected companies have engaged in dubious activities, amassed enormous profits, squandered government subsidiaries and offered top posts to high-ranking bureaucrats after they retire.

One of the most notorious cases involved the corporation KSD, which engages in the social welfare business. Tadao Koseki, the founder and former head of KSD, was sentenced last year to a three-year prison term, suspended for five years, for bribing two former Diet members.

The decision to broadly levy taxes on public-interest corporations was agreed to last week by a working group of the government’s Tax Commission.

The decision drew immediate fire from NPOs.

“We are totally worried about the plan,” said Akira Matsubara, head of the Coalition for Legislation to Support Citizens’ Organizations, a network that comprises several NPOs.

The most contentious component of the working group’s plan is the blanket taxation on so-called incorporated NPOs other than those that acquire tax-exempt status. Many of the incorporated NPOs, which currently number about 10,000 in Japan, are financially vulnerable.

Calls for the government to curb the tax breaks on such corporations date back to the abuses to the system that captured the public spotlight in recent years, including the KSD scandal.

Matsubara said not all types of nonprofit corporations should be dealt with in the same way.

“The dubious public-interest corporations should be dealt with separately,” he said. “Why should the criticism spill over to us?”

Even some members of the Tax Commission’s working group were wary of carrying out blanket taxation and cited shortcomings in the government’s decision-making process.

“The way the plan was discussed was unusually antidemocratic,” said Tsutomu Hotta, an attorney and head of Sawayaka Welfare Foundation, a public-interest corporation that promotes social welfare activities.

Hotta, who is also a member of the working group, said the plan, which was announced after a series of closed-door discussions and will be included in an overall reform program to be formulated by the end of March, needs to be discussed further before it is prepared as a Diet bill.

“I’ve often been told that the (planned) tax on public-interest corporations would hamper volunteer activities, but that is not true,” Tadatsune Mizuno, a professor at Hitotsubashi University and head of the working group, told a news conference last week. “We are considering how not to increase the tax burden on incorporated NPOs.”

But the Tax Commission working group’s plan fails to spell out specific requirements for NPOs to gain tax-exempt treatment.

“Given the current vague criteria for tax exemption, it is highly possible that the criteria would become much more severe in the future,” Hotta said.

He also warned that those who plan to establish NPOs and seek the status of public-interest corporation in the future will probably be taxed on their activities for the first few years, the period when they are typically under the most financial strain. This is because they would have to be listed as corporations that are not tax-exempt until they manage to receive that status.

The working group plans to report its proposal to the Tax Commission on Friday.

If adopted, the plan will be incorporated into the government’s basic reforms of public-interest corporations, due to be drafted by the end of this month.

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