Wednesday, October 16, 2013
Corp Tax Relief Eyed To Spur Consolidation, Trim Supply Glut
TOKYO (Nikkei)--Concluding that excess capacity is the underlying cause of deflation, the government will offer tax relief rewarding manufacturers that slim down through business realignment.
The bill aimed at enhancing industrial competitiveness, submitted to the extraordinary Diet session Tuesday, features measures "to encourage corporate reorganizations that help strengthen the metabolism of businesses," Minister of Economy, Trade and Industry Toshimitsu Motegi said at a news conference that day.
Under current tax rules, a company that spins off an unprofitable division for a merger with an industry peer may end up with a higher corporate tax bill because losses on its balance sheets will decline. The new legislative step would help ease this tax burden by allowing up to 70% of the investment in the new firm to be counted toward losses.
Should the new company post three straight years of operating profits, it will have to pay the reduced portion of its tax bill. But the government expects "the immediate reduction in the tax burden to spur business reorganizations," says a METI official. Firms that take advantage of the tax relief will be required to raise their return on assets by a few percentage points in five years.
Supply outstripped demand by 1.5% in the April-June quarter, according to Cabinet Office estimates. This enhances the government's belief that excess supply continues to fuel fierce price competition among companies, making an exit from deflation elusive.
In particular, the government is counting on such sectors as oil refining, electrical machinery, shipbuilding, steelmaking and chemicals to take advantage of the program. The business community also recognizes the need for action, with "reorganizations becoming part of the current tide," says Kazuo Tsukuda, chairman of the Shipbuilders' Association of Japan.
But past government initiatives to spark corporate reorganization often ended up prolonging inefficient operations. The industrial revitalization law in 2003, which offered reductions in license and registration taxes for firms that arise through consolidation, resulted in the launch of Renesas Technology Corp. But the new company, created from the integration of the chipmaking businesses of Hitachi Ltd. (6501) and Mitsubishi Electric Corp. (6503), has suffered from sluggish earnings. Last year, it received more than 100 billion yen in funds from the public-private entity Innovation Network Corp. of Japan.
"Corporate reorganizations require support not only in the form of tax relief, but also through the easing of employment regulations," says Mitsumaru Kumagai, chief economist at Daiwa Institute of Research, who says businesses must be able to restructure their workforces as well.
Domestic efforts to address excess supply, however, may prove lacking. With emerging markets such as China sharply increasing supply capacity, global conditions are having a growing impact on prices in Japan.
"To compete with China and others, eliminating excess facilities at home is not enough," argues Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. To that end, Japan "must nurture sectors holding clear technological advantages" over foreign competitors, he asserts.
(The Nikkei, Oct. 16 morning edition)