Japanese Firms Turn To Tax Breaks To Get Through Hard Times

by Mary Swire, Tax-News.com, Hong Kong

16 October 2003

A tax break designed to give Japanese firms a competitive edge in international markets is being used increasingly by financially troubled companies which would traditionally seek court protection under the relevant bankruptcy laws, the Yomiuri Shimbun reported this week.

The Industrial Revitalisation Law was enacted in 1999 and was intended to help international firms maximise their profitability by encouraging them to restructure their businesses. It includes measures such as tax breaks for capital spending, and allows firms to carry forward losses on the scrapping of non-profit making equipment for seven years instead of five. In addition, eligible firms can apply for low interest loans from the government's Development Bank.

However, since debt-ridden supermarket chain Daiei Inc. won approval to use such tax breaks, which were originally designed for Japan's larger, more successful firms to gain a competitive edge against their international peers, there has been a trend for ailing firms to exploit the law as a means of rescuing their businesses.

One factor behind this trend is a revision to the law made in April this year, which entitles firms with high levels of debt who are judged still to be commercially viable to take advantage of the tax breaks. Another factor, according to analysts, is the banks' willingness to dispose of bad loans to firms which have been granted tax breaks.

This has led to a glut in applications under the Industrial Revitalisation Law. Since it was enacted in 2000, some 234 firms have applied for the tax breaks. However, in the first two years of its operation, an average of only five firms per year made applications to the scheme. This contrasts with a total of 59 applications so far this year, 20 of which were for resuscitation purposes.

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