More companies reducing capital stock for tax savings

The Yomiuri Shimbun
An outlet of travel giant JTB, which has decreased its capital stock, is seen in Chiyoda Ward, Tokyo.

With companies facing tough business conditions amid the prolonged coronavirus crisis, one large corporation after another is taking the step of drastically reducing their capital stock in order to qualify as a small or midsize business.

This is because, under the corporate tax law, companies with capital of ¥100 million or less are considered as small and midsize businesses, entitling them to preferential tax treatment, although it has been pointed out that this system could undermine fair tax-burden sharing.

Capital stock is the money that is used by a company to carry out business activities, and it is included in net assets that need not be repaid on a balance sheet, which shows the state of the company’s assets and liabilities. Companies with large capital stock can be considered as having high credibility and trust in the financial market.

From ¥10.5 bil. to ¥100 mil.

The Izutsuya department store in Kitakyushu will reduce its capital stock from ¥10.5 billion to ¥100 million, effective on July 1. Hideo Kageyama, president of the department store, said at a press conference in April that the reduction of capital stock was aimed at eliminating the accumulated losses, while he also said, “[Expectation for] preferential tax treatment is the secondary purpose.”

The department store was in effect forced to voluntarily suspend business, and its net profit for the fiscal year ending in February declined by more than 70% from the previous fiscal year.

Major travel agency JTB Corp. similarly reduced its capital stock from about ¥2.3 billion to ¥100 million at the end of March. The company explained that it is trying to restore the soundness of its financial foundation, which was damaged by the evaporation of travel demand. It apparently intends to secure cash in hand by decreasing its tax burden.

As these companies are compelled to stay afloat amid the prolonged crisis, more of them seem to feel less hesitant to become small and midsize companies.

Kappa Create Co., which operates the conveyor-belt sushi restaurant chain Kappasushi, also reduced its capital stock from ¥9.8 billion to ¥100 million in February for such purposes as reducing its tax burden.

“In the past, the size of capital stock was used as a barometer to imagine the trustworthiness of a company. But we guess that tendency has faded away lately,” a company spokesman said.

Coronavirus crisis effects

Many of the companies deciding to reduce their capital stock are those severely affected by the coronavirus crisis, such as retailers, travel agencies and restaurants.

According to the Teikoku Databank, Ltd., a private survey company, 29 stock exchange listed companies with capital of more than ¥100 million reduced their capital to ¥100 million or less in 2019, while the number of such companies rose to 55 in 2020.

Among the tax benefits granted to small and midsize companies, what has an impact is the exemption from a size-based corporate tax that is levied on companies according to the size of their business, even though they are in the red. This is one of the local taxes, and companies having capital of ¥100 million or less as of the date of settlement are exempt from the tax.

The business size-based corporate tax was introduced in 2004 to secure stable tax bases for prefectures, because many companies fell into the red following the collapse of the bubble economy and that led to a decline in tax revenues.

Companies are considered as receiving certain administrative services even though they are incurring losses, so they are levied the tax according to the wages of employees, rent for buildings and other factors.

“Becoming a small and midsize company gives significant tax benefits to companies, so the number of big firms turning themselves into small and midsize companies continues to be on an uptrend, until such time that the coronavirus crisis is over,” a spokesperson at Teikoku Databank said.

Considering responses

Small and midsize companies can enjoy benefits of a system that allows them to reduce the amount of tax they pay by deducting deficits from future taxable income.

The government does not allow small and midsize companies to receive the tax benefits if they have a certain level of earnings. Even so, if large companies decrease their capital to ¥100 million or less, they might become eligible for the tax breaks.

There is a strong concern within the Finance Ministry that that does not serve the original purpose of supporting small and midsize companies.

Some have called for classifying large, small and midsize companies according to their sales and number of employees, not based on the amount of their capital stock.

However, restaurant businesses tend to have more employees while information technology companies make profits with a small number of people by utilizing intangible assets. For that, there is a strong opinion that such a classification method lacks fairness, given the different characteristics of each industry, according to the Finance Ministry.

Regarding the necessity of addressing the issue, Finance Minister Taro Aso said at a press conference after a Cabinet meeting on Tuesday, “We need to discuss the issue while looking into the impact on the management and finances of companies.”

Plan changed due to criticism

Even though large companies decrease their capital stock, there is little risk of suffering any actual disadvantage, but they could be criticized by society.

In 2015, when electronics giant Sharp Corp. was facing a massive deficit and considered reducing its capital of about ¥120 billion to ¥100 million, then Economy, Trade, Industry Minister Yoichi Miyazawa criticized the company, saying that he felt discomfort with Sharp’s corporate rehabilitation scheme because the plan did not match the actual situation of the company at all.

In the end, Sharp withdrew the plan and just decreased its capital stock to ¥500 million.