A potential scandal involving the abuse of a tax incentive program for companies has come to light.

It is suspected that a group of companies used the corporate version of the “furusato nozei” (hometown tax) program to win the contract for a project financed by its donations, while enjoying tax credits on the same donations.

The scandal has exposed loopholes in the system. Since the program is open to abuse, a broad investigation is needed.

This investigation should assess the extent of potential abuse, work out how the program is being used and identify and fix any potential weaknesses in it.

The furusato nozei program allows companies to receive tax credits of up to 90 percent on donations toward projects that promote regional revitalization.

Since its introduction in fiscal 2016, the tax break has been increasingly used as the incentives were expanded. Donations totaled 34.1 billion yen ($223.8 million) in fiscal 2022.

In this case, the scandal involves a project to develop and lease ambulances for the municipal government of Kunimi, a rural town of about 8,000 residents in Fukushima Prefecture.

The project was financed by around 400 million yen donated under furusato nozei by an internet service company and other entities within its corporate group. One subsidiary won a contract to manufacture the vehicles.

The story was broken last year by the Kahoku Shimpo, a Sendai-based daily. The Kunimi municipal assembly responded by setting up a “hyakujo iinkai" (Article 100 Committee), a special committee based on Article 100 of the Local Autonomy Law, to investigate irregularities in local administration affairs.

In its report, published this month, the committee said it suspects that the donors used the town as a means to reduce their tax bills. It pointed out that “special preferential treatment for specific companies” had taken place.

The committee suggested that multiple companies may have colluded with the municipal government. In return for their massive donations, they received benefits in the forms of tax credits and business orders. This could be considered an exploitation of public funds.

The corporate version of furusato nozei has protections that should prevent this from happening. It prohibits municipalities from giving economic benefits to donors.

This contrasts with the version for individual taxpayers, who receive gifts from local governments as well as tax credits for their payments.

Granting business contracts to corporate donors and related businesses is permitted through fair bidding. But this case involved an intermediary company, creating a closed business structure that effectively barred other companies from making bids.

The report called it “a de facto discretionary contract disguised as a bid.” Moreover, the donations were made anonymously.

In response to the committee's investigation, the town mayor said no procedural violations had occurred. However, some facts remain unclear, including the nature of the town's relationship with the companies.

The municipal government has said it plans to clarify the facts separately through an independent committee. However, the local administration is responsible for disclosing and explaining the details, including information about the companies involved.

The national government should also request a report from the town and take strict action to address the problems. It must also investigate whether benefits were given to donors in other municipalities, too, including whether donors won contracts and how they did it.

The content of this report alone makes it clear that there were deficiencies in the design and operation of the system. If municipalities and businesses collude behind closed doors, it is difficult for the assembly or the central government to spot and investigate violations.

To prevent a recurrence, the system must be reviewed and its transparency increased. It might be necessary to ban anonymous donations and limit the contracts available to donors.

While the purpose of corporate furusato nozei has a reasonable aim--to encourage corporate social contributions--it is crucial to verify whether the tax credits offered are justified by the benefits.

Based on this assessment, the government should re-evaluate whether there is a convincing case for such substantial tax incentives.

--The Asahi Shimbun, July 25