The Tax Commission on Tuesday effectively selected a size-based local business tax system to be introduced nationwide. The commission is an advisory panel to the prime minister.

The tax should be levied on each firm's "business activity value," which includes profit, aggregate salaries, interest payments and rent for lands or buildings, said panel head Hiroshi Kato.

The tax is one of the four proposals the panel suggested in July for the new system, under which even firms in the red would have to pay tax. The other three proposals include one based on the combination of floor size and aggregate salaries of each firm.

The business activity value seems the most logical standard, Kato told reporters after a panel meeting.

Because the current local business tax is based only on the profit of each business, loss-making firms are effectively tax-exempt.

The panel will make its recommendation in a medium-term proposal package to be submitted to the prime minister around July.

Kato said each prefectural government should be able to decide how to combine the new tax system with the present one, to avoid an excessive tax increase on loss-making firms.