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Japan plans carrot-and-stick tax changes to drive wage gains

[TOKYO] Japan will adopt a carrot-and-stick approach to boost pay for workers by providing tax benefits to companies that increase spending on wages and investment while clamping down on benefits for firms that don't.

Companies that raise pay by at least 3 per cent a year or invest in their human capital through skills training will be able to reduce their corporate income tax, according to documents from the ruling coalition obtained by Bloomberg News. The changes will be in place from fiscal 2018 to 2020, and may see some small and medium companies reduce their tax bills by up to 20 per cent, according to the document.

Firms that don't invest or increase pay will no longer be able to use existing deductions to cut their tax burdens, such as those for research and development.

The changes should help encourage more investment and increases in bonuses, but because it's only a temporary measure and is unlikely to drive sustained gains in base wages, according to Koya Miyamae, senior fiscal policy analyst at SMBC Nikko Securities. These measures are complex and difficult for companies to take advantage of, so cutting the corporate tax rate would have more effectively increased international competitiveness, he said.

The changes are expected to be announced by the ruling coalition's tax panel before going to the cabinet for formal approval. They will then be approved by parliament, where the coalition has a majority in both houses. A vote is likely before the start of the fiscal year beginning on April 1, 2018.

Changes are also coming for individual income tax. People earning more than 8.5 million yen (S$101,582) will see their tax burden rise from January 2020 due to a decrease in the basic deduction. Policy makers aim to avoid increasing the tax burden for households that are raising children or caring for elderly relatives.

People who do not work for companies, such as freelancers or business owners, will see some benefit as their standard deduction will be increased slightly.

Small and medium-sized enterprises are "relatively behind in terms of increasing wages" and these changes may prompt some of them to lift pay, according to Yuki Masujima of Bloomberg Economics. The changes in personal income tax may succeed in boosting revenue over the short term, he added, but over the medium-to-long term the change may result in a "brain drain" problem, as workers with higher labor productivity, and therefore higher wages, look for work in other countries.

The coalition also plans to increase the levy on heat-not-burn tobacco products from next April, and will also introduce a departure tax of 1,000 yen.

The changes will result in an extra 160 billion yen in revenue for the central government, and 120 billion yen for regional governments, according to Yoichi Miyazawa, the Liberal Democratic Party's tax panel chief.