Japanese firms hiking wages to get larger tax breaks if reform proposal enacted

The Yomiuri Shimbun

December 9, 2021

To encourage companies to raise wages, the government plans to expand incentives to provide larger tax breaks to firms that do so, according to a draft of the fiscal 2022 tax reform proposal.

The government and the ruling parties confirmed a broad framework for tax reform Wednesday, with an emphasis on distribution of wealth to realize Prime Minister Fumio Kishida’s “virtuous cycle of growth and distribution” policy.

Firms that do not raise wages by a certain amount will in effect be penalized by not being able to receive tax breaks on investment in the government’s carrot-and-stick approach.

The Liberal Democratic Party’s Research Commission on the Tax System and the tax panel of its coalition partner Komeito plan to announce the ruling bloc’s tax reform framework by the end of the week.

The centerpiece of the reform is the tax break system for raising wages. Small and midsize enterprises that raise the total payroll of employees by at least 2.5% will qualify for a corporate tax deduction equivalent to a maximum of 40% of the increase, according to the draft. The current deduction is 15% for all companies.

Large companies will receive a maximum 30% tax break if they meet certain requirements, while some corporate tax deductions for spending in areas such as research and development will be tightened for those that are reluctant to raise wages.

To be eligible for the tax reduction, big firms are required to increase the total payroll of employees continuously working from the previous April-March fiscal year by at least 0.5% in fiscal 2022. From fiscal 2023, these companies will be required to increase their total payroll by at least 1% or make capital investments above a certain level.

Up to now, the government has allowed large companies to apply for corporate tax credits even if their total payroll barely increases.

“The government has provided more ‘carrots’ than ‘sticks,’” said Masakazu Tokura, the chairman of Keidanren (Japan Business Federation), at a press conference in the Ehime capital of Matsuyama on Wednesday.

For individuals, the government plans to change the system of tax breaks for housing loans, to provide deductions from income tax and resident tax. The duration of the tax breaks will be extended to 13 years for newly built homes while remaining at 10 years for existing houses, though it will be reduced to a 0.7% tax exemption from the current 1%.

Moreover, the housing loan balance eligible for the tax reduction will be set at a maximum of ¥50 million for “durable, high-quality housing” under a preferential treatment for homes with high energy efficiency.

The government has explained that the new tax break system on housing loans is expected to benefit middle-class earners in terms of the size of the deduction, but some people may see their tax benefits decrease depending of their loan balance.