TOKYO -- The Japanese government is considering rewarding businesses that increase wages and invest in productivity growth by offering tax breaks that could lower their effective tax rates to as low as 20% or so.
A draft proposal for the tax breaks states its main goal is "reducing the tax burden to a level that will help companies compete well in the world."
Under the proposal, companies that actively invest in human resources through training and higher wages would be allowed to deduct a certain amount from their tax liabilities. This measure alone could lower the effective tax rate to the mid-20% level.
Furthermore, companies that also invest in innovative technologies, such as the "internet of things" and artificial intelligence, to boost productivity will receive additional tax breaks, potentially reducing their effective tax rates to as low as about 20%.
Under Prime Minister Shinzo Abe, the government has been lowering the effective corporate tax rate to make Japan more attractive for businesses. Since he came to power, the overall effective corporate tax rate in Japan has fallen from 37% to 29.97%. In fiscal 2018, which begins next April, the rate is already slated to decline to 29.74%.
Corporate earnings overall have improved along the way, but higher profits have largely been hoarded, despite repeated calls by the prime minister for employers to lift wages and help stimulate economic growth.
To encourage businesses to comply, the government was already considering reducing the rate to around 25% for companies that raise wages. But it is leaning toward upping the ante given that other countries, including the U.S. and France, are also working toward reducing corporate taxes.
The Japanese government is also examining the idea of slashing fixed-asset taxes to help small and midsize businesses boost productivity. The measure will likely cover new machinery and other fixed assets. The current rate of 0.7% may be reduced to zero.
The draft proposal, a temporary measure for three years starting in fiscal 2018, will be included in a policy package to spur productivity. The package is expected to be approved by the cabinet on Friday, with the specific tax rates to be hashed out by the tax panels of the ruling parties.