Japan Mulls Excluding Large Firms from “Wage Hike” Tax Break

Tokyo, Dec. 10 (Jiji Press)–The Japanese government and ruling parties are considering making large companies ineligible from fiscal 2026 for a program to reduce the corporate tax burden for firms that raise employee wages, it was learned Wednesday. This comes as pay hikes have taken root at large companies, many of which are financially strong, and the effectiveness of the program is decreasing as a result. On the other hand, the system will be maintained for small companies struggling to raise wages. The government and the coalition of the ruling Liberal Democratic Party and its new partner, the Japan Innovation Party, also known as Nippon Ishin no Kai, aim to reflect the plan in the fiscal 2026 tax system reform package, which is scheduled to be adopted by the end of this month. Under the program, the corporate tax burden will be reduced for companies that increase the total wages of employees. To be eligible, large and midsize companies must raise their overall wages by at least 3 pct from the previous year. When the program was introduced in 2013, many large companies were reluctant to raise wages. In recent years, however, many are becoming positive on pay hikes amid high consumer prices and labor shortages. Japanese firms agreed on wage hikes of 5 pct or more in the “shunto” annual labor-management negotiations in 2024 and 2025. In addition, the program has been criticized for being excessively beneficial to large companies because they have to raise wages by only 3 pct or more. The required pay hike rate will be raised to 4 pct or more for midsize companies in fiscal 2026, and they will be excluded from the program in fiscal 2027. The tax cut program will be maintained for small firms at a time when many are forced to raise wages to cope with labor shortages and protect employees’ livelihoods while being unable to reflect higher costs in their product and service prices. Based on the coalition agreement between the LDP and the JIP, the administration of Prime Minister Sanae Takaichi, also leader of the LDP, plans to abolish special tax incentive programs with little policy effect. According to an estimate made at the time of the tax system reform for fiscal 2024, when the current rules for the tax cut program to promote pay hikes were decided, the resulting annual decline in tax revenue was put at about 1.3 trillion yen, including some 546 billion yen from large and midsize companies. END [Copyright The Jiji Press, Ltd.]