TOKYO (BLOOMBERG) - 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 do not.

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-sized companies reduce their tax bills by up to 20 per cent, according to the document.

Firms that do not 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 is 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.

INCOME TAX SHIFTS

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$101,500) will see their tax burden rise from January 2020 due to a decrease in the basic deduction.

Policymakers 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.

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.