It was not unexpected to know from Mr. Ganesan, my friend for 40 years that one of his relatives has gone to Japan since he got a visa for work and I was equally delighted to know that he wanted me to write about Japanese income tax system. Furtherance to his wish, this article is written with the premise that a large number of our youth would visit Japan in near future and gain immensely with its culture and its prosperity.
Since America will shortly finalize its tax rates and other information around December, 2017, a detailed article will be written later for filing of tax returns for USA for the year 2017.
Now, the overview of individual/corporate tax system in Japan
All individuals, regardless of nationality, are classified as either residents or non-residents. Individual income tax comprises self-assessed income tax and withholding income tax. Self-assessed income tax will be levied on the individual’s income for the calendar year which runs through January, 1 to December 31.
Now let us know the meaning of residents and non- residents. The taxes levied are different for these two types of tax payers.
Residents
Persons having a domicile in Japan and persons having a residence in Japan for one year or more are termed residents. The worldwide income of residents, regardless of the location of the source of income, is subject to income tax. Even though I may live in Japan for the whole year, my income from India, if any, would also be taxed as income tax in Japan.
Non-permanent residents:
Residents having no Japanese citizenship and having a domicile or residence in Japan for five years or less within the period of ten years are non-permanent residents.
The scope of taxation for non-permanent residents corresponds to that for residents, but tax will not be assessed in Japan on income sourced outside Japan as long as that income is not paid within Japan or is not remitted to Japan. (“Domicile” as used above refers to the principal base and center of one’s life)
However, the salary paid based on the work in Japan is applicable to domestic-sourced income even if it is paid outside Japan, and income tax will be assessed totaling the salary paid within and outside Japan.
Now, we know that one who is not a resident is a nonresident. Obviously, his income within Japan will be the source for income tax.
Let us understand what is an income, deduction or credit? Japan is always susceptible for earthquakes and it may be of interest to know how income tax plays its role towards that area. Interesting, is it not?
Income
- Employment income
- Real estate income like rent, leasing etc.
- Interest income
- Dividend income
- Miscellaneous income like public pensions
- Retirement income
- Capital gains
- Occasional income
Income derived from lump-sum payments from life insurance policies, prize money, lottery winnings, etc. Aggregate Taxation Income derived from certain lump-sum payments from endowment life insurance policies or lump-sum payments from casualty insurance policies where the term of insurance or mutual relief is 5 years or less.
Timber income
Income derived from the sale of harvested forestry resources (timber), which have been owned for a period exceeding five years and other activities.
Next, we get details of deductions which are interesting, particularly, pertaining to Japan, a genuinely paternalistic and citizen conscious nation with the largest number of centurions.
Deductions
- Casualty losses
- Medical expenses
- Social insurance premiums
- Small business mutual aid premia
- Life insurance
- Earthquake insurance
- Special exemption for spouses: If your total annual income is not more than 10 million yen and your spouse’s income exceeds 380,000 yen but is less than 760,000 yen.
- Widow’s deductions, if one is a widower.
- Working students
- Persons with disabilities
- Dependents
- Basic exemption: The basic exemption is 380,000 yen.
Credits
- Credit for dividends
- For dwelling units if any addition or improvement done
- Contribution for political parties (When you have made certain specified contributions to a political party or political organization): I have not seen any other income tax paying country where contribution to any political party has been allowed as credit.
- Public interest incorporated association (If you made any donation to a specific public interest incorporated association, public interest incorporated foundation, incorporated educational institution, etc., social welfare juridical person, juridical person for offenders’ rehabilitation or national and municipal university corporations up to certain amount)
- Anti-earthquake improvement made for earthquake (In the case of having executed anti-earthquake improvement work to your house provided for residential use)
- Special tax credit for specified housing improvements, if you have carried out improvement work on your house to make it barrier-free, improve energy conservation or accommodate multi-family cohabitation and you provide the house for residential use within 6 months.
- Special tax credit for new building, etc. of a certified house If you have built a certified house, or purchased any one, and you provide the house for residential use within 6 months.
The following additional tax credits are available from amounts of income tax and special income tax for reconstruction.
- Credit for foreign tax, if you have paid foreign income tax.
- Deduction for withholding income tax and special income tax for reconstruction: Amount of income tax and special income tax for reconstruction which has been withheld from salary or pensions, etc. when received.
Now it is time to learn various slabs for income tax.
1. Self-assessed income tax on residents
Income is calculated using various methods established for various income classifications. The tax is calculated by subtracting the various income deductions from the total amount of income and then multiplying the difference, which is the amount of taxable income, by the progressive tax rates below. Any withholding income tax levied on the income beforehand will be deducted from the calculated tax. This is common practice among all nations.
2. Self-assessed income tax on non-residents
Non-residents are classified by their circumstances into (a) non-residents having an office, etc., in Japan,
(b) non-residents continuously engaged in construction or assembly in Japan for one year or more, or doing business through a designated agent in Japan, or
(c) other non-residents.
Taxable income is calculated within the scope of income established for each classification.
Individual income tax rates (as on date of this article, 100 yen – US $ 0.8967)
| Brackets of taxable income (in Yen) | Tax rates | |
| ———————– | or under 1,950,000 | 5% |
| Over 1,950,000 | or under 3,300,000 | 10% |
| Over 3,300,000 | or under 6,950,000 | 20% |
| Over 6,950,000 | or under 9,000,000 | 23% |
| Over 9,000,000 | or under 18,000,000 | 33% |
| Over 18,000,000 | or under 40,000,000 | 40% |
| Over 40,000,000 | ———————- | 45% |
Income tax on employment income is calculated based on the amount obtained by deducting the following employment income deductions from income.
| Employment income (Yen) | Employment Income deductions (yen) |
| Up to 1,625,000 | 650,000 |
| Over 1,625,000 – up to 18,00,000 | Employment income X40% |
| Over 18,00,000 – up to 3,600,000 | Emp. Income x30%+1,800,000 |
| Over 3,600,000 – up to 6,600,000 + 5,400,000 | Emp. Income x 20% |
| Over 6,600,000 – up to 10,000,000 + 1,200,000 | Emp. Income x 10% |
| Over 10,000,000 – up to 12,000,000 + 1,700,000 | Emp. Income x 5% |
| Over 12,000,000 | 2,300,000 |
Filing and payment of taxes
Persons who are residents whose total income does not exceed total deductions and persons who receive salary income subject to withholding tax at source (year-end adjustment) from only one payer not exceeding 20 million yen in that year and who have no other income exceeding 200,000 yen do not, as a rule, need to file a return.
As per the rules, non-residents file and pay taxes following the same regulations like residents. However, non-residents leaving Japan without designating a tax agent and reporting this fact to the director of the taxation office must submit an income tax return and pay the tax owed prior to leaving Japan.
Other types of Income taxes
Restoration Income Surface tax
From January 1, 2013, to December 31, 2037, individuals and corporations will be subject to a 2.1% restoration income surtax on the amount of withholding tax on income and self-assessed income tax. Obviously, tax treaties with other nations may result no tax under the above head.
Individual inhabitant tax
“Individual inhabitant taxes” is the collective term for prefectural tax and municipal tax on individual income, and persons having a domicile etc. in Japan as of January 1 each year are subject to these taxes. Individual inhabitant taxes consist of an income-graded component and a flat-rate (fixed amount) component etc.
Enterprise tax
Individuals engaged in certain businesses specified in local tax laws must pay enterprise taxes. Taxable income for enterprise tax purposes is generally calculated in accordance with the provisions for calculating income for income tax purposes, except where special stipulations apply.
Returns must be filed by March 15, and taxes must be paid in August and November in accordance with tax notices issued by the prefectural government. Individual enterprise tax rates range from 3% to 5%, depending on the type of business.
1. Tax rates of inheritance tax and gift tax
2. The above tax rates are between 10% to 55% for both the inheritance tax and gift tax, but there is a difference between the inheritance tax and the gift tax in the taxable amount each tax rate is applied. Inheritance tax and gift tax in Japan are among the highest in the world. Actually, being complicated in nature, one expects one’s tax consultant to do this job.
Tax treaties
Japan has concluded tax treaties with many countries for the purposes of avoiding double taxation of income internationally/locally and preventing tax evasion.
The provisions of tax treaties supersede those of domestic law. In determining the tax liability in Japan of individuals and corporations domiciled in a country with which Japan has a tax treaty, the location of the source of income deemed taxable income under Japanese law (specifically the provisions concerning where the income upon which taxation is based is generated) may at times be amended to accord with these tax treaties. Generally, professionals hailing from other countries and working in Japan or vice versa would be governed by tax treaties. It is the job of the tax professional to apply the relevant provisions of the tax treaties and avoid double taxation.
We have seen with many of our clients who work in India but hold American citizenship that foreign tax credits are applied to avoid double taxation.
Withholding tax
Withholding tax in Japan is similar to the one we have in India. Japan’s tax filing system is based as a rule on self-assessed income tax payment where individuals (tax payers) calculate their annual income and tax amount, and file tax returns by themselves.
In addition, a tax withholding system where companies (salary payers) collect income tax on the date of payment and pay the tax on behalf of individuals (income earners), is also introduced for specific incomes.
Withholding income tax is assessed against payments of certain taxable income, whether paid to an individual or a corporation. Income subject to withholding income tax is determined in accordance with the type of income and the classification of the recipient of that income.
Like in India, the amount withheld must be paid to the taxation office by 10th of next month.
Payments made to residents for following are also subject to withholding of tax at source:
- Interest
- Dividends
- Salary, wages, bonuses and similar compensation
- Retirement allowances
- Compensation, fees, etc., to certain professionals
- It is easily understandable that tax withheld at source would finally be used as credit towards payment of tax at the year end.
Then, what about payments to corporations and the tax withheld information?
They too are subject to tax withheld at source for the following payments:
- Interest
- Dividends
Corporate taxes
The corporate tax system in Japan is very cumbersome as may be observed from the following information.
The taxes levied in Japan on income generated by the activities of a corporation include corporate tax (national tax), local corporate tax (national tax), corporate inhabitant tax (local tax), enterprise tax (local tax), and special local corporate tax (a national tax, although filings and payments are made to local governments along with those for enterprise tax) (hereinafter collectively referred to as “corporate taxes”).
Except in instances requiring exceptional treatment, the scope of income subject to corporate inhabitant tax and enterprise tax is (including special local corporate tax; the same applies below) determined, and the taxable income calculated, in accordance with the provisions for corporate tax.
Corporate inhabitant taxes are levied not only on income but also on a per capita basis using the corporation’s capital and the number of its employees as the tax base. Corporations having paid-in capital of more than 100 million yen are subject to enterprise tax on a pro forma basis.
The following actual information on taxes for corporations is an eye opener about corporation tax system applicable in Japan.
| Start date of business | Small and Medium sized industries | Large industries | ||
| 1-4- 2015- March 31, 2016 | 21.4 % | 23.2% | 34.3% | 32.1% |
| April 1, 2016- March 31, 2017 | 21.4 | 23.2 | 33.8 | 29.9 |
| April 1, 2017- March 31 2018 | 25.9 | 27.5 | 33.5 | 29.9 |
| April 1 2018 on wards | 25.9 | 27.5 | 33.6 | 29.7 |
(M indicates million.)
1. Final tax return and tax payment
Corporations must file a final tax return for corporate tax, local corporate tax, corporate inhabitant tax, enterprise tax, and special local corporate tax on their income within two months from the day following the last day of each taxable year.
However, an extension of the deadline for filing a final tax return may be requested, with approval from the director of the taxation office, when a corporation is unable to file a final tax return due to various reasons. The income and tax amounts to be entered in the final tax return must be calculated in accordance with the statement of accounts approved by the general meeting of stockholders.
The calculated tax must also be paid within this period. The payment deadline will not be extended even if the deadline for filing of a final tax return is extended as described above. Therefore, interest tax and overdue tax for the extended period are imposed (as deductible expenses) if the tax payment is made during the extended period. Any interim payment made in advance on the amount of tax owed shall be deducted from the total amount to be paid.
Blue form returns
Tax return forms for corporations come in two formats: white forms and blue forms. A corporation may file a blue form tax return with approval from the appropriate national tax office. Corporations filing blue form tax returns enjoy a variety of tax benefits. This is an interesting feature of Japanese taxation which has not been witnessed any where else.
Conclusion
With wide range of opportunities available to our young and brilliant professionals visiting Japan on short or longer periods, it is essential that the tax system in Japan which is bit complicated due to its violent geography, longevity of its people and paternalistic character of its government which requires enormous resources to manage its country is understood properly.
An attempt has hence been made to give some minimal information about its individual as well as corporate tax system. It is clearly understandable that with the tax forms in Japanese language, only experienced and qualified tax professionals would file the tax returns though the tax office through its web page has offered help for filing of tax returns.
This may kindly be treated as an informatory article for knowledge purposes only.
Reference
Jetro, Japan external trade organization web page with official tax information:
https://www.jetro.go.jp/en/invest/setting_up/laws/section3/page3.html
2016 Income tax and special income tax for reconstruction guide, again, official web page with 35 pages booklet with web page which contains tax forms in Japanese language, an interesting one:
http://www.nta.go.jp/tetsuzuki/shinkoku/shotoku/tebiki2016/pdf/43.pdf
Author Bio
