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November 21, 2009

Taxes

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There's no getting away from it, you're going to have to pay your taxes in Japan: so how, when and how much should you expect to have to pay?

Please note that we are not tax accountants and this section is not an official tax site, just a starting point for you to get an overview of the tax system in Japan. Please read our disclaimer.

Taxes in Japan are broken up into two major categories: National Tax and Local Tax. After that, it gets very complicated! There are more than 25 additional taxes on "consumption", including everything from "bathing tax", "golf course utilization" (no, this isn't a joke!) to "gasoline tax" (part of the reason prices are 2 to 3 times higher than in the US). This may sound alarming, but the vast majority of these taxes are already included in the price you pay.

An overview of the various tax types follows...


Contents

Income tax

Doing your taxes is never easy and this guide is designed to help you get through the ordeal.

The Japanese income tax is progressive, meaning that the more you make the higher the rate of the tax to be paid will be. In 2007 the tax rate was between 5-40%. There is a standard basic deduction of 380 000 yen per year for each individual – if you earn less than that amount you will not be required to pay any income taxes. When calculating your earned income keep in mind that apart from your regular salary, any bonuses, house allowances and so on is also subject of taxation. Commutation compensation is non-taxable up to a certain amount (depending on way of commutation). Commutation by public transportation has a non-taxable amount of up to 100 000 yen per month in reasonable fares. There are a number of deductions that can be made and especially if you have your own company the possibilities for deductions is well worth checking out. As your income tax obligations as a foreigner in Japan can be quite complicated - it's highly recommended that you talk to a tax advisor before coming to Japan.


Status and responsibilities

Japan bases income tax obligations on resident status which is divided into Resident and Nonresident. In most cases, you will be responsible for income tax generated outside of Japan if you are a resident of Japan. Conversely, you may be responsible for income generated in Japan even if you are a non-resident, depending on: 1) Whether the actual transfer of funds takes place inside or outside of the country and 2) On the type of tax treaty that your country has with Japan.

A Resident is defined as someone who has domicile in Japan or has had a residence in Japan for one year or more. Those who do not fall under the status of Resident will be considered a Non-resident. Resident status is then divided into Non-permanent resident and Permanent resident.

If you are not a Japanese national and have have stayed in Japan for an aggregated time period of five year or less within the last ten years you are considered to be a Non-permanent resident otherwise you will be taxable as a Permanent resident. A Non-permanent resident has to pay taxes for incomes earned in Japan as well as incomes from sources abroad that are paid in Japan. A Permanent resident is taxable for all incomes from Japan and abroad.

Filing a Tax Return

The individual income tax is based on a self-assessment system in Japan. Each taxpayer is required to calculated their tax and fill out a Final Tax Return form to give to the Tax Office. The final tax will then be calculated and adjustments will be made regarding the amount of actual tax you have paid and the amount you should have paid. Depending on how much you have paid in during the year and your final tax you might need to pay in extra or you could get a tax returns paid back to you.

If you are employed and you're company withdraws money from your salary to pay taxes you might not need to to fill out a Tax return. Any final year adjustments will be made by the company and the adjustments will be seen on your pay slip. However you can always fill out a Tax return if you for example have deductions that you wish to make. If your company do not handle your tax payments or if your total employment income exceed 20 million yen you need to fill out a Tax Return. Also note that it is the total earned income that you are taxable for which means that if you have more than one employer or engage in other income earning activities you need to add all the incomes together.

The Tax Return should be handed in to the Tax Office where you live during the period of February 16 to March 15 of the following year and the tax should be paid before March 15.


Consumption/Sales tax

Many countries have point of sales taxes, some national and others at state level - here's a guide to Japan's Sales Tax and for tourists, how you can see that money again. The consumption tax in Japan is currently 5% (was 3% until June 2000). Out of the 5%, 4% is national tax and 1% is prefectural tax. When buying alcohol a national liquor tax is paid by the consumer. For tobacco products there are national, prefectural as well as municipal tobacco taxes. When purchasing gasoline there is a national gasoline tax.

Consumption tax is paid when purchasing goods or services and the price shown will include tax.

If you are only staying a short period in Japan as a tourist you can sometimes have the consumption tax repaid when purchasing goods in Japan. When leaving Japan you will find Tax Return desks at International Airports where you can claim a tax refund. Note however that the tax return does not include items such as food or hotel stays.

Resident tax

Apart from paying income tax on what you earn you also need to pay Resident tax. The general residence tax rate in 2007 was 10%. Previously the taxes could differ depending on your residence but as of 2007 the tax is the same regardless of where you live in Japan.

What is it?

Resident tax is comprised of the Metropolitan Tax and Special City Resident Tax, and are usually lumped together and called Shinminzei. As of 2007 the tax consists of 6 % municipal and 4% prefectural taxes. The final amount of tax is determined on the amount of income you received the previous year as well as the number of dependents you have. If you fill out (or do not fill out) a Final Tax Return that will effect your Residence tax.

The residence tax is payed to your local Ward Office. There are two ways of paying your residence tax; doing it yourself or paying through your employer. If you pay the tax yourself taxation slips will be mailed to you by the Ward Office. The slips will be sent to you in June, August, October and January. Extra charges will apply if you forget or fail to pay on time. The other alternative is to have the tax paid by your employer. Deductions for tax will then be made from your monthly salary and your employer will pay the tax to the Ward Office where you live.

First year free?

As the tax is based on the previous year's income, foreign residents are not required to pay this tax during their first year in the country. You do not have to submit any documents to be allowed this first year without Resident tax.


Capital Gains tax

In Japan the capital gains are added to the regular income and tax are then payed on the total sum of capital gains and income. Same tax rate is used for both capital gains and income. Japan has two types of capital gains tax applying to the sale of shares and, get this: You can take your pick!

Type A

The first type, Withholding Tax (GENSEN) requires you to pay 1.05% of proceeds, regardless of whether or not you made a profit on the transaction.

Type B

The second type, traditional Capital Gains Tax (SHINKOKU) requires you to declare 26% of net profits on the transaction on your income tax return. Many traders use the "GENSEN" system when they sell shares at a profit, and the "SHINKOKU" one when they sell at a loss (because the loss then appears on their tax return).


Property tax

Both national and local taxes apply to property taxation, to learn more you can visit the Ministry of Foreign Affairs (http://www.mof.go.jp/english/) for details. When it comes to capital gains from the sale of real estate taxes depend on the number of years the property has been owned before the sale. If the real estate has been held/owned for at least 5 years only 50% of the capital gain is taxable.


Inheritance tax

If you're rich and you die in Japan, be prepared to pay! - the maximum tax rate is currently 70%. According to the Ministry of Finance, "In additional to its function in providing the redistribution of wealth, the Inheritance tax also plays a role as a supplemental tax to the Income tax".

Inheritance tax must be paid by the person who inherits or is given (as a gift) property. The value of property that is subject to inheritance tax will be based on the market value at the time of inheritance /gift. The amount that is taxable is calculated after any debts that the deceased might have had has been deducted. Funeral costs that the person or persons inheriting have will also be deducted. Inheritance tax musts then be paid if the total amount of inheritance exceeds the basic exemption which is 60 million yen times the number of heirs. Anyone inheriting property needs to submit inheritance tax returns within a ten months of finding out about the inheritance.


Tax/Pension Refund

Paying taxes is not all bad news, the taxes laws in Japan allow for a number of options from tax reciprocity to refunds when you leave the country. Don't just say goodbye to your hard earned money, let it keep working for you. When you leave Japan you should make sure that you have paid all taxes, including resident tax. Normally this is done by appointing someone, a lawyer, as your representative in Japan.

However you also may be entitled to a tax return on the income tax payments you have done and/or a return of the money you have paid into the national pension plan. You can file a tax return by yourself or you can turn to companies specializing in helping foreigners with tax returns. If you want to file the tax return yourself forms can be found at your local Tax Office, normally it will take a couple of months before you receive an answer on your application. Whether doing it by yourself or with the help of professionals you will need to have your Statement of income (Gensen-Choshu-Hyo) from your employer that states your earned income and deducted tax for a year. To be able to get a pension refund you will need to have your pension book (nenkin techo) and your pension number. Sometimes this is kept by the employer but once you finish your employment the pension book should be given to you.

Double taxation – home country regulations and requirements

Double taxation is one of the problems you face when working and living abroad. Before moving it's advisable to research into the effect your move will have on taxes. This can usually be made by discussing the matter with the tax authorities in your home country and then keeping yourself updated with information about the taxes you need to pay in Japan. Japan has signed a Treaty for the Prevention of Double Taxation with a number of countries, including USA, Australia, Canada, UK and New Zealand. The treaty basically enables offsetting tax paid in one of two countries against the tax payable in the other country and in doing so double taxation is prevented.

There can also be exemptions which can be beneficiary for the taxpayer when it comes to transactions between the the two countries for such matters as capital gains.

Tax matters can sometimes be quite complicated and therefore it could be wise to consider seeing an accountant or tax professional to get professional advise on how to deal with tax in both your home country and in Japan.


Tax advice

A good place to start when you want information about taxes is the MOF and National Tax Agency's web sites. You can also visit your Tax Office for information and forms although be prepared for that they might speak only Japanese. However, English information, such as how to fill out a Tax Return, is available.

Each municipality will also usually have an English language information service (online and/or telephone service) that could be helpfully if you have questions.

As mentioned above there are also a number of companies that offer help with filing tax returns and other matters related to taxes. Also if your are employed your company might be able to help you with information or provide you with professionals that can help you with your questions. Finally a lot of information is shared in GaijinPot's Taxes forum.

Forums

Questions and/or comments? Go to the Taxes Forum


Links

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Some content adapted from Wikipedia.org.