Somebody in Japan earning a salary of 3.3 Million JPY would pay approximately 24% in taxes each year (including municipal taxes). A person earning 18 Million JPY is likely to be paying closer to 45% in taxes, meaning that out of 18,000,000 JPY earned they only get to take home 9,900,000 JPY of it. Seeing as the government does not have its own money, it depends on tax revenue to keep the country running and uses this money to service and maintain the healthcare system, social security and welfare, unemployment and labor, food and agriculture, and transportation systems.
|Brackets of taxable income||Tax rates|
|–||Or under 1,950,000 yen||5%|
|Over 1,950,000 yen||Or under 3,300,000 yen||10%|
|Over 3,300,000 yen||Or under 6,950,000 yen||20%|
|Over 6,950,000 yen||Or under 9,000,000 yen||23%|
|Over 9,000,000 yen||Or under 18,000,000 yen||33%|
|Over 18,000,000 yen||Or under 40,000,000 yen||40%|
|Over 40,000,000 yen||–||45%|
If you leave your house and go outside (and don’t live in the sub-Saharan desert) you will invariably be enjoying the spoils of government spending somewhere or other, and as such the tax system, and adherence to its rules, are important to maintain the current societal systems in which we all participate and benefit. This withstanding, if you are obligated to pay 100 yen in taxes, and you in fact pay 120 yen, you should be aware that this is a donation and non-mandatory. In essence, you should pay what you are obligated to by law, and retain that which you are not for your personal benefit. Paying close attention to the tax system and its laws will enable you to structure your finances so as to be legally compliant of tax law, and also maximise your savings. The following are some common areas overlooked by residents of Japan in their tax planning and will aid in answering the question “How can I reduce my tax bill in Japan?”.
Spousal Tax Breaks
Married? The spousal tax deduction cuts the taxable annual income of the household’s main earner by ¥380,000 if the dependent spouse is earning ¥1.03 million or less a year. By reducing their taxable income, the main earner and the household pay less taxes overall. The system was introduced back in 1961, when Japan was in the midst of its postwar modernization drive and undergoing rapid economic growth. Statistics from the internal affairs ministry show that the number of households in which both husband and wife work surged 73 percent to 10.65 million in 2013 from 6.14 million in 1980. In the same period, the number of married single-income households fell 33 percent to 7.45 million, compared with 11.14 million in 1980. Utilise this deduction while you still can as this section of the tax code is under review for reform under the current administration. Who said marriage was costly?
Feeling charitable? Donations made to charity can be offset against your income. The tax office reserves the right to disregard these donations as deductibles so it is advisable to check beforehand to see if your chosen organisation is qualifying or not (hint: Japanese charities are favorable…). Donations to local governments are invariably approved. Donations must be in excess of 5,000 JPY. Sharing is caring.
Invest in Real Estate
Now, this is not a tax saving per se but you are able to increase your income without a directly exponential increase in income tax [pending requirements]. Property investments paying you a monthly income will give you money which is then subject to income tax. What the tax code allows you to do is deduct a large number of expenses from this income to reduce your taxable base. The largest of which is depreciation cost (for accounting purposes, real estate assets in Japan lose value each year that you hold them) which can be deducted from your taxable base throughout the ownership term along with maintenance expenses, management expenses, insurances and even the interest payments on the loan (sorry cash buyers). There are certain requirements which must be met before the bank will lend you money, but if you qualify you may receive an increase in passive income and have extra tools to pro-actively manage your taxes.
Do you travel to work? Congratulations. Your daily movements may have fiscal benefits…
Amounts paid for entertainment and social expenses are, in principle, treated as salary. If it is clear that the expenses are used for the business of the employer, they are not taxable. This does not mean that you can “expense” a trip to a theme park with your family. It does however mean that you can expense a trip to the theme park with your clients, if it is to the express benefit of your company (provided it doesn’t exceed the permitted entertainment allowance).
Bereavement And Disaster
To every cloud a silver lining. Funeral contributions, condolence payments, consolation money for disasters, etc., are not taxable if they are deemed reasonable according to commonly accepted norms. Again, this is entirely at the discretion of the tax office. Giving 10 million to your son because his pet rabbit died will probably be looked upon unsympathetically by the tax officer.
Scholarships and Professional Development
Scholarships are not taxable. However, the money and items provided as a scholarship by an employer to an employee who has a child attending school, or provided by an employer to an employee to help fund the cost of the employee’s own schooling, are deemed to be salary, other than certain disbursements for the acquisition of skills needed by the employee to perform his/her work duties. The take-home point of this being, ensure your employer pays for these things on your behalf so as to mitigate a personal liability.
Social Insurance Premiums
If these are taken directly from your salary you need not do anything. If you pay them yourself then you need to file a deduction application. This includes both the national health insurance and pension schemes. These should be your first go-to tax deductions.
Other Insurance Premiums
Life insurance premiums, individual pension premiums and earthquake insurance can all be deducted up to 50,000 JPY per year. Be aware that in 90% of cases the deduction will be denied if the providing insurer is a non-japanese company.
Disability and Widows
Annual deductions start from 270,000 JPY per year and can increase in the case of disability pending the severity of the condition. Widows are flat rate.
This is potentially a large one. Does anyone depend on you? Moral support excluded, if you support anyone financially you may be eligible for a deduction. General Dependents are deductible at 380,000 JPY and Specific Dependents are deductible at 630,000 JPY. The criterion for each category can vary so call your friendly local tax office for confirmation before filing for the deduction. Essentially, if you ever send money to a family member, this can reduce your taxable base (senior dependents can be deducted up to 380,000 JPY and if they also live with you this increases to 930,000 JPY!).
Housing and Loans
If you receive a loan to spruce up your primary residence (your house) you can deduct up to 500,000 JPY. Sadly the tax credit system for housing investment ceased on the 31st December 2013 however there was a new credit rolled out in April 2014. The new deduction applies to buyers who have have been subject to the 8% consumption tax. The maximum mortgage balance will be increased to 40,000,000 Yen, which means the maximum annual tax deduction will be 400,000 Yen, or 4,000,000 Yen over 10 years. (Also, you should be aware that no consumption tax is payable if you purchase a second-hand property from a private seller. Your tax deduction will be limited to a maximum of 200,000 Yen per year ,based on a maximum mortgage balance of 20 million Yen).
Retired? Congratulations- you’ve probably had a long career of working and investing and now are free to enjoy the finer things. Take a tax break…
This list is not exhaustive and all of the above will likely change in the future with each revision of the tax code but this is, currently, the state of play. In being aware and mindful of the different classifications of income and expenditure in your own finances you will be able to achieve a better understanding of how to reduce unnecessary liability.
In summary, there are many deductions and allowances available for you to utilise to reduce your taxable base. Filing tax returns yourself can require some understanding of technical Japanese. Using a skilled accountant is advisable as their fees are often eclipsed by tax savings and rebates. For personal recommendations or further information about becoming tax-compliant and increasing your savings, wages or benefits head over to our Contact page or contact your Tyton Capital advisor.
– All About, March 25, 2013. The Yomiuri Shimbun, July 13, 2013
– Japanese National Tax Agency, Withholding Tax Guide 2008
– JETRO, Laws & Regulations on Setting Up Business in Japan
– Taxation in Japan 2014 – KPMG
– PwC Japan Tax Update 2015