Tax Reduction Strategies For Foreign People In Japan

DISCLAIMER: The following information does not constitute advice and is for informational purposes only. There is a focus on general, non-specific strategies which may or may not be suitable for people of certain nationalities. Any financial decisions taken, should be undertaken only after consulting with a professional to assess suitability. Acting without consulting with the appropriate professionals may sometimes have adverse consequences and in fact result in a tax bill which is larger than the initial one. x

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Tax planning becomes increasingly more important as governments see an increasing importance in increasing taxes. Tax is in fact the biggest expenditure that you will ever make in your lifetime. However. If, upon attending you place of work, your boss was to tell you that you were eligible to receive a 10% increase in salary this year, which would continue in following years -but- you had to perform a series of tasks today to qualify, you would likely work through the tasks, and then happily enjoy the increase in money. This is the essence of tax planning. It is often possible to compliantly reduce your taxable base, but it will require an amount of your time to evaluate your finances, and establish where the holes are. If you feel that your time for extra money ad infinitum is a good trade, then it is a good idea to understand your own tax situation.

Japan has some of the highest top-rate taxes in the world for individuals, at around 52% for the highest earners (municipal taxes change based on location, e.g Tokyo, Kanagawa..). Japan’s tax system does however have a number of unique areas whereby the pro-active are able to reduce their tax bill. This will be of increased relevance for foreign residents, who are increasingly subject to bi-lateral taxation agreements between Japan and their home country- commonly, despite BTA’s ostensibly being implemented to avoid double-taxation, an unfortunate side affect is that the person usually ends up paying taxes to the more expensive of the two.

 

Tax Deferred Retirement Plans

Depending on which country you are from and where you are tax resident, you may be able to access a tax-deferred retirement plan. These plans receive favorable income tax treatment and as such it makes sense for your to max out on your annual contributions each and every year when possible and then move onto other accounts thereafter. Plan contributions and investments accumulate free of taxation until the funds are withdrawn (usually at retirement age). As a result of deferring taxation (gross roll-up), a substantial pension pot can be built up over time. There are sometimes employer sponsored schemes whereby the employee is permitted to contribute to the account with pre-tax money. In this scenario you are potentially receiving investment income on taxes that would have normally been paid away.

Reduce Non-Deductible Interest Loans With Home Equity Loans

Interest on debts and loans is non-deductible for tax purposes. The money you owe your bank, or your credit card company will be subject to interest and grow while you sleep. This interest cannot be deducted from profits or income you may have received elsewhere. One way to eliminate these non-deductible debts is to obtain a home equity loan. If you have equity in a home you can obtain a home equity loan and use the proceeds to pay off the other non-deductible loans (which often have a higher APR anyway). Interest on home equity loans up to a limit is tax deductible. Accordingly, you are able to convert non-deductible interest into deductible interest. It should go without saying that in doing so you are pledging your home as collateral and if you fail to make the repayments, you will lose your home. You should be certain that you are able to make the repayments before considering the logistics of this strategy.

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Invest In Tax Exempt Bonds Or Mutual Funds

Taxpayers in higher tax brackets can reduce taxes by investing in tax-exempt municipal bonds or mutual funds that invest in tax-exempt bonds. Interest on municipal bonds is free from federal taxation. In some cases, the interest from tax exempt municipal bonds (which often looks low at first glance compared to their corporate peers), may be higher than a taxable bond once you’ve deducted the tax that you’d have to pay to the government. This withstanding, municipal bonds are only available to people from certain countries and certain residency requirements may need to be met. For younger investors they may also prove to be too vanilla (government backing = high credit quality) and the resulting income from the bonds may be insignificant compared to the returns that could have been achieved had the investor chose to participate in the equity market and just pay the resulting tax on the gains.

Selling Investments For A Tax Loss

Nobody likes losing money. Sometimes however, it may not be as bad as first thought. If you have realised a capital gain from selling another profitable investment, you may be able to erase that tax liability by offsetting it with a corresponding loss of the same value. You may also have securities in your portfolio which show paper losses. You could consider tax loss switching- that is, you sell the securities for a capital loss and reinvest the proceeds in instruments that are not identical (that is one of the preconditions for being able to use the loss as a deduction). There will be differing laws surrounding loss harvesting depending on your nationality and residency. It makes sense to find out the do’s and dont’s from an adviser before making any transactions to ensure that you are not realising any un-useful losses.

 

Accelerate Deductions Or Defer Income

When you know that your tax bracket will be the same or lower in the next year it may make sense for you to bring next year’s deductions into the current tax year. For example, you could prepay the property tax on your home or investment property or pre-pay your local or municipal taxes. If you make donations to charities this could be deductible too. Likewise, if you anticipate being in the same or lower tax bracket it could make sense to defer income to the following year too. Taxpayers who have control over their incomes often use this strategy. For example, you may be able to defer receiving a bonus until next year or a professional may delay billing clients so that she receives the amounts owed next year. This is a particularly useful strategy for business owners.

 

[Sources]

– PWC 201 6 Japan Tax Reform Proposal  and impact on individuals on  international assignments
– KPMG 2017 Tax Reform – Japanese Anti-Tax Haven (CFC) Regime
– KPMG Outline of the 2017 Tax Reform Proposals
– Deloitte Corporate Tax Rates Report 2016
– Japan Tax Agency: INCOME TAX AND SPECIAL INCOME TAX FOR RECONSTRUCTION GUIDE (FOR ALIENS)

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Tax Reduction Strategies For Foreign People In Japan
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Tax Reduction Strategies For Foreign People In Japan
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Methods and strategies to reduce tax for foreign residents of Japan
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