Japan is by no means a low-tax jurisdiction, nor are its bureaucracies famous for being simple and easy to understand. For this reason, it is easy to see why taxes in Japan can be a daunting subject, even for those able to read the relevant kanji; and a near impossibility for the new-to-Japan and barely literate. A website with an exhaustive description of all the taxes in Japan would push the limits of one’s monthly internet bandwidth allowance, but here is a brief overview of some of the primary taxes with which you should be familiar.
As far as the Japanese tax authorities are concerned, all individuals, regardless of their citizenship, are first separated into one of two categories: resident and non-resident. Japan then uses a self-assessing system of taxation, which focuses on the two main categories of taxes: income tax and withholding income tax.
If someone is deemed a Japan resident, then they are liable for taxes on all worldwide income. There could be some relief from non-Japan sourced income, however, only if foreign taxes are paid and a relevant double-taxation treaty exists with Japan. Also, if you are a foreigner that has been living in Japan for less than 5 years, you are deemed to be a non-permanent resident, and as such any foreign-sourced income is not included in your Japanese annual income taxes. Upon having lived in Japan for at least 5 years, you will then qualify as a permanent resident for tax purposes.
Even if deemed a non-resident in Japan, then you still could be liable to the tax office on an annual basis. Any income that is Japan-sourced, regardless of your international residence, will be taxable to the Japanese government.
The annual income tax liability itself is calculated using the statutory methods ascribed to each individual classification of income. The total amount of tax calculated is then reduced by any number of income tax deductions allowable in a given calendar year. The resulting number is then multiplied by the following progressive tax rates:
Brackets of taxable income
|–||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%|
The good news is that for the vast majority of working professionals in Japan, employment income taxes and deductions will be calculated for you by your company and withheld from your regular salary. In addition, recent changes to the tax code will streamline the tax withholding system, and some tax bills which were often sent in the post to be taken care of manually by the taxpayer at the convenience store or the post office, could soon be withheld and paid on your behalf by your employer (for example, residence tax and health insurance).
Fixed Asset Taxes
Land, property, and other fixed depreciable assets also have taxes payable on acquisition and disposal, as well as on an annual basis. Depending on the asset and where it is located, various taxes could be due each year to the federal government as well as your local municipality tax office. Fixed depreciable assets are famous for having annual tax deductions associated with them (for example, depreciation expenses); but fixed assets are often a net negative with regard to their tax status.
A topic of much debate among politicians and economists is Japan’s consumption tax. Otherwise referred to as VAT (value-added-tax), this is the tax you as a consumer pay each time you purchase a good or pay for a service. It was recently raised from 5% to 8%; and is currently under consideration to be raised further to 10%. In order to help alleviate the recent hike in consumption tax, the federal government has decided to phase in a slight decrease in corporate income taxes.
Automobile and other motor vehicle taxes
Each year, any owner of a car, truck, or bus must pay a motor vehicle tax to the prefecture in which they reside. Perhaps in order to discourage buying excessively large cars and to promote lower fuel consumption, the amount of motor vehicle tax payable is determined by the size of the car’s engine. For motorcycles and other smaller vehicles, a light motor tax is payable to their local municipality. Similar to the fixed assets, consumers must also pay an acquisition tax upon purchasing a motor vehicle, in addition to the consumption tax.
In navigating Japan’s tax system, it could very well be worthwhile to engage the assistance of a knowledgeable professional. For instance, while your employer may be taking care of a handful of annual Japanese tax deductions on your behalf, they could very well be missing more than a few other deductions. While we often advise against tax-driven investment decision-making; it could be worth your while to be at the very least tax-aware when it comes to allocating your investment capital; taking advantage of any potential tax benefits, some of which are only available for a short period of time. Lastly, as an international professional, it is also important to be aware of any tax implications or filing requirements in your country of origin (for example, Americans have extensive annual filing requirements with punitive penalties for non-compliance), which could necessitate seeking the advice of an expert in expat-taxes.
– Ernst and Young Tax – 2016 Japan Tax Reform Outline
– Japan National Tax Agency – Income and Corporate Taxes
– KPMG Japan – Tokyo Proposal for Local Tax Rates Applicable for Fiscal Years Beginning on or after 1 April 2017