Navigating the labyrinth of taxation can be a daunting task, especially when you’re in a foreign country like Japan. The Japanese tax system, known for its complexity, demands an understanding of various deductions and payments that hinge on factors like employment type, residence status, duration of stay, dependents, and where you live. So how do you know which tax return you need to file in Japan?
Understanding Taxes In Japan
Taxes in Japan present a unique landscape that can be quite different from other countries. The system includes not just income tax, which is deducted directly from salaries and varies based on income levels, but also a residence or municipal tax, often overlooked by foreign residents. The exact composition of these tax obligations can vary based on factors such as your employment type, dependents, and residency status.
Residency & Tax Implications
Your residence status in Japan can have a profound impact on your Japanese taxes, as the scope of taxation in Japan varies depending on your classification of residence. There are three main categories, each with distinct tax implications:
- Non-Permanent Resident: any individual of non-Japanese nationality having a ‘domicile’ or residence in Japan for an aggregate period of 5 years or less within the last 10 years. Non-permanent residents are taxed on income from sources in Japan and foreign-sourced income paid in Japan or remitted to Japan. If foreign-sourced income is received overseas and is not remitted to Japan, it is non-taxable in Japan
- Permanent Residents: any resident (someone who has had a permanent home (“juusho”) or owned a residence continuously for one year or more within Japan) other than a non-permanent resident. Permanent residents are taxed on all income, including foreign-sourced income not remitted to Japan. This is known as “Zensekai Shotoku Kazei (全世界所得課税)”
- Non-Resident: anyone staying in Japan for under a year without a juusho. Non-residents are taxed only on Japan-sourced income.
Note: If a resident leaves Japan temporarily but your spouse or relatives remain, or you retain a residence or personal property in Japan for your return, you’re still considered a resident during your absence.
Japanese Income Tax: Who Needs To File A Tax Return In Japan?
Income tax (所得税 or shotokuzei) is a deduction that most individuals working at companies in Japan see on their monthly paychecks. The tax rate varies depending on your income level with progressive tax rates. These rates range from 5% to 45%, depending on your income level. For instance, individuals earning less than 1.95 million yen annually pay 5%, while those with incomes above 40 million yen face a 45% rate. Additionally, there’s a flat 4% prefectural tax.
Generally, companies in Japan manage tax returns for their employees (this is known as “Tax Return A“, aka 確定申告A or Kakutei Shinkoku A). However, certain individuals will need to file their own income taxes – such as those earning over ¥20 million annually. Additionally, those under the following circumstances will also be required to file their income tax returns:
- -Those with multiple employers
- -Those with secondary incomes of over 200,000 yen annually
- -Those working for foreign employers must file their tax returns.
- -Those leaving Japan mid-financial year.
Note: non-residents in Japan must also file a tax return for income earned in Japan. The taxability of income in Japan, income abroad, or both depends on tax residency. A person is considered a “permanent resident for tax purposes” if they have lived in Japan for five out of the past ten years, regardless of nationality.
What Type Of Income Tax Return Do You Need?
If you belong to one of the groups who need to file a tax return, you’ll most likely need to file “Tax Return B” (確定申告B, or Kakutei Shinkoku B). More complex than Tax Return A, Tax Return B is generally used by individuals with non-traditional income sources such as multiple employers, side incomes, or if self-employed.
Within Tax Return B, there are two forms to choose from: the White Tax Form (白色申告 or Shiro Iro Shinkoku) and the Blue Tax Form (青色申告, Ao Iro Shinkoku). The White Tax Form is simpler and has generous deductions for dependents, but it doesn’t allow for the range of business-related deductions of the Blue Tax Form. The Blue Tax Form, on the other hand, allows for more deductions and the ability to roll over profits and losses, but it’s more complicated and requires basic accounting knowledge.
Finally, when buying or selling a property, there may be capital gains or losses, which need to be reported on your taxes. In this case, you should file a “Tax Return For Separate Taxation/Declaration Table 3” (申告書第三表（分離課税用), Shinkokusho (Daisanhyō (Bunrikazeiyō)).
If all of this information seems daunting, you’re not alone. Understanding which tax return you need and how to file it is a complex endeavor, and many get it wrong. This is one of many reasons why foreign residents often find consulting a professional financial planner to be so helpful.
Tax Preparation & Filing: Additional Considerations
As complicated as income tax returns can be, they are not the only way many foreign residents of Japan get tripped up when it comes to their taxes. As mentioned, the Japanese tax system encompasses more than just income tax, and its complexity can be a significant challenge, especially for those unfamiliar with local laws and practices. For these people, the expertise of an English-speaking tax professional in Japan can be invaluable.
An experienced adviser can provide guidance not only in navigating the intricate income tax filings but also in understanding and complying with other tax obligations like residence taxes. In addition, they can help identify potential tax deductions and credits, thereby minimizing tax liabilities. Finally, they can offer tailored strategies for those with unique financial situations to optimize tax positions. In short, consulting a tax professional can save you time, money, and significant stress.