Japan Tax System: How it works
Embarking on a journey through Japan’s tax system is akin to navigating the intricate patterns of a Japanese garden: both are meticulously organized with an underlying complexity that belies their serene appearance.
From income and corporate taxes to consumption tax and beyond, Japan’s fiscal framework is designed to support a wide range of social and economic policies.
This guide aims to demystify this system, providing a clear path through the financial foliage for residents and newcomers alike.
Let’s dive in!
What Is The Income Tax In Japan?
Income tax is the money you pay to the government from your gross earnings.
Usually, your employer deducts the tax due from your gross paycheck and pays it on your behalf.
This is why most employees in Japan do not need to file a tax return, except under certain conditions.
The income tax is based on a self-assessment system. It is paid every year on income earned during said year.
The calculations are based on your net income.
The tax rates generally range from 5% to 45%, depending on the taxable income bracket.
The tax rates are progressive for national income tax, with the minimum taxable income being JPY 1,950,000” (PWC, 2024).
What Is Progressive Tax And How To Calculate Your Earnings After Paying The Taxes?
The progressive tax system in Japan states that the tax rate rises as your income rises. This means that if you have higher incomes, you are subject to a higher tax rate, while those with lower incomes are taxed at a lower rate.
To calculate your earnings after paying your taxes in Japan, use the steps listed below:
- Calculate your gross taxable income:
This is your total income from all sources before any deductions.
- Apply the applicable deductions:
Several deductions can be made, such as the earned income deduction.
- Calculate the taxable basis:
Subtract the total deductions from the income after deductions to obtain the taxable basis.
- Determine the tax liability:
Calculate your national and local taxes due with the help of the taxable basis and the applicable tax rates.
- Calculate your net income:
Subtract your total tax due from the gross taxable income to get the net income after paying the tax.
You can also use online tax calculators or consult a tax professional for assistance.
What Are The Tax Classes In Japan?
In Japan, the tax classes for individuals are based on residency status.
There are 3 types of residence:
- Non-Resident
Non-residents have to pay income tax generally withheld at a flat rate of 20% for certain types of income, with no deductions available.
- Non-Permanent Resident
Non-residents in Andorra are subject to a 20% flat income tax rate on specific Andorran-sourced earnings, without the option for deductions. This streamlined approach simplifies tax obligations for those not residing within the principality yet earning from it.
- Permanent Resident
The following table enlists the type of residence and the sources of income on which tax is to be paid:
| Type of residence / Category of income | Income other than foreign-sourced income | Foreign-sourced income | |||
|---|---|---|---|---|---|
| Paid within Japan | Paid outside Japan | Paid within Japan | Paid outside Japan | ||
| Remitted to Japan | Other | ||||
| Residents(Permanent residents) | Taxable | Taxable | Taxable | Taxable | Taxable |
| Residents(Non-permanent residents) | Taxable | Taxable | Taxable | Taxable | Non-taxable |
| Non-residents | Taxable | Taxable | Non-taxable | Non-taxable | Non-taxable |
Income Tax Declaration In Japan
You must file a tax return to file a tax declaration in Japan. Income tax returns are filed individually, and joint tax returns are prohibited.
You are required to file a national tax return by 15 March of the following calendar year.
It is important to note that employees only need to file a tax return if
- They leave Japan before the end of the tax year
- Their employer does not withhold taxes
- They have more than one employer
- Their annual income is more than 20,000,000 yen
- They have a side income of more than 200,000 yen
The tax is paid on a four-installment basis or withheld from monthly salary.
The tax authority in Japan is the National Tax Agency, which is responsible for individual tax audits.
If you are a permanent resident and own assets outside Japan exceeding JPY 50 million, you must report your overseas assets.
The income tax rates in Japan are progressive, with the highest rate being 45% for taxable income over 40 million yen.
If you are a non-resident taxpayer, you will only be taxed on your income from Japan.
Remember that tax treaties between Japan and more than 50 countries can take precedence over the tax guidelines in Japan.
The tax filing process in Japan involves a final income tax return to report income from January 1st to December 31st of the prior year.
It is recommended to take assistance from an accountant or tax specialist.
How To Pay Less Tax In Japan?
Japan offers tax exemptions on home appliances, accessories, shoes, alcohol, food, cosmetics, cigarettes, and medicines.
Foreign visitors staying in Japan for less than six months can apply for tax exemptions on purchases of 5,000 yen or more.
It is recommended to keep receipts when making purchases, as you must present these receipts when applying for tax exemptions.
Furthermore, you are recommended to take advantage of tax reductions available on the following:
- Home Loan
- Employee Expenses
- Spousal Tax
- Charitable Contributions
Other Taxes In Japan
It is important to take all taxes in Japan. Neglect in proper payment of taxes results in legal consequences, including fines and deportation.
Here are some other taxes you need to pay in Japan:
- Consumption tax
Japan has a consumption tax rather than a value-added tax (VAT).
Suppose you are conducting business as a freelancer and are not a permanent company employee. In that case, you should consider other aspects of taxation, such as consumption tax (VAT), if your annual sales exceed a certain threshold.
- Enterprise tax
“The standard enterprise tax rate for fiscal years beginning on or after 1 April 2023 is 7.48%” (EU-Japan Centre, 2024).
It is a local tax, and corporations with paid-in capital of over 100 million yen are obliged to pay it.
- Corporate tax
It is a national tax, and the rate in Japan is 23.2% for companies with share capital exceeding JPY 100 million.
The tax rate varies with the size of the enterprise as well as the taxable income of said enterprise.
Taxes As A Seconded Employee In Japan
A seconded employee is an individual who is temporarily assigned or transferred from their home country to work for their employer or an associated company in another country.
Such seconded employees tend to have to pay taxes in Japan.
This depends on their residency status and the terms of their employment.
You and your employers should consider the tax treaty provisions between Japan and your home country to avoid double taxation.
These provisions may allow for a reduction in the tax rate, use of tax credits, and/or exemptions from certain taxes.
Conclusion
Having traversed the landscape of Japan’s tax system, it’s clear that its structure is as deliberate and multifaceted as the society it supports.
With a blend of progressive income taxes, a comprehensive consumption tax, and targeted corporate taxes, Japan aims to balance economic growth with social equity.
Whether you’re a salaried employee, an entrepreneur, or a seasoned investor, understanding this system is crucial to navigating life in Japan successfully.
Here’s to your financial health and prosperity in the Land of the Rising Sun!
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