Japan has a complex tax system that includes both direct and indirect taxes. The Japanese taxation system is administered by the National Tax Agency.
Double Taxation Agreements
Japan has signed double taxation agreements with over 80 countries, including the United States, Canada, Australia, and most of the EU member states. These agreements aim to avoid double taxation on income earned in both Japan and the other country. They also provide relief from withholding taxes on dividends, interest, and royalties.
Main Taxes for Expats
Income Tax
Expats in Japan are subject to the same income tax rules as Japanese residents. Income tax is calculated based on the amount of taxable income earned during the tax year, which runs from January 1st to December 31st. The income tax rates for 2023 are as follows:
- Up to ¥1.95 million is taxed at 5%.
- The amount between ¥1.95 million and ¥3.3 million is taxed at 10%.
- The amount between ¥3.3 million and ¥6.95 million is taxed at 20%.
- The amount between ¥6.95 million and ¥9 million is taxed at 23%.
- The amount between ¥9 million and ¥18 million is taxed at 33%.
- The amount above ¥18 million is taxed at 45%.
Expats may also be entitled to claim certain tax deductions and credits, such as the Basic Deduction and the Dependent Deduction. These deductions and credits reduce the amount of income tax payable.
Residence Tax
Residence Tax is a local tax that is paid by residents of Japan. The Residence Tax rate varies by region but is typically around 10% of the income tax payable.
Consumption Tax
Consumption Tax is a tax on the sale of goods and services in Japan. The standard rate of Consumption Tax is 10%. However, there are reduced rates of Consumption Tax for certain goods and services, such as food, books, and newspapers.
Special Tax Breaks for Expats
Foreign Tax Credit
Expats who pay tax on foreign income in another country may be eligible for a Foreign Tax Credit in Japan. The Foreign Tax Credit allows individuals to claim a tax credit for foreign taxes paid, up to the amount of Japanese tax payable on the same income.
Special Tax Treatment for Highly Skilled Foreign Professionals
Highly skilled foreign professionals who meet certain conditions, such as having a high level of expertise in their field and earning a certain level of income, may be eligible for special tax treatment in Japan. This treatment includes a preferential tax rate of 20% for the first five years of their stay in Japan.
Filing a Tax Return in Japan
Expats who are considered resident in Japan for tax purposes are required to file a tax return each year. The tax return must be filed by March 15th of the following year.
Expats can file their tax returns online using the National Tax Agency’s website. To do so, they need to obtain a digital certificate, which can be obtained by visiting one of the tax agency offices in person.
When filing a tax return, expats need to provide details of their income, deductions, and credits for the relevant tax year. If they have any foreign income or assets, they may also need to declare them on their tax return. It’s important to note that Japan operates on a self-assessment system, which means that taxpayers are responsible for accurately reporting their income and paying the correct amount of tax.
Tax Exit Procedures
Expats who are leaving Japan to move abroad need to follow certain tax exit procedures. Firstly, they need to notify the National Tax Agency of their departure and provide details of their new address abroad. They should also settle any outstanding tax liabilities before leaving Japan.
If an expat is considered non-resident for tax purposes, they are only liable for Japanese income tax on income earned in Japan. However, they may still be liable for Japanese tax on any income or gains that arise from Japanese sources, such as rental income or capital gains from the sale of a Japanese property.
Expats who have paid tax in Japan may be entitled to claim a refund of some of the tax they have paid. To do so, they need to file a tax return for the relevant tax year and claim the refund through the normal tax refund process.
The taxation system in Japan is complex and can be difficult for expats to navigate. Expats in Japan need to be aware of the main taxes that apply to them, such as income tax, Residence Tax, and Consumption Tax, as well as any special tax breaks that may be available. They also need to ensure they file their tax returns on time and follow the tax exit procedures if they are leaving Japan to move abroad. By understanding the Japanese tax system, expats can ensure they are complying with their tax obligations and maximizing any tax benefits available to them.