It’s tax time! Tax return tips for foreign residents

photo by blueprimecapital

In Japan, residents must file tax return between 16th February and 15th March for January to December of the previous year to pay income tax and special income tax for reconstruction. If you are working for a business, your employer withhold taxes from your salary and arrange the year-end-adjustment on behalf of you. However, if you are a sole proprietor or have multiple income sources, you have to file your tax return by yourself. While Japanese nationals residing in Japan must report all incomes from Japanese and international sources, the extent of tax obligation for foreign nationals vary depending on their situations. This column will explain the basics of tax return in Japan.

Residents and non-residents for tax purpose

Before filing tax return, the first thing you should know is resident category of yourself for tax purpose, resident or non-resident. If you fall into the resident category, then check if you are a permanent resident or non-permanent resident. Note that the word “permanent resident” is used in terms of tax purpose, thus irrelevant to your status of residence. “Resident” and “non-resident” are defined as below.

Permanent resident: Japanese nationals, and/or individuals who reside in Japan for more than five years in accumulated total in the last ten years.
Non-permanent resident: Individuals who are neither Japanese nationals nor non-resident, and have resided in Japan for less than 5 years in accumulate total in the last ten years.
Non-resident: Individuals who doesn’t have registered address in Japan, or have resided in Japan for less than one year.

Also, the extent that individuals in each category are taxed on can be explained as below.

Permanent resident: All incomes regardless of Japanese/overseas sources
Non-permanent resident: Income from all Japanese sources, and overseas incomes that are paid in Japan, or sent to Japan from overseas.
Non-resident: Only Japanese source incomes

Who needs to file tax return?

If you are working for a company in Japan, you only have to fill in a form and return it to your employer then they complete the rest of your tax requirements. So you don’t need to file your tax return yourself. On the other hand, sole proprietors and freelance workers file their own tax return. This is not too far away from the reality, but there are a few cases an employment income earner must lodge tax return by himself.

Employment income earners

You must file tax return if you have the balance after offsetting tax credit against your taxable income which is calculated by multiplying the tax rate and the balance remaining after subtracting tax deductions from all incomes subject to income tax, and fall into any of the below categories:

Your total sum of incomes exceeds 20-million yen
You receive salary from one employers, and total sum of all other incomes that are subject to income tax (except for salary and retirement income) exceeds 200-thousand yen
You receive salary from two employers or more, and total sum of employment incomes that has not been adjusted at the end of year and all other incomes that are subject to income tax (except for salary and retirement income) exceeds 200-thousand yen
You work for diplomatic establishments of foreign countries located in Japan and Japanese income tax and special income tax for reconstruction are not withheld from your salary

Sole proprietors and real estate income (or other income) earners

You must file tax return if the amount of dividend deduction is less than your income tax payable that is calculated by multiplying the tax rate and the sum of total profit before tax from businesses or real estate management etc and the balance remaining after subtracting tax deductions from other incomes subject to income tax.

Employment retirement income earner

You must file tax return if you have received retirement remuneration from overseas with no tax withheld, or the withheld tax from such retirement income is less than actual tax payable. On the other hand, if the tax withheld from your retirement remuneration is more than actual tax payable, you will have refund for the excess payment of income tax by filing tax return.

Other

You must file tax return if you receive 4-million yen or more pension benefits per year, or have 200-thousand yen or more income per year other than pension benefits.

Calculate your income tax & special income tax for reconstruction

Individual income tax and special income tax for reconstruction are calculated as follows.

Add all your income subject to income tax
Subtract all tax deductions from the figure 1
Multiply the tax rate of your income group and figure 2
Offset all tax credits against figure 3
2.1% of figure 4 is your income tax for reconstruction

※Refer to National Tax Agency website (Japanese) for individual income tax rate

Major incomes, tax deductions and tax credits include,

Income

Employment income, business income, retirement income, real estate income, interest income, dividend income, capital gains, occasional income, miscellaneous income, timber income

Tax allowances

Basic exemption, special exemption for spouses
Exemption for: working students, spouses, dependents, person with disabilities, widows or widowers
Deductions for: medical expenses, social security insurances, donations, earthquake insurance premiums, life insurance premiums, small business mutual aid premiums, specified housing improvements

Tax credits

Credit for: foreign tax, dividends,
Special credit for: loans, etc. related to a dwelling (specific additions or improvements, etc.), anti-earthquake improvement made to an existing house

Important tax credit for foreign nationals: credit for foreign tax

Among tax credits mentioned in the previous section, credit for foreign tax is very important one foreign national tax payer should know about. Japan has concluded tax conventions with many other countries to avoid double taxation. If you have paid income tax for your overseas assets which are as well taxable in Japan, the tax amount you paid in agreement country can be offset against your tax obligation in Japan. Types of taxes that such foreign income tax can be offset is prioritized as follows: income tax, special income tax for reconstruction, prefectural inhabitant’s tax and municipal inhabitant’s tax. If the foreign tax you paid exceeds the cap amount to be offset, such an excess amount can be rolled over for next three years.
※Name of countries that have concluded tax convention with Japan are listed on Ministry of Finance website.

About tax return forms

There are a few forms for different taxes to file return. Form B is the most general form widely used by tax payers such as employment income earners and sole proprietors. Tax return forms can be downloaded via National Tax Agent website, obtained from a local tax office in person, or requested by post if you sent a paid reply envelop to a local tax office.

Form A: Simplified edition of Form B, suitable for tax payers who report only employment income, pension or other benefits from government, dividend income and occasional income with no estimated tax payments.
Form B: For all tax payers including business income earners, real estate income earners and employment income earners.

※Other than Form A and B, there are “Separate taxation form” to report capital gains generated by selling land, building, stock or shares, and “case of loss form” to report business loss from previous year.
※Business income earners need to file “White return” or “Blue return” in addition to Form B to report profit/loss and confirm their tax obligations.

How to file return

When filing tax return to a tax office, proof of income such as certificate of income and withholding tax, or proof of deductions such as invoices of medical costs or insurance premium payments must be attached with tax return form. Your tax return can be filed by the following ways.

Submitting in person: Most reliable way. Note that tax offices become extremely busy at the beginning and ending of tax time.
By post: Sending by normal post is accepted, however, sending by registered mail is recommended to obtain a proof of delivery. Tax return must not be sent by courier services.
Online (e-tax): Handiest method, but you need to register and purchase specific device to start online tax return.

The hardest thing to understand in the world is the income tax

Weather you like it or not, there is no way to avoid tax obligation as long as you work in Japan. Understanding all those different incomes and deductions, but foreign residents need to concern about classification of resident status on top of that. Tax return is troublesome, so it is fair enough if you just leave it to your accountant. But knowing your own tax obligation while working in Japan is important. You may save some money by revising your income tax and deductions available to you.