Everyone looks forward to a smooth and peaceful stay in Japan – no hassle, no worries. If you are planning to live in Japan or are already residing in Japan, residency for tax purposes should be an essential thing to include in your to-do list.
This article can assist you in the understanding of your legal liability in Japan. Not paying your taxes may inflict big fines or even an imprisonment. Thus, it is important to understand how your residence status will affect your payments.
What Defines Residency?
According to the Article 2 of the Income Tax Act of Japan, the term “resident” shall mean an individual who:
- has a domicile in Japan; or
- has had a residence in Japan continuously for one year or more.
An individual who falls under any of the following cases is presumed as having a domicile in Japan:
- An individual has an occupation which normally requires residing in Japan continuously for one year or more;
- It can be sufficiently presumed that an individual will reside in Japan continuously for more than one year in light of the circumstances, such as whether it has the Japanese nationality and has its relatives who share the same livelihood with such individual in Japan, or whether it has its occupation and assets in Japan.
Income Tax According to Classification
No need to be confused about the amount of taxes you have to pay in Japan. There is a basis of calculating your income tax, which is paid annually.
This refers to a person who has lived in Japan for less than one year and does not have his primary base of living in Japan. Non-residents pay taxes only on income from sources in Japan, but not on income from abroad.
- Non-Permanent Resident
A person who has lived in Japan for less than five years, but has no intention of living in Japan permanently. Non-permanent residents pay taxes on all income except on income from abroad that does not get sent to Japan.
- Permanent Resident
A person who has lived in Japan for at least five years or has the intention of staying in Japan permanently. Permanent residents pay taxes on all income from Japan and abroad.
Income Tax Return
Income tax is executed in a form of withholding tax that is automatically deducted from wages or salaries. This system actually makes it easier for the taxpayers in Japan to submit an income tax return. There are several exceptions to this rule:
- If the individual leaves Japan before the end of the tax year
- If their employer does not withhold taxes (e.g. employer outside Japan)
- If the individual has more than one employer
- If their annual income is more than 20,000,000 yen
- If the individual has a side income of more than 200,000 yen
Importance of Tax Residency
Whether you put up a business elsewhere in the world, you still need to pay your tax obligation if you are a resident in Japan.
The Japanese domestic law provides that:
“Japanese resident is obliged to pay tax on their worldwide income. In order to meet this obligation, the resident has to either file an annual Japanese tax return or suffer Japanese withholding tax on their income and apply an exemption from filing a Japanese tax return.”
There are many cases where Japanese company’s employees do not have to file an annual Japanese tax return given that, in many cases, their only source of income is from employment in Japan on which withholding tax has been imposed and their total annual employment income is below the threshold requiring a tax return to be filed. In contrast, a non-Japanese expatriate individual coming to Japan may often have income from overseas (from rent or overseas investments) and such an individual would likely have to file a Japanese tax return once they become Japanese resident.
Depending on your residence status you may be subject to different kinds of taxes. Two primary factors influencing the tax payments is the time of your residency and your income. If you receive income from abroad in many cases you can file for tax returns, especially if your country has a collateral agreement with Japan about tax payments.
Residency for Tax Purposes FAQ
Can I extend my tax payments?
No, in Japan there is no such practice, All the taxes must be paid in due time, otherwise, you will have to pay fines for not meeting the deadlines. If the situation with delayed payments or non-payments persists person may be subject to imprisonment.
I am confused about the country I am paying taxes to.
Ultimately, you pay income taxes to the country that pays you the salary even if you work in Japan, if your country has a bilateral agreement about payment of taxes. If there is no such agreement, you probably have to pay taxes to both countries. Make sure to clarify your working conditions and tax payment requirements.
You also pay consumption taxes on products and services that you by in or from Japan. Some of them may be reimbursed later when you leave the country.
How much is the income tax in Japan?
If you are a resident of Japan your income tax is proportional to your salary: the more higher your income is, the higher the rate. For non-residents, there is a flat rate tax of 20.24% on all Japan-sourced income.
How much is the consumption tax in Japan?
Currently, the consumption tax is 8%. However, there is a chance it will be raised to 10% within the next year.
Can I get tax-free items in Japan?
If you are a resident of Japan you can shop at tax-free shops in the airports and other such places that are international tax-free territories after crossing a border control. But you cannot ask for tax-free deductions from other licensed stores within the country because you are not going to leave Japan.
On the other hand, if you are visiting Japan for less then a year, you can get tax-free returns when you shop for more than 5000 yen in a licensed shop within a specific day. You can get your returns at the airports or straight away in the store, but first, you will have to pay full price and get your returns at the cashier later on.
You will need your passport to go through this procedure. It is good to save your checks in order to be able to prove your tax returns at the customs control should there be any questions.