The Journal The Authority on Global Business in Japan

ACCJ EVENT | TAX

March 2014

Income Tax: Things to Know

By Megan Waters

The ACCJ held its annual income tax seminar at the Tokyo American Club on February 14. Titled “Individual Income Taxation in Japan for Expatriates: Things to Know,” the presentation highlighted changes that take effect this year concerning the information required for individuals filing their own income tax returns.

Important insights into a subject that many often find confusing were provided by Ernst & Young’s Harish Shrivastava, partner; Noriko Satomi, executive director; and Raj Kulkarni, senior manager.

Important points

  • The tax year in Japan is the same as the calendar year
  • All 2013 tax returns must be filed by March 17, 2014
  • No extensions are given; late submissions are subject to a penalty

According to Shrivastava, if you are in any of the following categories, you don’t need to file an individual tax return.

  • Compensation is paid 100 percent by a Japanese entity, and doesn’t exceed ¥20 million for the year; the total of other income doesn’t exceed ¥200,000
  • Two employers in the year, but only one gensen choshu-hyo (annual salary statement) is provided, and the above criteria are met; both employers’ compensation is included in that one salary statement

A number of changes have come into effect as of the 2013 tax year. These include an additional surtax of 2.1 percent on national income tax, the capping of employment income deductions at ¥2.45 million if the gross compensation exceeds ¥15 million, and a mandatory requirement for permanent residents to annually file a report of their foreign assets if the total value of the assets at yearend exceeded ¥50 million.

Further, Shrivastava explained, it is crucial to know whether you are a permanent or non-permanent resident here and, for permanent residents, when you became one.

Non-permanent residents

  • Have spent over one year, but less than five years, in Japan
  • This status only applies to non-Japanese citizens
  • Have been in Japan less than five cumulative years of the past 10
  • Taxed on Japan-sourced income and non-Japan sourced income remitted to Japan, plus any amount paid out in Japan
  • Non-Japan interest, dividends, capital gains, and rental income are not taxed for the first five years in Japan

Caution
Consider breaking residency before January 1, as local inhabitants tax (LIT) is levied based on the prior year’s income if you are a resident of Japan on January 1. It is not prorated and is levied 100 percent or not at all.

Be careful when changing employers and continuing Japan residency if you are equalized (taxes are paid by the employer). Your former employer could reason that it was your decision to remain in Japan past January 1 of the following year, thus triggering LIT (10 percent of taxable income). Your former employer may not pay the inhabitant tax, and the matter is of no concern to your new employer.

Further, directors of Japanese entities are taxed differently from ordinary employees, resulting in more taxable income and, thus, higher tax.

Additional changes will take place in January 2015. A higher national income tax rate of 45 percent will be introduced for those with a taxable income of ¥40 million and above.

Common misconceptions

  • I don’t get paid in yen, thus I cannot be taxed in Japan
  • Only a part of my salary is paid in Japan and the rest overseas, so only the yen portion can be taxed here
  • Income from exercising stock options deriving from an overseas parent-company stock is not taxable in Japan
  • Income from stock options is always considered a capital gain
  • An item is tax-exempt in my home country, so it is also tax-exempt in Japan

For more information, please visit:
www.nta.go.jp/tetsuzuki/shinkoku/shotoku/tebiki2013/pdf/43.pdf (Japan National Tax Authority)
Call Harish Shrivastava on 03-3506-2017