Japan – Personal Taxation, Expat Taxation with Reporting (Part 1 of 20)

Majorly there are two types of taxes in Japan i.e. National Income Tax and Local Inhabitant Tax (also known as Resident Tax). National Income tax is mandatory withheld by the employer at progressive rates, from 5% to 45% but in case of resident tax, employee has the option to pay by his own or opt for monthly deduction from salary. Local Inhabitant tax is imposed on individuals who have a residence or domicile in Japan as of January 1 of each year. Unlike the National Income Tax, the inhabitant tax is levied on the income earned in the previous year.

Special Income tax for reconstruction is included in National Income Tax @ 2.1% of income tax. This tax is for the purpose of securing sufficient resources for the reconstruction work in those areas affected by the 2011 Great East Japan Earthquake and Tsunami.

Expat Taxation

National Income tax is levied @ 20.42% (including Special Income tax for reconstruction) on income other than foreign-sourced income either paid within or outside Japan.

When an expat finishes a Japan assignment and departs from Japan in the middle of the year, he/she is obligated to pay the entire local inhabitant tax amount base on the previous year Japan source income, even after leaving Japan as long as he/she is deemed a Japan resident as of January 1 of the departing year.

On the contrary, when an expatriate enters Japan in the middle of the year, he/she is not subject to inhabitant tax until June of the following year if no Japan source income has been earned in the year prior to arriving year.

Statutory Reporting

Withholding tax certificate for tax office and employee: Tax Certificate issued by employer (Annually)

Report on Payroll to Local tax office: Each Employee Salary income of the previous year to municipal office of each employee place of domicile by January 31 each year

After submitting reports, municipal office calculates the annual tax for each employee and sends a payment schedule to the employer no later than May 31. The tax is paid over 12 months from June to May of the following year as per payment schedule.

Salary Earners transfer Notification to Local Tax Office: When employee leaves the company (Resignation, Company Transfer, Absent for a long time, Demise, Corporate Dissolution), the employer need to send this report to local tax office for local inhabitant tax purpose.