The word "tax" in any ezine title seems to automatically induce drowsiness, so I thought I'd try a slightly catchier hook for this week's main article. Japan's top tax-reform committee recently recommended a major change to the current tax code that would both simplify the current tax system, and could eliminate some nasty tax burdens on foreign Frugalites.
The main change is a merging of the two current tax systems: the jyuminzei (local tax) and shotokuzei (income tax) systems. Jyuminzei are local taxes that are administered by your local government body. If, for example, you live and work in Shinjuku Ward of Tokyo, then Shinjuku Ward will be in charge of taxing you. Shotokuzei is regular national income tax, administered by the national government. National tax rates are the same throughout Japan, but local/resident taxes differ.
Changes in Collection
The major difference between these two tax systems lies in how they are collected. Income taxes are (for most full-time company/government employees) calculated and charged monthly based on your current income. Resident/local taxes, however, are based on your PRIOR year's income, and are collected from June the FOLLOWING year for twelve months. So, for example, while your 2005 income taxes are based on your current 2005 salary and are paid from January through December 2005, your resident/local taxes are based on your 2004 salary and will not be paid until June 2005-June 2006!! Both income taxes and resident taxes are typically withdrawn from your salary by your employer, but this is not the case with self-employed persons, part-time workers, and others.
Surprise!
So, basically, what does this mean? Some nasty surprises. Ever heard of a foreign resident in Japan suddenly getting a very large tax bill in the mail, about a year and a half AFTER they arrived despite having never been taxed before? Well, the explanation is simple: The first year of their residence in Japan they were not charged residence taxes because they had no recorded income in Japan. Their second year in Japan, their resident taxes start accruing, based on the prior year's income. In late May or early June, the tax bill arrives, usually to the person's home! Also, because of the six-month lag in tax payment (resident/local taxes accrue from January but are not billed until June), a foreigner leaving Japan can often be hit up with big tax bill right before departure: their Jan-June 2005 tax bill, for example, even if they are leaving in June!!!
The final nasty surprise can come for people who have switched jobs and taken a salary cut, gone freelance, or for some reason seen their income go down (became a part-timer, stay-at-home Mom/Dad, etc.). Despite earning less income (which their income tax reflects), their resident/local taxes are still very high because they are based on the PRIOR year's salary. So while learning to live on less, they are still liable to a high tax bill, which can put a real pinch in the budget.
Relief in Sight
What will the proposed changes to the tax code do? Simply put, they will adjust the resident/local tax system to that of the income tax system, eliminating many of the surprises mentioned above. The government is also studying ways to eliminate a "double taxing" of two years' residential taxes at once. Will you end up paying less to the government? In the end, the answer is probably no - there will just be fewer "surprise tax bills" in the mail, but more accurate paycheck deductions. Hope this was helpful!
Tax system information was taken from the 11 June 2005 "Nikkei Shinbun"article "Jyuminzei, shotokuzei to toitsu."
By Wendy J. Imura. Copyright 2005.