First, please note that the Japanese tax return period is approaching. People who are self-employed, have a side job in addition to their full-time employment, sold/bought a house in 2005 using a housing loan, had out-of-pocket medical expenses exceeding 100,000 yen for your family, or met with natural disasters might find themselves the benefits of a tasty tax return if they file.

While I covered this topic in more depth last year, let me review briefly the “easy way” (?) to file your tax return in Japan. First, find some time during the tax-filing period (February 15- March 15 every year) to visit your city’s local tax office. The Japanese word for tax office is “zeimusho,” and they are located in most regions. During this period, the tax office offers free advice in calculating and filling out your form. All you have to do is bring your income statements (genzei choshu hyou) from all of your income sources, plus receipts/documents supporting your tax deductions (in the case of medical expenses, your medical bills, for a business, your receipts, etc.). You should also bring your gaijin card, inkan, and other relevant documents. The friendly tax agents will, literally, fill out the form for you. After this, you will be directed to a row of touch-panel screens where you will be guided, again, in how to fill in your form. After finally filing your form, you will be asked to either pay the tax you owe (this happens) or give bank account information for your tax return.

A hint: I recommend going in the morning (early) and lining up outside the door to the tax office, or the hall where the advising is held, as early as possible. People start lining up before 8:00 AM, and the earlier you get there, the quicker you’ll get out.

Finally, the Tax Office has finally made its English tax information available online. See the 2005 Income Tax Guide for Foreigners for reference and look online for the latest guide every year.

© 2005 Wendy J. Imura.

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.”

© 2005 Wendy J. Imura.

Unfortunately, the winds of change are blowing around Japan’s tax system, and the outlook is not good, especially for salaried folks. Although Japan’s tax policy for the next few fiscal years is usually revised in December, the latest round of changes was a doozy. I thought I’d outline some of the major changes for my Frugal Readers, as knowing what’s going on with your paycheck is
a very important issue in controlling how you spend, and save, your money.

The biggest issue for 2004 was a reduction in fixed-rate income tax cuts, or ‘teiritsu genzei.’ In 1999, the government passed a law cutting income tax rates by 20%, and local tax rates by 15% across the board. This was supposedly a permanent tax cut measure aimed at jump-starting the economy during the Obuchi administration. Unfortunately, Japan’s government deficit is ballooning, and these tax cuts will be halved starting in 2005, and fully repealed in 2006. This is bad news, mainly for higher income families — a two-parent, two-child family earning 7 million yen a year would see an increased tax burden of 80,000 yen per year (estimated).

This major increase in taxes unfortunately coincides with a number of other tax/social welfare payment hikes scheduled to begin in 2005/2006. Corporate pension premiums (kosei nenkin) are forecast to edge upward every year from 13.934 percent until reaching 18.3 percent in 2017. Japan’s tax exemptions for dependent spouses are also set to be phased out, and contributions to unemployment insurance and national health insurance are forecast to rise. According to the Nikkei Shimbun, it is expected to raise the burden on taxpayers by 1.6 trillion yen altogether.

So, in short, taxes are going up. But, the tax hikes have been constructed in ways you are unlikely to notice — small, incremental deductions to your paycheck every month.

My advice is to read your pay stub carefully, and save them for at least several years to keep track of how much is being deducted. If you have a hard time understanding your pay stub, use an English/Japanese dictionary to help you get a rough idea of the terms, at least. Knowledge (even of how your taxes are going up) is power.

© 2004 Wendy J. Imura.

This individual recently moved from Saitama to another part of Tokyo, and has also recently started working from her home as a part-time English teacher after quitting her well-paid job as a trainer with a large English school in June. My friend was naturally troubled as she’s taken a major cut in income, but was just hit with a large tax bill. Indeed, what gives?

Well, the public payment (taxes, health care, and pension) systems in Japan are fairly confusing, but an understanding of them can help both explain and avoid the above situation. The most important thing to understand is that most Japanese citizens rarely have to bother with filing a tax return or figuring out their taxes themselves: companies do this (called ‘nenmatsu chosei’) at the end of every year for their employees, and adjust their pay accordingly. If you are a full-time or near full-time employee, chances are your company calculates both your income taxes (shotokuzei) and local taxes (jyuminzei), and pays them from deductions in your salary, without you ever noticing. (Local taxes are also known as resident taxes).

So, why the sudden large tax bill? If you are required to pay local taxes, the city you reside in on January 1 of each year will be the city you owe. Resident taxes in Japan are calculated based on the previous year’s income. Thus, the local taxes you pay in 2004 are based on your 2003 (Jan-Dec 2003) income. For salaried persons, these taxes are automatically withdrawn from your salary starting in June of that year, and are paid every month until May of the following year.

So why the big tax bill? When she quit in June 2004, my friend still owed payments for a full year of residents’ taxes, based on her 2003 salary. As her company was no longer making the payments by withholding the money from her paycheck, she was now responsible for paying the tax herself.
Even after she moved to another city, she still owed taxes to that city as she was an official resident there on 1 January 2004.

For foreigners, the rules are special: you are not required to pay Japanese local taxes for your first year of residence in Japan. After that year, you are now liable for local (or residents’) taxes.

As to how to avoid paying the tax: good luck! If you are leaving Japan and unlikely to ever come back again, it will be hard for the local tax office to find you. It might make it difficult for you to receive a pension tax refund, however (though this is uncertain, as the local tax offices and national pension agency don’t seem to talk to each other much).

If you are staying in Japan and are having difficulty paying the tax due to financial hardship, bring your tax bill (it comes in a small booklet with tearoff sheets, though the color differs by locality) and your most recent salary statement and/or a ‘taishoku shomei sho’ (official document saying you’ve left your job) to the ‘jyuminzei ka’ (resident’s tax office) window of the town or city you live in. In most cases, some explanation on your part, and proof that you really can’t pay the bill, will often persuade the tax man to lower or cancel your bill altogether. However, I don’t recommend
this unless you really cannot pay the bill.

© 2004 Wendy J. Imura.

1) you have income from two or more sources,
2) you have profits from a side business of Y200,000 or more,
3) you have real estate income (rental or sold),
4) you made a profit from the sale of certain investments (stocks, bonds, certain funds, etc.)

You do NOT need to file a tax return if your tax is deducted directly from your salary each month under the withholding tax system (most employed people fall in this category).

You could be eligible for a tax refund in certain cases, such as if you quit or were fired from your job in 2003 and are still unemployed, if the self-funded portion of your medical expenses on National Health was higher than Y100,000 or more, if you purchased a home with a housing loan, or if you were victim of robbery, theft, natural disasters, or embezzlement.

How do you file a tax return? Either complete a form in Japan and return it to your local tax office, or visit the local tax office consultation window (kakutei shinkoku madoguchi) which should run at the tax offices in various localities around Japan until Monday, March 15th. The tax consultation windows allow you to consult with a tax office representative, who essentially fill out your form for you. Accountants are often on call for advice. March 15, coincidentally, is the final day to pay taxes you owe.

© 2004 Wendy J. Imura.