Income tax 

1) What is income tax?

Japanese taxes are divided into two categories: national tax, which is paid to the national government, and local tax, which is paid to prefectural and municipal governments.

Income tax is a tax on all income for the year from January 1st to December 31st each year and is a national tax. Those who have income are obliged to pay income tax.

2)Withholding tax system

However, since it is complicated for all taxpayers to file a final income tax return and there is a possibility that some may not file, the company deducts the amount of income tax from the salary and pays it on behalf of the taxpayers.

This is how the "withholding tax system" works, and in principle all employers are required to withhold income tax.

While 'income tax' is a tax paid by the individual based on his or her income for the year, 'withholding tax' is an income tax that a company collects from the employee's source and pays on his or her behalf.

If you are subject to withholding tax, the tax is deducted from your salary and you do not have to file a tax return.

As income tax is essentially a tax levied on annual income, withholding tax is only a provisional tax payment and a 'year-end adjustment' must be made.

The year-end adjustment is a procedure to determine the taxpayer's income for the year and to recalculate the income tax. If the recalculation shows that the amount of income tax collected is too high or too low, a refund or additional taxation will be made.

The year-end adjustment applies to those who have resided in Japan for more than one year.

Foreign employees who reside and are employed in Japan but have been in Japan for less than one year at the end of the year, and those who are transferred to an overseas branch and have been working there for more than one year, are not subject to the year-end adjustment.

3)Income tax formula

Income tax is calculated by applying the tax rate to the remaining taxable income after deducting all income deductions from the annual income.

Income Tax Amount = (Income - Income Deductions) x Tax Rate - Tax Credits

【Income tax rate】

The tax rate is based on an excessively progressive tax rate that varies in steps according to the amount of income, and the higher the income, the higher the tax rate.

(Source: National Tax Agency, "Income Tax Rates")

https://www.nta.go.jp/taxes/shiraberu/shinkoku/tebiki/2015/taxanswer/shotoku/2260.htm

【Income tax credit】

An income tax credit is a deduction of a certain amount from a person's income when calculating the amount of income tax, provided that certain requirements are met.

Income tax deductions include：Miscellaneous deductions, medical deductions, social security premium deductions, disabled person's deduction, basic deduction, spouse deduction, dependent person's deduction, widow(er)'s deduction, single parent's deduction, working student's deduction, etc.

The following are the most common spousal and dependent exemptions.

Spousal deduction: This is a system that reduces the income tax liability of a person who has a spouse whose annual income is below a certain amount. To qualify for the spousal deduction, the dependent's total income for the year must be less than 10 million yen.

A spouse eligible for the spousal deduction must meet all of the following requirements as of 31 December of the current year.

①Must be a spouse under the Civil Code. (A common-law marriage does not qualify).

②Live with the taxpayer.

③The total annual income of the spouse must be less than ¥480,000.

④The taxpayer must not have received any salary during the year as a full-time employee in the business of a blue return system or as a full-time employee in the business of a white return system.

Dependent care exemption：If you are caring for a relative who meets certain requirements, you may be able to deduct a certain amount from your income.

Caretaker allowance: This scheme allows you to receive certain deductions from your income if you support a relative who meets several requirements.

A relative who qualifies for the dependent care deduction must meet all of the following requirements as of 31 December of the current year: 

①The person must be a relative other than a spouse.

②Must be at least 16 years of age.

③Must live in the same household.

④Total income must be less than ¥480,000. However, if the taxpayer earns only part-time or salary income, the total income must be less than ¥1,030,000.

⑤The taxpayer does not receive salary income as a full-time employee of a blue taxpayer.

【Tax credit】

A tax credit is a deduction of a certain amount from the amount of income tax.

The tax credit is a deduction that can be taken directly from the amount of tax due, whereas the income tax credit deducts a certain amount from the income that is taxed, so the tax credit is more tax efficient.

Tax credits include

Dividend deduction, foreign tax credit, special credit for housing loans, special tax credit for certain home improvements, etc.

4) Classification by type of residence

The Income Tax Law classifies taxpayers into "residents" and "non-residents", and further divides "residents" into "permanent residents" and "non-permanent residents", thereby differentiating the scope of income subject to taxation.

The scope of taxation differs according to the above categories of residence. 

The method of collection of withholding tax also differs according to the above categories of residence.

5) Deductions applicable to foreigners

If a foreign worker is a "resident", they are basically subject to the same income and tax deductions as Japanese nationals, and are entitled to all deductions provided they will face too.

On the other hand, non-residents are entitled to only three deductions: miscellaneous deductions, deductions for donations and basic deductions.

①Foreign tax credit

Foreign tax credit is a system whereby a "resident" who has paid income tax on income earned in his or her home country can have the amount of income tax paid in his or her home country deducted from Japanese income tax when filing a tax return in Japan.

This system is based on tax treaties concluded between the two countries to resolve the issue of "double taxation", whereby a foreigner who pays income tax on overseas income is required to pay income tax both in Japan and in his or her home country.

Currently, tax treaties (treaties whose main content is the elimination of double taxation and the prevention of tax evasion and avoidance) have been concluded with 150 countries.

(Source: Ministry of Finance, "Data on tax treaties")

https://www.mof.go.jp/tax_policy/summary/international/tax_convention/index.htm

The amount of tax deducted varies from country to country, so be sure to confirm the amount of tax deducted.

②Temporary visitor exemption

Non-residents may also qualify for the temporary visitor exemption if they are from a country with which a tax treaty has been concluded.

The short-stay exemption is a system that exempts the taxpayer from paying income tax in the country where the short-stay visitor is staying, provided that certain conditions are met.

The requirements for short-stay relief vary from one tax treaty to another, but in general the requirements are as follows

①The treaty must provide for a tax exemption for short-stay visitors.

②The length of stay must not exceed 183 days.

③ The salary must be paid by the employer in the other country.

④The Japanese employer does not pay the salary.