JPN-Journal.com News/Laws for Foreigners Working in Japan.

Tax Filing
Taxable year for individuals is from January 1 to December 31 of the same year (1/1/2007 thru 12/31/2007).



Tax returns are accepted starting February 16 of the following year (if 2/16 falls on a weekend, then the next business day) and are due March 15 (if 3/15 falls on a weekend then the next business day) of the following year. Tax returns for the taxable year 2007 are accepted from 2/18/2008 and due 3/17/2008.

Tax return filing, however, is not necessary for many salaried employees.


Year-End-Adjustment

In Japan, the calculation of income tax is based on the self assessment system. Under this system, taxpayers who best know the results of their economic activities for the year calculate the amount of taxable income and the corresponding tax liability by filing a complete tax return.

However, it is interesting to note that for salaried employees, representing the majority of the working force in Japan, actual filing of a tax return is not mandatory.

Salaried employees with annual gross salary under 20,000,000 yen undergo a tax settlement process at the end of each year called year-end-adjustment. The calculation results in either an overpayment of taxes (over-withholding from monthly salary) or an underpayment of taxes (under-withholding from monthly salary).

An overpayment of taxes results in tax refund, usually in the form of being withheld less taxes in December, the last month of the year, than in normal months. An underpayment results in additional tax liability, usually in the form of being withheld more taxes in December than in normal months.

The year-end-adjustment process is performed by the employer (either by the company's payroll function or by a third party outsourcing company). For individuals whose only source of income is salary from his/her employment, this is deemed as filing a tax return and no additional filings are required.

Tax filing is, however, required for employees with annual gross salary over 20,000,000 yen or those with income sources other than salary from his/her employment.


Types of Taxpayers and Income Subject to Tax

Residents
Any individual who has a domicile or owns a residence continuously for one year or more is classified as a resident. Income subject to taxation is the broadest. Residents are obligated to pay income tax on entire income prescribed by the Income Tax Law.

Non-Permanent Residents
Any individual who has no intention to permanently reside in Japan and has had a domicile or residence continuously for a period of five years or less is classified as a non-permanent resident. Income subject to taxation is narrower than residents. Non-permanent residents are obligated to pay income tax on income from domestic sources and any other income which was paid in Japan or deemed to be remitted from abroad.

Non-Residents
Any individual other than residents or non-permanent residents is classified as a non-resident. Income subject to taxation is the narrowest. Non-residents are obligated to pay income tax only on income from domestic sources.

For tax purposes, if an individual leaves Japan with the intent to be absent temporarily and later reenter Japan, the individual is treated as having been residing in Japan during the period of absence.

Types of Income

Under the Income Tax Law of Japan, income is divided into 10 categories depending on their specific nature.

1. Interest Income
Interest income includes interest from bonds, debentures, and interest on savings, as well as distributions from earnings derived from investment and loans trusts. In general, income tax is withheld by the payer at the time of payment. Interest earned on savings with overseas banks not subject to withholding tax must be declared. Interests on loans to individuals or companies do not fall under the category of interest income. They are classified either as miscellaneous income or business income.

2. Dividend Income
Dividend income includes payments received as surplus and distribution of profits of investment trusts (excluding corporate management investment trusts such as public and corporate bond investment trusts and public offering bonds). Individuals deemed as having paid separate taxation at source do not need to declare this income in their returns because the tax procedure has been completed when it was withheld at source.

3. Real Estate Income
Income from real estate includes income from leasing land, building, property right, sailing vessel, aircraft, etc. Down payment, contract renewal fee, fee for transfer of title are generally treated as income from real estate. However, down payment, etc. arising from setting up land-leasing right may be classified as income from capital gain.

4. Business Income
Business income includes income derived from wholesale and retail commerce, hotels and restaurants, manufacturing, construction, finance, transportation, maintenance, and any income derived from sales of products or services. It also includes income of doctors, lawyers, writers, actors and actresses, professional baseball players, traveling salespersons, carpenters and those involved in fisheries or similar enterprises.

Business income encompasses agricultural income defined as income from agricultural production, fruit growing, sericulture, rearing of poultry and livestock, the manufacture of straw goods or similar activities, and dairy farming.

5. Employment Income
Employment income includes salaries, wages, amounts paid to former employees based on prior service, pensions other than lump-sum pensions, bonuses and similar amounts, reduced by the earned income deduction. Allowances (cost of living allowances, child education allowances, medical allowances, tax allowances, housing allowances, etc.) and fringe benefits (benefits received on employer-provided housing with low or no rent payments and benefits received on a employer-provided loan with low or no interest rate) are included in employment income.

6. Retirement Income
Retirement income includes retirement allowance, severence pay, lump sum payment from social insurance systems, and any other payments triggered by retirement from employment.

7. Forestry Income
Forestry income include income derived from lumbering or the transfer of timber.

8. Capital Gain Income
Capital gains income includes income from the transfer of tangible and intangible property, but does not include income from the sale or transfer of land or buildings or the proceeds of sales of inventory or other property continuously transferred in business.

9. Occasional Income
Occasional income is incidental income of a nonrecurring nature that does not fall into the aggregate assessment income tax categories of interest income, dividend income, lease income, business income, employment income or capital gains.

10. Miscellaneous Income
Miscellaneous income is income that does not fall into any other category of income. Common miscellaneous income includes annuity from insurance system and income of a nonrecurring nature such as interest received from a loan to a friend and/or a family member.

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Types of Deductions

1. Casualty loss deduction
You may be entitled to claim this deduction if you, your spouse, or relatives in the same household suffered losses or damages to property from disaster, theft, or embezzlement. The deduction does not cover losses related to assets not regarded as essential for living such as paintings, antiques, precious metals, and second houses.

2. Medical expense deduction
You are eligible to claim this deduction if medical expenses you, your spouse, or relatives living in the same household exceed certain amount.

3. Social insurance premiums deduction
You are eligible to claim this deduction if you, your spouse, or relatives living in the same household paid premiums or had premiums deducted from your salary for national insurance (tax), national pensions, or made insurance payment under the Long-Term Care Insurance Law.

4. Small business mutual aid premiums deduction
You may be eligible for this deduction if you paid mutual aid premiums under a contract with the Small Business Mutual Aid Corporation or with the Physically Handicapped or Mentally Retarded Persons Mutual Aid Programs operated by local governments.

5. Life insurance premiums deduction
This deduction is applied to the amount remaining after subtracting policy holder dividends from the total payments made for insurance and individual pension plan premiums. Classification of premiums (insurance or individual pension plan) is indicated on the certificate issues by insurance companies.

6. Earthquake casualty insurance premiums deduction
This deduction is applied to the amount remaining after subtracting policy holder dividends from the total payments made for earthquale casualty insurance policies, and also for long-term insurance policy defined as those in effect for a period of ten years or more and which provides for a rebate upon the expiration of the term of agreement.

7. Donations and contributions deduction
You may be eligible for this deduction if you made donations to national and local governmental bodies, social welfare institutions, certified NPOs, certain political parties, and to other organizations working for the public good. In the case of political donations, you may choose, whichever is advantageous to you, between this deduction or the credit for contribution to political parties.

8. Disability deduction
You may be eligible for this deduction if you, your dependents, or your spouse are disabled as of December 31 of the tax year. Disability is defined as those who have received an identification booklet for the physically handicapped, war invalids, or mentally ill, those who are judged as intellectually handicapped persons by an appointed doctor for mental health, or those who are 65 years or older and certified by the head of a local public body that their level of disability is no less than that of the disabled or those with other physical or mental disabilities.

9. Widows/Widowers deduction
You may be eligible to claim this deduction if you are a widow or widower.

10. Working students deduction
This deduction is applicable to working students except those whose total amount of income was above a certain threshold.

11. Spouse deduction
You may claim this deduction if you have a spouse qualifying for exemption. A qualifying spouse is defined as one living in the same household as the taxpayer as of December 31 of a tax year and whose total amount of income did not exceed a certain amount.

12. Special deduction for spouse deduction
You may claim this deduction if your total amount of income for 2007 is less than 10,000,000 yen and you have a spouse in your household whose income in 2007 is more than 380,000 yen and less than 760,000 yen.

13. Dependents deduction
A fixed amount of deduction may be claimed if you have dependents. Dependents include relatives, foster children or elderly persons legally entrusted or fostered by the prefectural or municipal governor and who lives in the same household as you as of December 31 of a tax year, and whose total amount of income did not exceed a certain amount.

14. Basic deduction
Basic deduction of 380,000 yen is available to all taxpayers. No special requirements need be satisfied.
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Types of Tax Credits

1. Dividend credit
2. Mortgage credit
3. Political contribution credit
4. Anti-earthquake construction credit
5. Foreign tax credit
6. Proportional tax credit