The world has never been smaller and many people are doing business and traveling around the globe. We have more options than ever to choose not only where to live but how to be involved or connected with two or more places across borders. However, the system keeps tabs on us wherever we go. I am not a tax specialist but will I cover some basics for your information.
Apart from consumption tax which you are paying every day, the most relevant taxes for both foreign nationals and Japanese citizens are income tax and residence tax. Both taxes will be levied on the individual’s income for the calendar year [*1], but income tax is paid on the national level while residence tax is paid on the prefectural level (e.g. Fukuoka Prefecture) and municipal level (e.g. Fukuoka City).
There are other taxes such as property tax, motor vehicle tax, inheritance tax and so on.
For income tax purposes, all individuals regardless of nationality, visa types, and whether they are registered as a resident or not, are classified as either “residents” or “non-residents”. Those who are classified as “residents” are further classified as either “permanent residents” or “non-permanent residents” under the Income Tax Act.
Roughly speaking, “permanent residents” pay taxes on all income from Japan and abroad while “non-residents” pay taxes only on income from sources in Japan, but not on income from abroad. “Non-permanent residents” are in the middle of these two categories.
In practice, there are people who live and/or work in two or more countries. They can be categorized as a “resident” in Japan; nevertheless the same person can be charged taxes in other countries as well. To avoid this, Japan has double taxation agreements with many countries which allow you to offset the tax paid in one country against the bill for the other, so you don’t have to pay tax twice on the same income.
For income tax, Japan has a progressive tax system ranging from 5% to 45%, and the tax rate is determined based on the taxable income. Like in other countries, taxable income is the total earnings minus available exemptions/deductions such as spouse deductions.
For residence tax, the rate is uniformly 10%, consisting of 4% on the prefectural level (e.g. Fukuoka Prefecture) and 6% on the municipal level (e.g. Fukuoka City), plus a fixed amount of ¥5,000 [*2].
How to pay
However, most people (both Japanese and foreign nationals) are not acutely aware of the tax system because as long as you are employed by a company etc., taxes are subtracted from salaries and submitted by the employer, and therefore you can do without knowing anything about it at all.
Meanwhile, those who are not employed (e.g. self-employed people) have to determine the tax amount themselves by filing a tax return.
2. National Pension
Although the word contains “national”, everyone who is residing in Japan aged 20 to 60 have to contribute to the national pension system. Similar to the withholding tax system, most people are not acutely aware of the system because their employer takes care of payment on their behalf.
There are two types of pension, respectively called “National Pension” (kokumin nenkin) and “Employee’s Pension” (kosei nenkin). The National Pension is also called the “Basic Pension” and everyone who is enrolled in the system will be covered by the National Pension scheme, and those who are employed by a company are further covered by the Employee’s Pension scheme, which means those who are employed are entitled to receive more pensions than those who are not.
While everyone, including foreign nationals who intend to stay in Japan only for a limited period of time, are obliged to contribute to the system, it is somewhat unreasonable to treat them uniformly in this global age.
Currently the tax system deals with this by allowing those who leave Japan after having paid for six months or more to reclaim a lump sum payment upon leaving, while those who have paid for 10 years or more are entitled to receive pensions.
3. National Health Insurance
Again, although the word contains “national”, everyone who is staying in Japan for 3 months or more has the chance to be covered under the scheme, and again employees are more generously treated than the unemployed, in the sense that half of the premium is paid by employers. Generally speaking, full-time employees (seishain) in Japan have been well protected in many points, and it will be one of the reasons why Japan has sometimes been deemed as a socialist country.
However, there is no penalty even if you do not join it, but you will have to fully bear your own medical expenses if you see a doctor and/or are sent to a hospital.
[*1] Residence tax is calculated based on the previous year’s income. Therefore you do not need to pay them during your first year in Japan.
[*2] The fixed amount was originally ¥4,000 but has temporarily been increased until 2023 by a special legislation related to the Great East Japan Earthquake.
Disclaimer: While every effort has been made to ensure that the information on this article is accurate at the time of posting, it is not intended to provide legal advice as individual situations will differ. If you do require advice or wish to find out more about the information provided and related topics, please contact the author.