Taxes in Japan are paid on income, property and consumption on the national, prefectural and municipal levels. Below is a summary of some of the most relevant types of taxes paid by individuals:
- Income Tax
Paid annually by individuals on the national, prefectural and municipal levels. Also known as “resident tax” on the prefectural and municipal level. The amount is calculated based on the net income of the individual person.
- Enterprise Tax
Prefectural tax paid annually by self-employed individuals engaged in business activities. The amount is calculated based on the person’s net income and the type of business.
- Property Tax
Municipal tax paid annually by individuals who own land, housing and other types of depreciable assets.
- Consumption Tax
Paid by consumers when they purchase goods and services. The rate is currently eight percent.
- Vehicle related Taxes
A prefectural automobile tax is paid annually by individuals who own a car, truck or bus. In case of passenger cars, the amount is calculated based on the engine displacement. A municipal light vehicle tax is paid annually by individuals who own motorbikes or other motorized light vehicles. A national motor vehicle tonnage tax is paid by vehicle owners at the time of the mandatory inspections (shaken). A prefectural automobile acquisition tax is paid by persons when they acquire a car.
- Liquor, Tobacco and Gasoline Taxes
The national liquor tax is paid by consumers when they purchase alcoholic beverages. National, prefectural and municipal tobacco taxes are paid by consumers when they purchase tobacco products. A national gasoline tax is paid by consumers when they purchase gasoline. The liquor, tobacco and gasoline taxes are included in the prices shown by shops.
Income tax is paid annually on income earned during a calendar year.
For tax purposes, people living in Japan are classified into three categories. This categorization is not related to visa types:
A person who has lived in Japan for less than one year and does not have his primary base of living in Japan. Non-residents pay taxes only on income from sources in Japan, but not on income from abroad.
- Non-Permanent Resident
A person who has lived in Japan for less than five years, but has no intention of living in Japan permanently. Non-permanent residents pay taxes on all income except on income from abroad that does not get sent to Japan.
- Permanent Resident
A person who has lived in Japan for at least five years or has the intention of staying in Japan permanently. Permanent residents pay taxes on all income from Japan and abroad.
Note that tax treaties between Japan and more than 50 countries, including the USA, UK, Canada, Australia, China, South Korea and most European countries, can take precedence over the above guidelines.
How to pay taxes?
Income tax in Japan is based on a self-assessment system (a person determines the tax amount himself or herself by filing a tax return) in combination with a withholding tax system (taxes are subtracted from salaries and wages and submitted by the employer).
Thanks to the withholding tax system, most employees in Japan do not need to file a tax return. In fact, employees only need to file a tax return if at least one of the following conditions is true:
- if they leave Japan before the end of the tax year
- if their employer does not withhold taxes (e.g. employer outside Japan)
- if they have more than one employer
- if their annual income is more than 20,000,000 yen
- if they have side income of more than 200,000 yen
Employees, who do not need to file a tax return, will have their income taxes withheld from their salaries by their employer, and an eventual adjustment is made with the year’s final salary. People, who are required to file a tax return, such as self-employed persons, must do so at the local tax office (zeimusho), by mail or online (e-Tax) between February 16 and March 15 of the following year. The tax return for 2016 had to be filed between February 16 and March 15, 2017.
When to pay taxes?
If not withheld by the employer, national income taxes are due in full by March 15 of the following year (mid April if you pay by automatic bank transfer), with two prepayments paid in July and November of the running tax year. Prepayments are calculated based on the previous year’s income, i.e. you do not pay them during your first year in Japan.
For example, if you had to pay national income taxes for 2016, they had to be fully paid by March 15, 2017 (or April 20, 2017 in case of payment by automatic bank transfer), with the prepayments paid in July and November 2016.
If prefectural and municipal income taxes are not withheld by the employer, they are to be paid in quarterly installments during the following year. For example, the 2016 taxes are paid in four installments in June, August and October 2017 and January 2018.
The tax rate is determined based on the taxable income. Like in other countries, taxable income is the total earnings minus a basic exemption, exemptions for dependents and various types of deductions, such as deductions for insurance premiums, medical expenses and business expenses of the self-employed.