– Blog・FAQ –

Personal income tax in Japan is determined by applying a tax rate to the tax base, which is the income earned by an individual during the year. Income is subject to taxation regardless of the source from which it is derived. There is no definition of income in the articles of the Income Tax Act. Although the Income Tax Act does not provide a specific definition of income, we can consider it as any broad economic benefit that an individual earns or something that could be considered an economic benefit for an individual.

The amount of income tax is basically calculated by applying a tax rate to the amount remaining after subtracting deductions and exemptions from “gross income”. In practice, further tax credits are applied to the tax amount calculated by this method.

Simply put, gross income is first calculated by deducting necessary expenses from revenue. This calculation is done separately for each type of income. From this gross income, various deductions and exemptions, such as the spouse exemption and medical expense deduction, are subtracted. The resulting taxable income is then subject to a progressive tax rate to calculate the amount of tax. 

But the tax amount calculated here is something like “the preliminary tax amount”.

The amount of tax credits, such as the special credit for housing loans, is then subtracted from the resulting tax amount. The final amount of tax due, after applying all eligible tax credits, is the amount that the individual owes.

The calculation process involves several steps and begins with recognizing the revenue earned.

❶ Determine Total Amount of Gross Income

Calculate the total amount of gross income earned from various sources such as salaries, business income, and investments. This is calculated by first subtracting the necessary expenses from the revenue for each income type, then summing the resulting income for each of those types.

❷ Apply Deductions from Gross Income to Determine Taxable Income

Deductions and exemptions from gross income include a spouse exemption, a medical expense deduction, and a basic exemption. The remaining amount after applying these deductions and exemptions is the taxable income.

❸ Apply Progressive Tax Rates to the Taxable Income to Calculate the Tax Amount

Taxable income is then subject to progressive tax rates. Japan uses a progressive tax system, meaning the tax rate increases as the taxable income rises.

❹ Subtract Applicable Tax Credits to Find the Final Tax Due

Apply any eligible tax credits, such as the special credit for housing loans, to reduce the calculated tax amount. The remaining amount is the final tax due, which is the actual amount of tax that the individual owes after applying tax credits. Furthermore, any withholding tax that has already been paid throughout the year is subtracted from the final tax due.

Non-Resident Taxation

The explanation regarding “Classification for residential status” is omitted here, but any individual who is not a Japanese resident, not domiciled in Japan, or has not resided continuously in Japan for one year or more, is classified as a non-resident. Individuals classified as non-residents are subject to income tax only on their Japan-sourced income. The specific tax treatment depends on the type and source of income, among other factors.

You are considered a non-resident in Japan for tax purposes unless you have a domicile in Japan or have had a residence continuously for one year or more.

Under the Income Tax Act, the concept of domicile is borrowed from the Civil Code. It is generally accepted that the definition of domicile in tax law aligns with that in the Civil Code. Regarding domicile, the Civil Code defines it as an individual’s primary residence, closely tied to their daily life. In simpler terms, domicile is the actual place where an individual resides and lives. Domicile is determined not by the individual’s intention but by their actual physical presence and lifestyle. Factors such as the duration of stay in Japan, family residence, occupation, asset location, and others are considered in making a concrete determination.

Given the relatively high Japanese income tax on gains from the sale of cryptocurrencies, some Japanese investors may choose to leave Japan for countries with lower tax rates. However, the determination of domicile, which is crucial for establishing tax residency, involves a multi-factor analysis and can lead to uncertainty. Therefore, it is important for investors fleeing Japan to consider risk management strategies to mitigate tax burdens and avoid unexpected taxation by the Japanese National Tax Agency.

Gross income is the sum of various types of income. The Income Tax Act classifies income into 10 types based on its source and nature. Each type of income has specific requirements for classification and designated methods for calculation. The 10 types of income include business income, employment income, occasional income, capital gains, miscellaneous income and so forth. Miscellaneous income serves as a catch-all category, encompassing all types of income not classified under other categories.

Gross income is calculated as the aggregate sum of these various income types. However, certain incomes are calculated separately, and tax rates are applied accordingly. It’s important to note that under a progressive tax rate system, where tax rates increase as income rises, the applicable tax rate for gross income may be higher.

The amount of each income type is typically derived by subtracting necessary expenses from the revenue. For example, business income would entail deducting expenses related to operating the business.

The following expenses can be deducted from revenue when calculating business income, real property rental income, and miscellaneous income:

１．The cost of sales corresponding to revenue, and other direct costs incurred in generating revenue.

２．Selling, general, and administrative expenses, along with other operating expenses incurred during the year.
While losses are not typically considered necessary expenses for earning income, some losses may be deductible within certain limitations.

For example, losses due to disasters and bad debts are examples of losses that can be included as necessary expenses, subject to specific criteria and restrictions.
For other types of income, deductions for actual necessary expenses are generally not allowed. However, deductions for estimated necessary expenses, such as those for employment income, may be allowed.

The corporate tax rate is calculated by applying the corporate tax rate to the taxable income of the corporation.

For a corporation with capital exceeding 100 million yen, the tax rate is 23.2%. For small and medium enterprises, the tax rate is 15% or 19.2% on income up to 8 million yen per year, and 23.2% on the portion of income exceeding 8 million yen per year.

The taxable income of a corporation is the sum of its income from all sources, without distinguishing between types of income as the Personal Income Tax Act does. The Corporate Income Tax Act does not define income; it only specifies how to calculate it.

In other words, a corporation’s income is the amount that remains after subtracting deductible expenses from “total revenue”. You can also say that a corporation’s income is revenue in the broadest sense minus expenses in the broadest sense.

In this case, “total revenue” includes revenues from the sale of inventories, revenues from the transfer of assets for no consideration (recorded at the market value of the assets at the time of transfer), and, in exceptional cases, valuation gains on assets. Of course, “valuation gains on assets” is a term to describe increases in the value of assets that are recognized but not yet realized through a sale.

On the other hand, “deductible expenses” encompass the cost of sold inventory, as well as operating expenses or selling, general, and administrative expenses such as staff salaries and rent, along with losses due to disasters.

These are general rules, and treatment may vary slightly depending on the corporation type.

Unless otherwise specified, the amount of “revenues” that constitute “gross revenue” and the amount of “costs, operating expenses, and losses” that constitute “deductible expenses” are calculated according to Generally Accepted Accounting Principles (GAAP).

While tax accounting generally follows GAAP, specific provisions in the Corporate Tax Act and the Act on Special Measures Concerning Taxation may modify its application for income tax calculations.

The Japanese consumption tax, also known as VAT (Value Added Tax) or GST (Goods and Service Tax) in other countries, is calculated by applying a percentage rate to the taxable sales.

Determine the Tax Rate:

The standard consumption tax rate in Japan is 10%.

A reduced rate of 8% applies to certain items such as food and beverages (excluding alcohol and dining out) and subscription newspapers. 

Calculate the Taxable Amount:

The taxable amount is the total amount of sales or purchases subject to consumption tax.

Calculate the Consumption Tax:

Multiply the taxable amount by the applicable tax rate (10% or 8%).

For example, if the taxable amount is 1,000,000 yen and the tax rate is 10%, the consumption tax is calculated as follows:Consumption Tax=1,000,000 yen×0.10=100,000 yen

Tax Credits for Businesses:

Businesses can deduct the consumption tax they have paid on their purchases from the consumption tax they have collected on their sales.

For example, if a business collected 150,000 yen in consumption tax from sales but paid 50,000 yen in consumption tax on purchases, the net consumption tax to be remitted is:

Net Consumption Tax=150,000yen−50,000 yen=100,000 yen

Net Consumption Tax=150,000yen−50,000yen=100,000yen

Exemptions and Special Cases:

Small businesses with annual taxable sales of 10 million yen or less are exempt from paying consumption tax.

Certain goods and services are exempt from consumption tax, including rent, medical services, and educational services.

By following these steps, businesses in Japan can accurately calculate their consumption tax obligations and ensure compliance with the tax regulations.