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Annual adjustment of income tax (Year end adjustment of income tax) in Japan

Posted on 27/11/2012 by Koji Takahashi

Case 15

<Question>
I just started a business in Tokyo this April. I’ve heard that companies have to recalculate the income tax of employees and officers by December. At the moment, I’m the only employee so do I still have to recalculate my taxed income? Additionally, I came from Canada last year and I worked at a Japanese company until February.

 

<Answer>
Paid salaries are subject to a withholding tax every month. The withholding tax is a kind of advance payment of Income tax, the difference has to be settled in the future by some methodology such as filing the tax return or an Annual Adjustment of income tax (a year end adjustment of income tax). The calculated income tax on the tax return is different to the total amount of the annual withholding tax due to several income deductions or credits that are not considered when the withholding tax is withheld.   (The withholding tax is calculated considering the exemption of dependents which is one of the deductions or credits though the impact is minimal). Consequently, the collected withholding tax cannot be equal to the actual income tax, so filing the tax return or the Annual Adjustment of income tax (the year end adjustment of income tax) is necessary.
The Annual Adjustment of income tax (the “Annual Adjustment”) is a process which is performed by employers at the end of year to re-calculate the Income Tax and settle it. If there is any shortage in payment, such a shortage will be withheld from the last salary payment and if there is any overpayment, such an overpayment will be adjusted by appropriating it to the tax amount to be withheld from the last salary payment or by refunding it to individual employees.

 

The scope of the Annual Adjustment

People whose salary is JPY 20 million or less and who submit “Application for (Change in) Exemption for Dependents of Employment Income Earner(給与所得者の扶養控除等(異動)申告書)*1
The above people who;

  1. Passed away during the year
  2.  Left companies in December and received the salary in December
  3. Are part-time workers whose annual salaries are JPY 1,030,000 or less and won’t be hired again after resignation or dismissal.

Exceptions from the above are out of the scope for the Annual Adjustment, rather they need to file the income tax return by March 15 the following year.

 

*1 A salaried person shall submit an “Application for (Change in) Exemption for Dependents of Employment Income Earner” (給与所得者の扶養控除等(異動)申告書)to the employer no later than one day prior to the date on which employment income is first paid each year. If not, a higher tax rate for collecting the withholding tax is adopted. Additionally, this application does not need to be filed to the tax authority.

 

Procedures

The Annual Adjustment is implemented in December, and if the paid withholding tax is different to the annual income tax it is adjusted with the usual monthly deduction in December.

  1.  Ensure officers and employees prepare Application for Deduction for Insurance Premiums for Employment Income Earner and an “Application for a Special Exemption for the Spouse of an Employment Income Earner (給与所得者の保険料控除申告書兼給与所得者の配偶者特別控除申告書
  2. Complete Ledger of Withholding Income Tax for Employment Income” (給与所得に対する所得税源泉徴収簿
  3. Calculate the amount of the settled withholding tax with Ledger of Withholding Income Tax for Employment Income”

The following income deductions are in the scope of the annual adjustment, so the supporting documents should be obtained by the officers and the employees.

Income deductions & Tax credits on the Annual Adjustment

The following are income deductions and tax credits on the Annual Adjustment. The amount of the deductions and the credits depends on the situation, and whether the necessary supporting documents, which prove the amount of the deductions and the credits, have been obtained.

  • Deduction for social insurance premium
  • Deduction for small-scale enterprise mutual aid premiums
  •  Deduction for earthquake insurance premium
  •  Exemption for spouse
  • Exemption for dependents
  • Exemption for disabled persons
  • Exemption for widows
  •  Exemption for working students
  • Special exemption for spouse
  • Special credit for loans relating to a dwelling

 

Filing tax return for additional refund

People who are out of the scope of the Annual Adjustment have to file the income tax return by March 15 of the next year though people who are in the scope of the Annual Adjustment also may file the income tax return for other income deductions which couldn’t be deducted by the Annual Adjustment. The following are examples of the deductions.

  1. Medical expense credit
    Any person eligible for a medical expense deduction because the amount paid for medical expenses exceeds the lesser of either 100,000 yen or the amount equivalent to 5% of total income.
  2.  Foreign tax credit
    Any person eligible for a foreign tax credit relating to the tax equivalent to income tax paid in foreign countries.
  3. Home loan credit
    Any person eligible for a special credit for loans relating to a dwelling due to the acquisition of a house, etc., or who had not claimed the deduction during the year-end adjustment from the second and subsequent years after the acquisition
  4. Dividend income credit
    The credit is only available for dividend incomes from Japanese companies. If taxpayers’ total taxable income is JPY 10 million or less, the credit is calculated as 10% of net dividend income after any related interest expenses.

 

Q&A case (resident or non-resident & changing job)

  1.   Resident or non-resident
    It is not clear how long you have lived in Japan though, as long as you started a business in Japan, you are considered a Japanese resident so you are in the scope of the Annual Adjustment.
  2. Changing job
    Obtaining the Withholding Record” from the previous job is necessary. The Annual Adjustment is implemented with the previous salary.
  3.  Filing tax return
    If other tax credits like the above are claimed, filing a tax return is necessary.

 

Reference
Income Tax Rules for a salaried person

 

 

By Certified Public Accountant (CPA) & Tax Accountant, Koji Takahashi,
Tokyo & Yokohama