Japan taxes income twice: national income tax and a local inhabitant tax. The local tax is 10% of taxable income, split between the municipality (normally 6%) and the prefecture (4%), plus a flat per-capita amount of around 5,000 yen that since 2024 includes a 1,000 yen national forest environment tax. Deductions differ slightly from those for income tax.
The defining feature is timing. The tax is charged by the municipality where the person lived on 1 January, on their income for the previous calendar year. The employer reports each employee's pay to the municipality by the end of January, the municipality calculates the tax, and the employer deducts it from salary in 12 monthly instalments from June to the following May. This is called special collection. People without an employer to deduct it pay directly.
Someone who arrives in Japan in the middle of a year therefore pays little or no inhabitant tax at first, and a full year's worth of tax on their first Japanese salary starting the following June. Someone who leaves still owes the tax for the year in which they were resident on 1 January.
What it means for a foreign employer
- Net pay jumps around for new arrivals. An expatriate or returnee pays no inhabitant tax in their first months, then a full 10% charge from June of the following year. Explain this, or the second year looks like a pay cut.
- The same applies to people coming off a career break. Inhabitant tax is due on last year's income even if this year's is lower.
- Leavers owe the remainder. When someone leaves between June and December, the remaining instalments are usually deducted from the final salary or paid directly. Departing foreign staff should appoint a tax agent if they owe more.
- Factor it into tax equalisation. For assignees on tax-protected packages, the timing lag means the employer often pays the tax after the assignment has ended.
Sources
- Local Tax Act, Articles 24, 294, 317-6 and 321-3.
- Act on the Forest Environment Tax and Forest Environment Transfer Tax (in force for the 2024 tax year onward).