Introduction
The year-end tax adjustment in Japan is a system in which companies conduct the final tax amount adjustment for income tax of salaried employees at the end of the year. In many countries, it is common for individuals to file their own tax returns, making the year-end tax adjustment in Japan a difficult area to understand in terms of both its purpose and practical application for personnel from foreign-affiliated companies and overseas headquarters.
In particular, the "various deductions" in year-end adjustments are based on the contents of the declarations submitted by employees, which means that if the processing is done with insufficient understanding, there is a risk of over- or under-collection and issues arising during tax audits. In the case of foreign-affiliated companies, it is also characteristic that discrepancies with Japan's unique systems are more likely to become apparent due to foreign employees, mid-term hiring and resignations, and overseas insurance and welfare programs.
This article focuses on the practical aspects of foreign-affiliated companies in Japan, outlining the main deduction systems in year-end adjustments and organizing the key decision points in practice.
1. Positioning of the Deduction System in Year-End Tax Adjustments
The deductions in year-end adjustments can be broadly classified into "personal deductions" and "material deductions (such as insurance premium deductions)." These are established to settle individual circumstances that cannot be fully reflected in the monthly withholding tax at the end of the year.
The company is in a position to determine the applicability of deductions based on various declarations submitted by the employee and to calculate the final income tax amount. It is important to note that, from a tax perspective, the company's responsibility arises from the determination of deduction applicability, so there may be cases where the explanation "we processed it as the employee declared" is insufficient.
2. Practical Points on Basic Deductions and Income Adjustment Deductions
The basic deduction is a personal deduction applicable to all residents, and the amount of the deduction decreases progressively based on the total income amount. In the year-end adjustment, even employees with only salary income need to determine their income amount based on their salary income amount.
When dealing with foreign-affiliated companies, it is important to note that if there are additional compensation from overseas or salaries paid outside of Japan, a decision must be made on whether to include them in the year-end tax adjustment. As a general rule, the total income amount is calculated based on the salary income subject to taxation in Japan, so it is essential to clarify the distinction between residents and non-residents and the scope of taxation.
3. The Difficulty of Determining Dependent Deductions and Spousal Deductions
Dependent deductions and spouse deductions are among the most common areas for judgment errors in year-end tax adjustments. The criterion for determination is "income amount," which is important to note as it is not simply based on annual income or salary.
In the case of foreign employees, there are instances where spouses or dependents living abroad can be eligible for dependent deductions. In such cases, documentation proving the family relationship and remittance-related documents are required; however, if the formal requirements are not met, the deduction will not be granted.
Additionally, regarding the spousal deduction and the special spousal deduction, the eligibility for these deductions is determined by the income amounts of both the individual and their spouse. Therefore, in cases of dual-income households or when a spouse earns income overseas, careful verification is necessary.
4. Practical Response to Life Insurance Premium Deductions and Social Insurance Premium Deductions
The life insurance premium deduction and earthquake insurance premium deduction are deductions applied based on the premiums paid by employees. The processing is generally based on the deduction certificates issued by insurance companies within Japan, and as a rule, overseas insurance is excluded from the year-end adjustment deductions.
In foreign-affiliated companies, there are cases where the overseas headquarters is the policyholder for group insurance or where employees are enrolled in overseas health insurance systems. It is important to inform employees in advance that these are not eligible for Japan's life insurance premium deduction.
Regarding social insurance premium deductions, this applies not only to Japan's health insurance and employee pension insurance but also to cases where individuals pay national pension insurance premiums, etc. On the other hand, contributions to overseas social insurance systems are generally not included as deductible items in Japan's year-end tax adjustment.
5. Deduction of Contributions to Small Business Mutual Aid and Considerations for Foreign-affiliated Companies
The defined contribution pension (iDeCo) and small enterprise mutual aid contribution deductions are applicable deductions for year-end adjustments, but their treatment varies depending on the type of membership and contribution method.
In foreign-affiliated companies based in Japan, there are cases where a corporate-type defined contribution pension plan is implemented. If the contributions are deducted from the salary, they are automatically reflected in the year-end tax adjustment. On the other hand, for employees who are individually enrolled in iDeCo, it is necessary to make a determination of applicability upon receiving the deduction certificate.
6. Year-end adjustments and restrictions on deductions for foreign employees
Even if they are foreign employees, if they qualify as residents in Japan, they will be subject to year-end adjustments and various deductions just like Japanese employees. On the other hand, if they leave the country during the year and become non-residents, they will be excluded from year-end adjustments and, in principle, will need to settle through a final tax return.
Additionally, since year-end adjustments do not apply to short-term residents and non-residents, it is important to organize the explanations and operations of the deduction system by residency classification.
7. Key Points of Deductions That Are Easily Confirmed in Tax Audits
In a tax audit, the preservation status of the tax returns and supporting documents that serve as the basis for deductions is closely examined. In particular, for dependent deductions and insurance premium deductions, it is questioned whether the formal requirements are met and whether the company has fulfilled its obligation to verify.
In foreign-affiliated companies, there are many cases where the division of roles between the HR and accounting departments at the Japan office and the overseas headquarters is unclear, resulting in a concentration of accountability on the Japan side, which requires careful attention.
8. Summary
The practical application of deductions in year-end adjustments requires a unique understanding of the Japanese system and an awareness of individual employee circumstances. In foreign-affiliated companies, the relationship with foreign employees and overseas systems often makes decision-making more challenging than in typical domestic companies.
By understanding the basic structure of the deduction system and carefully managing resident classification, income determination, and documentation, it leads to a reduction in practical risks. It is necessary to position year-end adjustments not merely as an annual task but as an important process in tax management at the Japan base.