Introduction
In recent years, in Japan, there has been a trend towards stricter verification of tax payment status for foreigners applying for residence status, renewal, and permanent residency. Particularly for highly skilled professionals, management visa, permanent residency, and spouse visa renewals, the proper payment status of income tax, resident tax, and social insurance premiums has become an important examination item, and tax compliance is closely related to the residence management system itself, not just a tax issue.
Under such circumstances, there has been a growing demand from not only foreigners themselves but also tax accountants, administrative scriveners, and corporate HR personnel who support their tax filings, to "more strictly confirm the existence of estimated tax payment obligations." Especially for individual business owners and foreigners with overseas income, it is necessary to recognize the status of estimated tax payments as part of tax compliance, in addition to final tax returns.
The estimated tax payment system was established to reduce the burden on taxpayers caused by large tax liabilities occurring at one time and to stabilize national revenue. In recent years, it can be said that this system has also increased in importance from the perspective of managing the residence status of foreigners and compliance checks by financial institutions.
1. Overview of the Estimated Tax Payment System
Estimated tax payment refers to a system where, if the "estimated tax payment standard amount" calculated based on the income and tax amount from the previous year as of May 15 of that year is 150,000 yen or more, a portion of the income tax and special reconstruction income tax for that year is paid in advance.
The purpose of the estimated tax payment system is to avoid taxpayers incurring a large tax burden at once during the final tax return the following year, while also stabilizing national tax revenue throughout the year. The amount of tax paid as estimated tax will be deducted from the final tax amount during the final tax return the following year and settled as a deficiency or refund.
In cases where there is an obligation for estimated tax payments, the head of the tax office will notify the estimated tax amount by June 15 of that year, and taxpayers will typically pay one-third of that amount in the first and second periods.
2. What is the estimated tax payment standard amount?
The estimated tax payment standard amount is calculated based on the tax amount declared in the previous year's final tax return. Therefore, the estimated tax payment standard amount is characterized as a "standard amount modified based on certain legal rules from the previous year's actual results," rather than an "expected amount of this year's income tax."
However, if the previous year's amount includes capital gains, temporary income, miscellaneous income, or temporary income subject to average taxation, or if it is subject to foreign tax credits or disaster relief laws, the estimated tax payment standard amount will be recalculated based on Article 104 of the Income Tax Act, rather than simply using the previous year's declared tax amount.
In particular, in international tax practice, many taxpayers are subject to foreign tax credits, and this recalculation provision has significant practical implications. For expatriates, sole proprietors receiving compensation from foreign corporations, and foreign residents with overseas investment income, it is not appropriate to determine the obligation for estimated tax payments solely by looking at the tax amount from the previous year's final tax return.
3. Differences from the declared tax payment estimate
A concept that is easily confused with the estimated tax payment standard amount is the "declared tax payment estimate."
While the estimated tax payment standard amount is a statutory determination amount mechanically calculated based on the previous year's actual results, the declared tax payment estimate refers to the final tax amount estimated based on the actual income situation of that year when applying for a reduction in the estimated tax amount.
When calculating the declared tax payment estimate, it is necessary to consider not only the expected amounts of salary income, business income, and foreign income, but also tax deductions such as income deductions, withholding tax amounts, foreign tax credits, and housing loan deductions, as well as the contents of tax system reforms for that year.
Therefore, it is practically useful to organize the following.
Estimated tax payment standard amount
= Statutory determination amount based on the previous year's actual results
= Statutory determination amount based on the previous year's actual results
Declared tax payment estimate
= Final tax amount forecast based on the expected results for the current year
= Final tax amount forecast based on the expected results for the current year
4. Foreign tax credits and the estimated tax payment standard amount
One of the most debated points in international tax practice is the relationship between foreign tax credits and the estimated tax payment standard amount.
In practice, it is understood that the existence of the obligation for estimated tax payments is determined based on the "declared tax amount" in the final tax return, that is, the amount of income tax and special income tax for reconstruction after deducting foreign tax credits and withholding tax amounts. This perspective is considered reasonable in practice and economically, as it determines the obligation for estimated tax payments while taking into account foreign taxes and withholding income taxes that have already been paid in the previous year.
On the other hand, looking at the wording of Article 104 of the Income Tax Act, it states that "the amount of income tax that has been or should have been withheld" is to be deducted, but it does not directly mention foreign tax credits. Therefore, from the perspective of textual interpretation alone, there is room for doubt about how to treat the foreign tax credit portion in the calculation of the estimated tax payment standard amount.
However, in the basic notification of the Income Tax Act, the expression "income deductions and tax credits when calculating the estimated tax payment standard amount" is used, indicating that practical operations consider tax credits in general. In that sense, the practical operation that takes into account foreign tax credits is considered to have a certain degree of rationality, at least in the current taxation practice.
5. The importance of confirming estimated tax payments in the era of enhanced residency qualification management
In recent years, the confirmation of compliance with tax obligations has become increasingly strict in immigration and residency management administration. In particular, the proper payment status of income tax and resident tax has become an important examination item in applications for permanent residency, the highly skilled professional points system, and management visa renewals.
Therefore, for foreign taxpayers, the necessity to confirm not only the submission of tax returns and the payment of resident taxes but also the existence of estimated tax obligations and their compliance status is increasing.
In particular, for foreign residents with overseas income, business income, real estate income, etc., if estimated tax notifications were sent but payments were not made, it cannot be denied that this may affect the evaluation of overall tax compliance, not just the late payment penalties.
In the future, as the management of foreign residency qualifications is expected to become even stricter, understanding and proper management of the estimated tax system is considered to be one of the important compliance items in international tax practice.
Conclusion
The estimated tax system is not just a prepayment system, but an important system established to level the income tax burden based on the previous year's performance.
Especially in the field of international taxation, the calculation of estimated tax standards tends to become complicated due to the relationship with foreign tax credits, foreign income, non-resident related income, etc. Additionally, considering the recent administrative environment of strengthening the management of foreign residency qualifications, there are increasing situations where more careful confirmation of the existence of estimated tax obligations and payment status is required than before.
Proper management of estimated taxes, taking into account both international taxation and immigration practices, is expected to become increasingly important in the future.
For those who need to manage estimated taxes, please contact us.