Saving Taxes in Japan

It came to me to write this article while replying to Lena’s comment in an earlier post.

I’ve said it to death that I never chose Japan for money. Sure, some professions offer better remuneration in terms of higher gross salary, but when you look at the taxes, you’ll see why it doesn’t necessarily pay better to work here.

Case in point: A Singaporean lawyer friend based in Singapore loves Japan so much, he’s been to all 47 prefectures and still visits Japan at least 3 times a year. Through the past few years, he’s been offered very high gross salary by banks and other law firms to move to Japan. His fundamental decision maker is money based. He doesn’t have to pay rent in Singapore since he lives with his family so, having to pay rent here doesn’t make good money sense. He asks those companies to pay for his rent and all of them agreed. Because of his already high salary, the expensive income tax, pension, residence tax and health insurance takes a lot out of his gross salary, so he turned them down but these companies always came back with higher offers. Unfortunately, no matter how high they raise it, it doesn’t cover the tax and make wise money sense for him to move since he gets more take-home pay in Singapore and on top of that, CPF contribution from the employer (for non-Singaporeans, CPF is our retirement scheme in Singapore). Not forgetting that CPF pays a return of between 2.5% to 6% interest. Whether we would get our money back or not is not part of this article.

If you’re one of those who take money as an important basis for your decisions, it is important to remember that income tax is very high in Japan. Reason why people are shifting their bases to Singapore.

Let’s take an average employee who receives $40,000 a year as an example. In Singapore, he pays 0% for the first $20,000 ($0), 2% for the next $10,000 ($200), and 3.5% for the next $10,000 ($350). That makes a total of $550, which is under 1.5% of $40,000.

In Japan, the same worker (based on the current exchange rate of about $1 to 80 yen) would be paying 10% or $4,000. That’s an additional $3,450 a year. No small sum I would say. And we haven’t even factored in the other funny taxes.

So, someone who makes $125,000 a year would pay $8,700 in Singapore (about 7%), while the same person would be paying $41,250 in Japan (about 33%). That’s an extra $32,550 you could use to do so many other stuff, and how much more my lawyer friend would get by remaining in Singapore and choosing to fly to Japan for holiday 3 times a year instead. Besides, companies paying for his rent doesn’t necessarily work fully to his favor because a 100% coverage of rent would be treated as part of the remuneration and that will be fully taxed as well.

The following is what I negotiated and might be useful for those of you whose company offers to pay your rent. For example, if you make $40,000 a year, and your company pays for your rent that comes up to $10,000 a year, you would be taxed on $50,000 because the rent is counted into your total compensation. That pushes you to a higher income tax bracket of 20%, which makes the income tax $10,000 a year.

There’s a way to save on taxes legally, and to make it simple to understand, it’s just 3 steps:
1) Have your company rent it for you
2) You pay half the rent
3) Have the company increase your pay by half the rent

The reasoning is this: If you rent the house by yourself, no matter how much the company offers to cover your rent, it will be factored into your compensation which will eventually be taxed. Take note that this doesn’t only increase the amount of income tax you pay, but also your pension, insurance, and residence tax, all of which are based on your annual salary. But if it is offered as company housing and you pay at least 50% of the derived property value, then the other half will be considered an allowance that will not be taxed. This means, for example, you pay $5,000 a year for the rent. And, have the company include in your compensation that $5,000 as salary. This way, you will only be taxed on $45,000, which is about $9,000, saving you $1,000 a year for the same benefits. Depending on your actual salary and rent, that amount of savings could decide whether or not you get pushed to a higher income tax bracket.

Note that the above is an oversimplified explanation of actual tax calculations for the purpose of easy understanding. Also, based on the derived property value, it usually turns out that you will pay a little less than half the actual rent if you had rented it yourself.

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