photograph by kohji shiiki
Individual tax returns for 2009 were due by 15 March this year. But this didn’t affect the multitude of foreigners (not to mention Japanese) who have left Japan over the past couple of years to set up shop in other parts of the region. Singapore and Hong Kong are the most popular destinations and the individuals involved tend to be those working in the high value financial services and professional sectors.
According to Paul Previtera, a Tokyo- based tax attorney, “The reasons these people leave Japan are numerous but one factor does seem constant—Japan’s high rates of individual tax and the complexity of the Japanese tax system when compared with other countries in the region.”
Individual tax rates in Hong Kong and Singapore range from 0-15 percent and 3.5-20 percent respectively. By contrast, Japan’s top national tax rate for individuals is 40 percent and there is a local tax of 10 percent. Combining the national and local taxes, a Japanese individual’s tax rate can reach up to 50 percent. In addition, an individual working in Japan is likely to be subject to a multitude of other taxes including social insurance taxes, labor insurance taxes, land tax, and consumption tax.
A further issue is the less than straightforward manner in which taxes are calculated. Take local tax for example. Liability is based on whether you were a resident of Japan on January 1st. If you leave Japan on December 31st, you may avoid having to pay a year of local tax (standard advice from the Big 4 accounting firms to their multinational clients). Remain in Japan for a couple of New Year drinks in Roppongi and you will wake up with a tax headache.
Another issue is that local tax is based on your previous year’s income. Make a million dollars in 2010 only to lose your job at the end of the year? You’ll be required to pay local tax in 2011 based on the $1 million you made in 2010 in spite of your newly unemployed status.
Japan also changed its rules regarding which foreigners were subject to tax on worldwide income. Up to 2006 this meant foreigners who had been in Japan for the past five years. However, the law was changed to cover anyone who had been in Japan for five out of the past 10 years.
According to tax accountant Naoko Sumida, “The effect of this has been to add further uncertainty and also to discourage individuals from taking up a second posting in Japan.” Add to this the fact that Hong Kong and Singapore generally don’t tax individuals on income earned outside these jurisdictions and an assignment to Japan becomes even less attractive.
The problems associated with the loss of talented workers are likely to get worse as more jobs become mobile. “The steps Japan is considering to reform its corporate tax system need to be matched on the individual side—if skilled professionals are reluctant to work in Japan, the desired foreign direct investment will simply not occur,” says Previtera.
If Japan is serious in its quest to become a regional financial hub, individual tax is an issue that needs to be addressed soon.
Dean Page is CEO of Tokyo-based venture capital and advisory firm, Foreya Partners. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young.
Dean.Page@VentureCapital.Asia
Izumi Shibasaki is an associate at Foreya Partners and is currently completing her legal studies at Touro College in New York.
Izumi.Shibasaki@VentureCapital.Asia
