Japanese Business Glossary

消費税 (shohizei), consumption tax, is a value-added tax (VAT) levied on most goods and services in Japan. It operates as a multi-stage tax, collected at each stage of production and distribution, and is ultimately borne by the final consumer. The standard rate is 10%, while a reduced rate of 8% applies to certain items, such as food and non-alcoholic beverages.

The consumption tax system in Japan includes both taxable and exempt transactions. Taxable transactions encompass the sale of goods and services. However, certain transactions, such as the sale and lease of land, interest on loans, and medical services, are exempt from consumption tax.

Businesses are required to calculate and remit the tax collected from their sales. They can deduct the consumption tax paid on their purchases, known as input tax, from the tax collected on sales, known as output tax. This process is called the input tax credit, ensuring that the tax burden ultimately falls on the final consumer rather than on businesses throughout the supply chain.

There are two main accounting methods for handling consumption tax: the tax-included method and the tax-excluded method. The tax-included method simplifies bookkeeping by incorporating the tax into the price of goods and services, while the tax-excluded method separates the tax from the price, providing clearer financial reporting.

Businesses with annual taxable sales exceeding 10 million yen are required to register as taxable businesses and file consumption tax returns. Smaller businesses may qualify as tax-exempt businesses and are not required to collect or remit consumption tax unless they choose to register voluntarily.

扶養控除 (fuyou koujo), tax exemption for dependents, is a tax deduction in Japan designed to reduce the taxable income of a taxpayer who has qualifying dependents. This deduction helps lessen the tax burden for individuals supporting dependents such as children, elderly parents, or other relatives.

To qualify for this deduction, the dependent must meet several conditions. They must be related to the taxpayer within six degrees of consanguinity or three degrees of affinity. They must either share a household with the taxpayer or receive significant financial support, such as regular remittances for living expenses or education. The dependent's annual income must not exceed 480,000 yen, or 1,030,000 yen in the case of salary income, after deducting necessary expenses.

The amount of the deduction varies based on the dependent's age and relationship to the taxpayer. For general dependents aged 16 or older, the deduction is 380,000 yen. For dependents aged 19 to 23, classified as "specific dependents," the deduction increases to 630,000 yen. For elderly dependents aged 70 or older, the deduction is 480,000 yen if they live separately, and 580,000 yen if they live with the taxpayer.

Taxpayers can claim扶養控除 through the annual year-end adjustment (年末調整) process conducted by employers or during the annual tax return filing. Proper documentation, such as proof of remittances or a declaration of shared household, may be required to substantiate the claim.

医療費控除 (iryohi kojo), medical deduction, is a tax deduction in Japan that allows individuals to deduct certain medical expenses from their taxable income. This deduction can be claimed if the total medical expenses exceed a specific threshold within a given year. The threshold for medical expenses is typically 100,000 yen or 5% of the individual's total income if the income is below 2 million yen.

Eligible expenses include costs for treatment and care provided by medical institutions, prescribed medications, transportation costs for hospital visits, and specific treatments such as dental care, including orthodontics for medical reasons, and laser eye surgery (LASIK). Non-eligible expenses include cosmetic procedures, general health check-ups unless they lead to treatment for a detected illness, and costs associated with lifestyle or preventive measures like gym memberships or dietary supplements. Transportation costs are covered if they involve public transport or taxis when public transport is not feasible, but not for personal vehicle use.

To claim the medical expense deduction, individuals must file a tax return and submit a detailed statement of medical expenses. They must also keep all receipts for five years in case the tax authorities request verification. The process can be facilitated using the My Number Card, which simplifies record-keeping and submission.

所得 (shotoku) refers to income in Japan that is subject to tax after deducting allowable expenses from total revenue. It differs from gross revenue, which is the total amount received before any deductions. For a company employee, the total earnings before any deductions like taxes and insurance premiums are considered gross revenue. After subtracting necessary expenses, such as the "salary income deduction" (給与所得控除), the remaining amount is the taxable income or shotoku.

Income categories under Japanese tax law include salary income, business income, interest income, dividend income, real estate income, retirement income, forest income, capital gains, occasional income, and miscellaneous income. Each type of income has its own method of calculation and associated deductions.

To calculate taxable income, specific deductions are subtracted from the gross income. These deductions can include social insurance premiums, medical expenses, and other allowable expenses. An employee's taxable income is calculated by subtracting the salary income deduction from their gross salary. The tax calculation involves progressive tax rates, where higher income brackets are taxed at higher rates.

税 (zei), refers to taxes, which are mandatory financial charges imposed by the government on individuals and businesses. These taxes fund various public services and governmental functions. In Japan, several types of taxes each have specific regulations and purposes.

所得税 (shotokuzei) is an income tax imposed on individual earnings, calculated based on total taxable income after allowable deductions. This tax is progressive, with higher income brackets taxed at higher rates. Employers typically withhold this tax from salaries, and it is settled through annual tax returns or year-end adjustments.

消費税 (shohizei), or consumption tax, is a value-added tax on most goods and services. The standard rate is 10%, with a reduced rate of 8% for certain items like food and non-alcoholic beverages. Businesses collect this tax from consumers at the point of sale and remit it to the government.

法人税 (hojinzei) is a corporate tax on company income. It is calculated by determining a corporation's taxable income, applying the relevant tax rate, and subtracting any applicable tax credits. The corporate tax rate varies based on the size and type of corporation.

住民税 (jūminzei) is a local tax paid by residents to their municipalities and prefectures, calculated based on the previous year's income. It funds local services and infrastructure. Unlike income tax, resident tax is generally a fixed rate.

These taxes ensure that governments have the necessary resources to provide public goods and services, maintain infrastructure, and support economic stability.

軽減税率 (keigen zeiritsu), reduced tax rate, which applied to certain goods and services to ease the tax burden on essential items. In Japan, while the standard consumption tax rate is 10%, a reduced rate of 8% applies to specific items such as food and non-alcoholic beverages. This system is designed to lessen the financial impact on consumers purchasing essential goods.

The reduced tax rate is part of Japan's broader consumption tax system, which includes various mechanisms to calculate and apply taxes accurately. Businesses must distinguish between items subject to the standard rate and those eligible for the reduced rate when issuing invoices. Proper documentation, including specifying the applicable tax rate on invoices, is necessary for compliance and to enable buyers to claim tax credits correctly.

For businesses, calculating the consumption tax involves methods such as the "split-rate method," which applies the appropriate rate to different categories of goods and services, and the "aggregate method," which sums up tax amounts based on recorded transactions. Understanding and correctly implementing the reduced tax rate is crucial for businesses to maintain compliance and ensure accurate tax reporting.