Calculating foreign tax credit

[unborderedlife]

Hi all, I'm preparing to file my Japanese tax return and since I've been here more than 5 years in the past 10, I'm considered a permanent resident for tax purposes and need to declare all worldwide (Australian) income. The income is only dividends and bank interest, and I file an Australian tax return each year to pay the required tax as a non-resident. I have already paid the tax for the past Aussie FY (July 2019 - June 2020).

Regardless, I believe I still need to declare the income on my Japanese tax return for 2020. But to avoid double-tax, I should be able to claim a foreign tax credit, calculated as per the formula below:

Credit limit for income tax = Amount of income tax for the year {A} × (Adjusted amount of foreign income for the year {B} / Total amount of income for the year {C})
Source: https://www.nta.go.jp/english/taxes/ind ... /12007.htm

My questions are as follows:

1. When calculating the amount of income tax for the year {A}, should it be based on the gross income OR adjusted income with all deductions (health insurance, earthquake insurance, basic deduction, etc.) already subtracted (as shown on the end of year slip)?
2. Does {C} need to include domestic income that has tax withheld or are exempt (e.g. Coronavirus stimulus payment, NISA dividends)?
3. The NTA page says if the foreign tax pays exceeds the credit limit above, we can credit the excess against the special income tax for reconstruction for the year. But only to a certain limit. If the foreign tax we paid still exceeds the foreign tax credit + special income tax for reconstruction credit, is it just too bad?

I've searched for this information in both English and Japanese and cannot find a clear answer so I'm hoping someone here can help. Thanks in advance.

[mule96]

1. When calculating the amount of income tax for the year {A}, should it be based on the gross income OR adjusted income with all deductions (health insurance, earthquake insurance, basic deduction, etc.) already subtracted (as shown on the end of year slip)?

My understanding is, it is gross income except the deductions mentionend on the link you posted.

2. Does {C} need to include domestic income that has tax withheld or are exempt (e.g. Coronavirus stimulus payment, NISA dividends)?

Very good question. Seeing that this is usually no part of the tax declaration at all, I would say no, but in the end only an tax accountant (or one of the free advisors they have in some tax declaration buroes). Does it matter?

3. The NTA page says if the foreign tax pays exceeds the credit limit above, we can credit the excess against the special income tax for reconstruction for the year. But only to a certain limit. If the foreign tax we paid still exceeds the foreign tax credit + special income tax for reconstruction credit, is it just too bad?

Thats probably bad then. In the online tax declaration tool, you only need to provide {B}. The rest is automatically calculated based on the tax information you provide. May be you can also play around there?

[unborderedlife]

Thanks for your response.

2. Does {C} need to include domestic income that has tax withheld or are exempt (e.g. Coronavirus stimulus payment, NISA dividends)?

Very good question. Seeing that this is usually no part of the tax declaration at all, I would say no, but in the end only an tax accountant (or one of the free advisors they have in some tax declaration buroes). Does it matter?

I'm also learning towards a no, as if I include them in {C} I should in principal also add the withheld tax amount back to {A}. Due to the formula, it does affect the credit limit a little.

3. The NTA page says if the foreign tax pays exceeds the credit limit above, we can credit the excess against the special income tax for reconstruction for the year. But only to a certain limit. If the foreign tax we paid still exceeds the foreign tax credit + special income tax for reconstruction credit, is it just too bad?

Thats probably bad then. In the online tax declaration tool, you only need to provide {B}. The rest is automatically calculated based on the tax information you provide. May be you can also play around there?

Thanks, I'll have a play around and hopefully it'll become clearer.

[TokyoWart]

1. When calculating the amount of income tax for the year {A}, should it be based on the gross income OR adjusted income with all deductions (health insurance, earthquake insurance, basic deduction, etc.) already subtracted (as shown on the end of year slip)?

I just checked the calculation on my form for 2019 and the total tax A is from Line 27 which is after all the deductions you mentioned.

Does {C} need to include domestic income that has tax withheld or are exempt (e.g. Coronavirus stimulus payment, NISA dividends)?

This is the first year for a Coronavirus stimulus but my understanding it doesn't appear on taxes. Your NISA dividends are never reported to the government and don't appear on the tax return.

3. The NTA page says if the foreign tax pays exceeds the credit limit above, we can credit the excess against the special income tax for reconstruction for the year. But only to a certain limit. If the foreign tax we paid still exceeds the foreign tax credit + special income tax for reconstruction credit, is it just too bad?

My experience is that the foreign tax paid always exceeds the credit limit according to this calculation. The recovery from the special tax for reconstruction is also very small. For 4 years those excess payments appear on the sheet (外国税額控除に関する明細書) where you calculate the foreign tax credit but they never do anything for you.

[unborderedlife]

1. When calculating the amount of income tax for the year {A}, should it be based on the gross income OR adjusted income with all deductions (health insurance, earthquake insurance, basic deduction, etc.) already subtracted (as shown on the end of year slip)?

I just checked the calculation on my form for 2019 and the total tax A is from Line 27 which is after all the deductions you mentioned.

Does {C} need to include domestic income that has tax withheld or are exempt (e.g. Coronavirus stimulus payment, NISA dividends)?

This is the first year for a Coronavirus stimulus but my understanding it doesn't appear on taxes. Your NISA dividends are never reported to the government and don't appear on the tax return.

Cheers, thanks for the confirmation on both counts. How about income that already has had tax withheld (i.e. dividends in the 特定口座 and Japanese bank interest). Can they also be omitted from the tax return and thus the formula above?

My experience is that the foreign tax paid always exceeds the credit limit according to this calculation. The recovery from the special tax for reconstruction is also very small. For 4 years those excess payments appear on the sheet (外国税額控除に関する明細書) where you calculate the foreign tax credit but they never do anything for you.

Yes, I did the calculation and the special income tax for reconstruction credit only worked out to be around 500 yen...So I guess you just "lose" the excess you pay. :/

[unborderedlife]

1. When calculating the amount of income tax for the year {A}, should it be based on the gross income OR adjusted income with all deductions (health insurance, earthquake insurance, basic deduction, etc.) already subtracted (as shown on the end of year slip)?

I just checked the calculation on my form for 2019 and the total tax A is from Line 27 which is after all the deductions you mentioned.

Does {C} need to include domestic income that has tax withheld or are exempt (e.g. Coronavirus stimulus payment, NISA dividends)?

This is the first year for a Coronavirus stimulus but my understanding it doesn't appear on taxes. Your NISA dividends are never reported to the government and don't appear on the tax return.

Cheers, thanks for the confirmation on both counts. How about income that already has had tax withheld (i.e. dividends in the 特定口座 and Japanese bank interest). Can they also be omitted from the tax return and thus the formula above?

My experience is that the foreign tax paid always exceeds the credit limit according to this calculation. The recovery from the special tax for reconstruction is also very small. For 4 years those excess payments appear on the sheet (外国税額控除に関する明細書) where you calculate the foreign tax credit but they never do anything for you.

Yes, I did the calculation and the special income tax for reconstruction credit only worked out to be around 500 yen...So I guess you just "lose" the excess you pay. :/

[TokyoWart]

Cheers, thanks for the confirmation on both counts. How about income that already has had tax withheld (i.e. dividends in the 特定口座 and Japanese bank interest). Can they also be omitted from the tax return and thus the formula above?

I think there are two different ways your dividends can be reported in Japan. At least on my form, the dividends from my 特定口座 are not appearing anywhere in this calculation. On my tax return that first page where you have the list of income sources under 収入金額等 and 所得金額 the entries for 配当 are blank (the foreign dividends appear later on 第三表 and the Japanese dividends along with capital gains/losses appear on a supplement to that form). Interest (利子) does appear but at 882 yen for the year (just looking at my return right now -- that's more interest than I remember receiving and I think it must be mostly foreign interest) it really isn't making any difference in the calculation.

[unborderedlife]

Cheers, thanks for the confirmation on both counts. How about income that already has had tax withheld (i.e. dividends in the 特定口座 and Japanese bank interest). Can they also be omitted from the tax return and thus the formula above?

I think there are two different ways your dividends can be reported in Japan. At least on my form, the dividends from my 特定口座 are not appearing anywhere in this calculation. On my tax return that first page where you have the list of income sources under 収入金額等 and 所得金額 the entries for 配当 are blank (the foreign dividends appear later on 第三表 and the Japanese dividends along with capital gains/losses appear on a supplement to that form). Interest (利子) does appear but at 882 yen for the year (just looking at my return right now -- that's more interest than I remember receiving and I think it must be mostly foreign interest) it really isn't making any difference in the calculation.

I've been playing around with the form, and based on your comment above, I should not enter foreign-sourced dividends but only interest on the first page under 収入金額等? Do I then enter the foreign dividends under 外国税額控除等? I'm using e-tax, so I'm not sure what 第三表 refers to...

[TokyoWart]

Cheers, thanks for the confirmation on both counts. How about income that already has had tax withheld (i.e. dividends in the 特定口座 and Japanese bank interest). Can they also be omitted from the tax return and thus the formula above?

I think there are two different ways your dividends can be reported in Japan. At least on my form, the dividends from my 特定口座 are not appearing anywhere in this calculation. On my tax return that first page where you have the list of income sources under 収入金額等 and 所得金額 the entries for 配当 are blank (the foreign dividends appear later on 第三表 and the Japanese dividends along with capital gains/losses appear on a supplement to that form). Interest (利子) does appear but at 882 yen for the year (just looking at my return right now -- that's more interest than I remember receiving and I think it must be mostly foreign interest) it really isn't making any difference in the calculation.

I've been playing around with the form, and based on your comment above, I should not enter foreign-sourced dividends but only interest on the first page under 収入金額等? Do I then enter the foreign dividends under 外国税額控除等? I'm using e-tax, so I'm not sure what 第三表 refers to...

I have to admit to some doubt because I no longer prepare my own Japanese tax return. I am really just relaying what my returns have shown for the last few years. Page 3 is for 分離課税用 (separate taxation calculation) and my understanding is this is an optional way to have some investment taxes calculated. My Japanese taxes are complicated because I am denied the usual way to claim foreign tax credits applied to earned income so I don't know if this works best for your return. With that caveat (all of these describe my form which is 申告書Ｂ):

1. My foreign dividends don't appear anywhere on page 1 (第一表)
2. I see that some capital gains but not dividends do appear on page 2 (第二表) under 所得の内訳
3. Dividends and capital gains are appearing on page 3 (第三表) which is the form for 分離課税用. Those reported dividends include both foreign and domestic Japanese dividends in 収入金額　under 上場株式等の配当等 and a different figure under 所得金額 for the line 上場株式等の配当等. I think this is because this figure was offset by some capital losses I applied to reduce the effect of my dividends.

You asked if you should enter your foreign dividends under "外国税額控除". On page 1 of your tax return that field is giving the amount of tax credit you get to subtract from your Japanese taxes. The dividends certainly don't appear there on page 1. However, on the form entitled 外国税額控除に関する明細書 which you use to calculate the foreign tax credit those foreign dividends appear on the field 外国所得税額の内訳.

Sorry if this is just making things more confusing. When I did my taxes on my own I would take this to the tax office and sit at the terminal with them for the electronic entry and even the tax office people seemed a little uncertain of what to do.

[mule96]

Just as some more explanation from my experience

- 分離課税 is when you chose that your dividends and capital gains get taxed for the capital gain flat rate (~20.315%). You can actually get them taxed on the normal income tax (総合課税 - on the page where you enter the dividends and tax capital gains this is the first point that appears).

- If you dividends are taxed with the flat rate, they shouldnt appear on Page (収入金額 and 所得金額). Everything from ㋐と㋚ is taxed at income tax rate afaik.

I would really also like to find out the formula that they use in the online system to calculate the allowable Tax credit, but havent found it out.