US Dividend taxes: 10% US + 20% Japan, no way around it?

[TBS]

This is a great guide (in Japanese) - although I need to spend more time to understand the residence tax implications he's talking about there.
https://www.inside-shiina.com/entry/How ... with-e-tax

This is great! Another other guide was shared on reddit once, but it is not as comprehensive: https://nisa-chan.tokyo/us-stock-foreign-tax-deduction/

[adamu]

What I'm currently struggling with is that there seem to be three ways to handle the taxation of the foreign dividend income:

Declare it as income for aggregate taxation 総合課税
Declare it as income for separate taxation 申告分離課税
Don't declare it and just leave it to the tokutei kouza 源泉分離課税

In all three cases, you can still fill out the foreign dividend deduction section on the tax return. But none of the Japanese blogs I've found discuss whether the last option is allowed - claiming the deduction, but not declaring the income (tax was already withheld in the tokutei kouza). eTax lets you do it, and in the simulations I've done at least that works out to be the best option.

The investigation continues...

[adamu]

OK, I'm pretty sure the 3rd option isn't allowed now, because it's necessary to re-calculate the Japanese witholding tax witheld from the tokutei kouza.

This article (Japanese) explains it well: https://meetsmore.com/services/tax-retu ... edia/50816

Basically, in the tokutei kouza, let's say there was a dividend of $100.
The US takes 10%, leaving you with $90. That's then subject to 20.315% Japanese tax, or ~$18.

However, if you claim the foreign dividend deduction, you are no longer subject to double taxation, so the Japanese tax needs to be applied to the full $100. So it's necessary to declare it as aggregate or separate taxation on the tax return. Using separate taxation as an example:

Japanese tax is due on the $100 at 20.315% = $20.315. That's more than the $18 the tokutei account took.
But then you can deduct the $10 US tax, leaving you with tax of $10.315.
Better than the ~$18 before.

If you choose aggregate taxation instead of separate taxation, then it's not 20.315% of $100, but the $100 is added to your total income, and then your individual tax rate is applied to that.

The 20.315% includes 5% residence tax. I'm still not sure how that is handled when declaring the dividends like this.

---

This is also what Tkydon said above, but the info was lost to me in the wall of text about US tax forms that don't apply to me.

As a Permanent Resident for Tax Purposes in Japan, the issue of Dual Taxation is take care of by filing the Kakutei Shinkoku in Japan, declaring the Gross US Dividend Income (before deduction of the US 10% Tax) which is taxable at 20.315% (15% National, 0.315% Reconstruction, and 5% Residential Taxes), and then claiming the Foreign Tax Credit against the 10% Tax paid in the US (Form B - Page 2 - Item 146 (last year's form) ).
Japan will then reduce the 15% National tax to 5%, to remove the double taxation and account for the 10% Tax already paid in the US.

The Net total taxation on the US Sourced Dividend Income will then be 20.315% (The Japanese Dividend Tax Rate), but will now consist of 10% US, 5% National, 0.315% Reconstruction, and 5% Residential Taxes. Therefore, this eliminates Double Taxation on the same Dividend Income.
(Double Taxation refers to actually paying the Tax twice, not the fact that taxes are due and payable in both countries).

That only applies in the case of separate taxation, though. And to be specific, the Japanese tax rate itself is not reduced - it's applied at the full rate, and the amount of US tax paid is deducted from the amount of tax due.

[RetireJapan]

I have never done this (too lazy) but as our US dividends rise it is becoming more and more expensive to ignore.

Sigh.

I guess when I am self-employed next year I will have to wrestle with the tax declaration anyway...

[adamu]

By then there might be a shiny wiki guide

Although to be honest, tax is so complex and dependent on the individual, writing guides for it is pretty tough. I can see why tax accountants exist.

[Tkydon]

For Foreign Dividends, you specifically cannot use the Aggregate Taxation Method Dividend Allowance.

The Aggregate Taxation Method Dividend Allowance is designed to only partially offset the higher tax of higher marginal bands, so that holders of Japanese Equities would not have to file a Kakutei Shinkoku, but this is not to their benefit if total income is about Y6M. (I calculated this somewhere else), and is specifically disallowed for foreign dividends. Therefore, for foreign dividends, it only makes sense to use Aggregate Taxation Method if your Total Income from all sources is less than about Y4,000,000. You should do the actual calculation for your situation. See the Tax Rates below.

Also, remember that the Marginal Rates of Tax under Aggregate Taxation Method are subject to 10% Residents' Taxes, where the Dividend Tax is only subject to 5% Residents' Taxes.

You can choose to leave the dividend income as "undeclared" / 申告不要 for Residents' Taxes if you were choosing to use Aggregate Method for taxation of the Dividends; instead of 10% you would only pay the withheld 5% residents' Taxes, which along with the Dividend Allowance for Japanese Dividends would reduce the taxes for low income investors, BUT you cannot use the Foreign Tax Deduction if you do so. So No claiming that 10% or 15% of Foreign Withheld Tax back!

Marginal Tax rate (％) National - Reconstruction - Residents' Taxes = Total
Under 1,949,000 ― 5% ― 0.105% ― 10% = 15.105%
1,950,000 ― 3,299,000 ― 10% ― 0.21% ― 10% = 20.21%
3,300,000 ― 6,949,000 ― 20% ― 0.42% ― 10% = 30.42%
6,950,000 ― 8,999,000 ― 23% ― 0.483% ― 10% = 33.483%
9,000,000 ― 17,999,000 ― 33% ― 0.693% ― 10% = 43.693%
18,000,000 ― 39,999,000 ― 40% ― 0.84% ― 10% = 50.84%
Over 40,000,000 ― 45% ― 0.945% ― 10% = 55.945%

vs.

Flat 15% ― 0.315% ― 5% = 20.315%

If Total Income is over about Y4M, or if the Dividend Income would fall into the 3,300,000 ― 6,949,000 30.42% tax band, then the Separate Taxation Method should be used. (Form B, Pages 1&2 and Page 3.

Japanese tax is due on the $100 at 20.315% = $20.315. That's more than the $18 the tokutei account took.
But then you can deduct the $10 US tax, leaving you with tax of $10.315.
Better than the ~$18 before."

A Kakutei Shinkoku is not required for a Tokutei Kouza. For Japanese dividends that would be fine, as the withholding tax rate is correct,
but if you leave foreign dividend taxation to the Tokutei Kouza 源泉分離課税:

If you calculate that out, the withholding comes to a total of US Withholding 10%, plus Japanese Taxes (20.315% x 0.9) 18.2835%,
(90% of each of the 15% National, 0.315% Reconstruction, and 5% Residents' Taxes, so actually 13.5% National, 0.2835% Reconstruction, and 4.5% Residents' Taxes...)

so Grand Total Foreign Withholding plus Japanese Withholding of 28.2835%.
(Some foreign countries withhold 15%, so in that case would be 33.2835%.)

Therefore, it probably doesn't warrant using the Tokutei Kouza for Foreign Equities, unless you are willing to pay the additional 7.9685% or 12.9685% tax to avoid having to do the paperwork. (Very low amount.. maybe...)

Outside of a Tokutei Kouza, if your total income other than employment income or pension income is less than Y200,000, then you need do nothing, as taxes have been withheld (too much, but...).

But you only need to pay a total of 20.315%... So you don't want to do that...

Leaving the only option of Separate Taxation Method 申告分離課税 - Form B Pages 1&2 And Page 3.

At the time of the Kakutei Shinkoku (March - April), only Japanese National and Reconstruction Taxes are due at 15.315% (15% National, 0.315% Reconstruction),
and the 5% Residents' Taxes will actually be charged to you in the next year's Residents' Taxes (July to June of the following year.), so are not collected at this time.

As you have already had the Taxes withheld, you should receive a Gensenchoshuhyo from your Broker, the information from which you enter in the Kakutei Shinkoku for Credit.

They will credit you for the 18.2835% withheld
You then claim back, and they will credit you for the Foreign Tax Credit 10% or 15%, depending on country (Form B - Page 1 - Item 46)
So you will receive total credit for the full 28.2835% or 33.2835%...

They will then only charge you the 15.315% National and Reconstruction Taxes
so you would receive a refund of 28.2835% - 15.315% = 12.9685%
or 33.2835% - 15.315% = 17.9685%
(Refund $12.97 per $100)

Then, the 5% Residents' Taxes will actually be charged to you, less the Foreign Tax Credit of 30% of the 10% or 15% in the next year's Residents' Taxes either in Payroll or in 4 Juminzei installments (July to June of the following year.)

[TBS]

..

This is good info but this bit is incorrect (and I think we've discussed it before on another thread):

If your total income other than employment income or pension income is less than Y200,000, then you need do nothing, as taxes have been withheld (too much, but...)

...

If your total income other than employment income or pension income is more than Y200,000, (or you want to only pay 20.315%...) then you must file your Kakutei Shinkoku, even though taxes have been withheld.

For Tokutei with tax withholding, it is not necessary to do a Kakutei Shinkoku for it even if the income is above ¥200,000. Moreover I don't think it is a good idea to conflate discussions like this with the ¥200,000 miscellaneous income limit, as it is not available for freelancers, part-timers etc. Unless it gets mentioned specifically people may get confused about it.

The Aggregate Taxation Method Dividend Allowance is designed to only partially offset the higher tax of higher marginal bands, so that holders of Japanese Equities would not have to file a Kakutei Shinkoku, but this is not to their benefit if total income is about Y6M. (I calculated this somewhere else), and is specifically disallowed for foreign dividends, so the Separate Taxation Method has to be used. (Form B, Pages 1&2 and Page 3.

This is a good point - the dividend allowance (配当控除) isn't available for foreign stocks. You can still do the Aggregate Taxation Method (総合課税) however with foreign stock dividends. It might make sense if someone has a low income and is in the 5% income tax band. Or as this first blog post adamu posted mentioned if you want to take advantage of the 配当控除 for Japanese stock dividends in your portfolio. Potentially it may make sense to sacrifice a little higher tax rate on the foreign stock dividends in some limited cases. As you say the separate taxation 申告分離課税 will be best for the majority of people on here.

This blog post adamu posted is not clear enough on the point that the 配当控除 isn't available for foreign stocks I feel. This one I posted is better for that.

[Tkydon]

I have tried to re-word. Please check it and let me know if this is better. Thx.

[adamu]

Thanks TBS, I was going to make the same comment about aggregate taxation for those on low incomes. Especially as it's the first sentence in the post and it's incorrect. But I spent the whole weekend researching this and was pretty burnt out yesterday

As we're on the topic of aggregate/separate taxation, there is another spanner in the works.

It appears that you can choose to leave the residence tax part of the dividend income as "undeclared" / 申告不要 meaning that rather than being calculated under the information in the tax return, the tokutei kouza handles it. This is the method recommended in the first post I mentioned and that TBS also mentioned above.

What I can't understand is if that is really allowed when claiming the foreign tax deduction. Because as I (and Tkydon) said above, when claiming the tax deduction, the amount of Japanese tax needs to be recalculated based on the full dividend *before* the foriegn tax was deducted. However, if you leave the residence tax as undeclared, then it will be the tokutei kouza's 5% of the dividend after the foreign tax was deducted, even though the foreign tax was credited back in the tax return. I've not found any information discussing this case. For national income tax, this would be like claiming the foreign tax deduction, but not declaring the income on the tax return (case 3 in my post above).

[Tkydon]

I would say it makes huge sense to leave the dividend income as "undeclared" / 申告不要 for Residents' Taxes if you were choosing to use Aggregate Method for taxation of Japanese Dividends; instead of 10% you would only pay the withheld 5% residents' Taxes, which along with the Dividend Allowance for Japanese Dividends would reduce the taxes for low income investors.

However, if you choose not to declare it, you cannot claim the Foreign Tax Credits. The Broker cannot do that for you.

However, if you are going to use the Separate Taxation Method, it doesn't make that much difference; 5% Withholding vs 5% Separate Method Residents' Taxes, but you do get the Foreign Tax Credits.