Japan Tax Office wants me to file Japanese tax return first before filing U.S. tax return

[Nattokin]

This just in.... I discovered the following in the technical explanation:

Paragraphs 1 and 2 of Article 17 are subject to the saving clause of subparagraph 4(a) of Article 1 (General Scope). Thus, a U.S. citizen who is a resident of Japan and receives a pension, a social security payment, or an annuity payment will be subject to U.S. tax on the payment. However, paragraph 3 of Article 17 is not subject to the saving clause, by reason of the exception of paragraph 5 of Article 1...

Wow! Seems like it couldn't be clearer... Because of the saving clause, the US right to taxation wins out over Japan's right to taxation for Social Security! Accordingly, a U.S. citizen who is a resident of Japan and receives a pension, a social security payment, or an annuity payment will be subject to U.S. tax on the payment.

Again, please let me know if I'm misreading things. I want to figure this out.

[Tkydon]

Hm-m-m-m... This still is not settled in my mind. Far from it.

Today I have been looking at the Technical Explanation of the US-Japan tax treaty,
https://www.irs.gov/pub/irs-trty/japante04.pdf.
It was recently brought to my attention, and the following sections have me wondering.

First, here's what it says regarding exceptions to the Article 1 saving clause:

Article 1, Paragraph 5

...Paragraph 5 sets forth certain exceptions to the saving clause that preserve these benefits for residents of the Contracting States and, in the case of the United States, citizens of the United States. Under paragraph 5, the following provisions of the Convention are applicable to all residents of the Contracting States and, in the case of the United States, citizens of the United States, despite the general saving clause rule of subparagraph 4(a):
...
(3) Paragraph 3 of Article 17 (Pensions, Social Security, Annuities, and Support Payments) provides exemptions from taxation by the Contracting State of source or the Contracting State of residence in certain circumstances for periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support.

It says nothing whatsoever about Paragraph 1 of Article 17 being an exception to the saving clause. The way I read it, only Paragraph 3 of that article seems to be an exception. Right?

If so, then Tkydon's assertions, above, that

"As Article 17 says Zero US Tax on Social Security for Japan residents, there is no Foreign Tax Credit in Japan on Social Security... i.e. not taxable in the US for residents of Japan, who are non-US Citizens or Green Card Holders"

would seem to incorrect. The saving clause would seem to take precedence over Article 17, Paragraph 1. At least I think it does. Can anyone demonstrate otherwise? If so, please read through the technical explanation and show me where I'm mistaken. I'd like to know.

Continuing on, here's what the Technical Explanation says regarding Article 23:

Article 23 (Relief from Double Taxation)
This Article addresses the manner in which each Contracting State undertakes to relieve double taxation. The United States uses the foreign tax credit method under its internal law and by treaty.
Paragraph 1
Japan agrees, in paragraph 1, to allow to its residents a credit against Japanese tax for U.S. taxes. For this purpose, the U.S. taxes covered by subparagraph 1(b) and paragraph 2 of Article 2 (Taxes Covered) are U.S. taxes. Under subparagraph (a) of paragraph 1 of Article 23, where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with this Convention, the amount of U.S. tax payable in respect of that income is allowed as a credit against the Japanese tax imposed on that resident. The amount of credit, however, shall not
exceed that part of the Japanese tax which is appropriate to that income.

This part seems key: Japan agrees to allow to its residents a credit against Japanese tax for U.S. taxes... (and) where a resident of Japan derives income from the United States which may be taxed in the United States in accordance with this Convention, the amount of U.S. tax payable in respect of that income is allowed as a credit against the Japanese tax imposed on that resident.

Responses, please. I want to figure this out.

Article 17 says (for non-US Citizen / non-US Green Card Holder)
Social Security paid by the US to a Resident of Japan is Only Taxable in Japan. It is not taxable in the US. Zero Tax in US.

This means, (for non-US Citizen / non-US Green Card Holder) there is no US tax Liability under Article 17. Zero.

Article 1-4(a) says, Oh, But it is taxable in the US for a US Citizen / US Green Card Holder...

Article 23-1 says, If there was a Tax Liability under the Treaty in the US (like for dividends, etc.), then Japan would honour that % stated in the Treaty and provide a Foreign Tax Credit for the Tax paid in the US up to that agreed % in the Treaty.

But in the Treaty Article 17, Zero is allowed, so Zero is the Foreign Tax Credit in Japan...

Article 23-3 says, In the case where a US Citizen Resident of Japan is affected by Article 1-4, the US will grant a Foreign Tax Credit (on the US side) to compensate...

"Article 23
3. For the purposes of applying the preceding paragraphs of this Article, where the United States taxes, in accordance with paragraph 4 of Article 1, a citizen, or a former citizen or long-term resident, of the United States who is a resident of Japan:
(a) Japan shall take into account for the purposes of computing the credit to be allowed under paragraph 1 only the amount of tax that the United States may impose on income under the provisions of this Convention that is derived by a resident of Japan who is neither a citizen, nor a former citizen nor long-term resident, of the United States;"

In this case, this is Zero - Article 17 says Zero.

"(b) for the purposes of computing the United States tax on income referred to in subparagraph (a), the United States shall allow as a credit against the United States tax the Japanese tax after the credit referred to in that subparagraph; the credit so allowed shall not reduce the portion of the United States tax that is creditable against the Japanese tax in accordance with that subparagraph; and"

But there is No Foreign Tax Credit in Japan, as (a) above, So,

"(c) for the exclusive purpose of allowing the credit by the United States provided for under subparagraph (b), income referred to in subparagraph (a) shall be deemed to arise in Japan to the extent necessary to allow the United States to grant the credit provided for in subparagraph (b)."

The US Social Security shall be deemed to arise in Japan ... to allow the United States to grant the credit, as in Article 17, the tax payable in the US should be Zero...

In actual fact, the tax payable in the US should only be the excess over the Taxes Paid in Japan at Marginal Rate National and reconstructions Taxes, and 10% residents' Taxes on Total Taxable Income after all Allowances and Deductions, including the Japanese Public Pension Deduction.

This should also then apply to Interest Income, as under Article 11-1, the tax allowed on the US Side (for non-US citizens, etc..) is also Zero.

And the tax assessed in the US on Social Security before the application of the Foreign Tax Credit under Article 23-3(c) should be subject to the Low Income Social Security Exclusion, depending on the level of your other income from Government Service Pension (Zero Tax in Japan, so no Foreign Tax Credit in the US) and interest income...

The IRS will allow the US Social Security Income and Interest Income, which in reality is US Sourced Income, to be reassigned as Japan Sourced Income using
IRS Form 1116
for the purpose of applying for the US Foreign Tax Credit to eliminate the Double Taxation.

[Tkydon]

This just in.... I discovered the following in the technical explanation:

Paragraphs 1 and 2 of Article 17 are subject to the saving clause of subparagraph 4(a) of Article 1 (General Scope). Thus, a U.S. citizen who is a resident of Japan and receives a pension, a social security payment, or an annuity payment will be subject to U.S. tax on the payment. However, paragraph 3 of Article 17 is not subject to the saving clause, by reason of the exception of paragraph 5 of Article 1...

Wow! Seems like it couldn't be clearer... Because of the saving clause, the US right to taxation wins out over Japan's right to taxation for Social Security! Accordingly, a U.S. citizen who is a resident of Japan and receives a pension, a social security payment, or an annuity payment will be subject to U.S. tax on the payment.

Again, please let me know if I'm misreading things. I want to figure this out.

From a similar discussion in 2022..

Unfortunately, things aren't that simple. It seems you are (mis-)interpreting the treaty as if the U.S. Savings clause in article 1, paragraph 4

It isn't giving U.S. exclusive rights to tax you for anything. What it is stating is despite the income being taxable in Japan, you as a U.S. Citizen can be taxed on the same income unless it is specifically excluded in paragraph 5. However, in article 23, foreign tax credit, it explains the complicated rules of claiming foreign tax credit from one country or the other or a little bit of both to reduce or eliminate the double taxation. However, each country has its own rules on the limits of the foreign tax credit that you can claim in the tax year.

Article 23 paragraph 1 covers Japanese foreign tax credit.

There is none in this case.

Article 23 paragraph 2 covers U.S. Foreign tax credit.

Article 23 paragraph 3a states Japan will only give tax credit that it would give for income that would have been taxed by the U.S. if you were not a U.S. Citizen. From a practical manner, it means the usual U.S. retirement account distribution and U.S. bank interest and capital gains on stocks has 0% tax withholding so Japan will give no foreign tax credit for those income. For dividend on common stocks, the withholding rate is usually 10%. So for dividends, you must claim foreign tax credit in the Japanese tax return for the first 10% of your U.S. income tax and if the tax exceeds 10%, you must claim that from the U.S. tax return on Form 1116, certain income re-sourced by treaty category.

Article 23 paragraph 3b states explains U.S. will provide foreign tax credit which could not be claimed from Japan under paragraph 3a within its rule.

Article 23 paragraph 3c states U.S. will allow reassigning the portion of U.S. income that could not be credited by Japan in paragraph 3a to the extent the foreign tax credit can be claimed within its rule if the excess tax was a result of the U.S. savings clause in article 1 paragraph 4. In other words, if you're taxed by the U.S. more than a non-U.S. citizen living in Japan, that excess is creditable by certain income re-sourced by treaty category in IRS Form 1116.

That would be 100% of the US Tax paid on Social Security as Article 17 says Zero.

It sounds great so far doesn't it. In a perfect world, no double taxation will happen as explained but the issue is that the way the limit of foreign tax credit works, you end up with carry back and carry forward on unused foreign tax credit for the credit you couldn't claim for any given year. For U.S., it isn't that bad 1 year back and 10 year carry forward but practical reality is that once you start carrying back and your tax situation doesn't change a lot, the odds of getting these unused carry forward to expire eventually is very high and when that happens, you're double taxed.
...
In the best case scenario, you are able to use every foreign tax credit and you end up paying the higher of the two tax as your total tax burden plus few thousand dollars for tax accountant to do this hopefully correctly. But average case is it'll be higher due to unused foreign tax credit expiring.

emikami was describing Japan Foreign Tax Credits for income that was taxable under the Treaty. Again, not relevant here as Japan Tax Credit is Zero.

He then goes on to talk about the Income related part of the Japanese National Health Insurance Premium.

For national health insurance, the rates and limits vary depending on municipality but for those age 40-64, it is about 12% + a fix amount per person and for those age 65+ it is about 10.2%.

The difference is that those age 40-64 pay extra 1.8% for kaigobun (long term care insurance). The limit before the premium reaches maximum varies but 600,000 yen to 850,000 yen seems common. While this is a tax and it is based on income, it is a tax with a service aspect to it (health insurance). Therefore, it is not eligible for foreign tax credit. But it is counted for shakai hoshyo hoken ryo kojo (Social insurance tax deduction) on your Japanese tax return. If you're under age 60, you must pay into their social security even if you aren't working but those payment are also counted as Social insurance tax deduction on Japanese tax return.

Side note: Obamacare premium model is very similar to Japanese National health care system. I wonder if Obamacare copied the Japanese system? In the U.S., most enroll in Medicare Part B and drug coverage thus their premium is going to be somewhat standardized and not increase until the income level reaches somewhere around $88,000 (single filer) or $176,000 for (married filing jointly). In the Japanese, system, the income based premium continues forever. 65+ is different from age 40-64 and there's also an age 75+ category as well but you still pay based on income level.

But, the the kaigobun (long term care insurance) is still charged after age 65+, but billed separately, so not included in the main Premium, but still charged...

Instead of getting one bill including kaigobun (long term care insurance) when all Insured persons are under 65, after (an) insured person(s) turn(s) 65, you will get multiple bills; one bill including kaigobun (long term care insurance) for all Insured persons still under 65, and a separate bill for kaigobun (long term care insurance) for each Insured person over 65+

[Nattokin]

Thank you.

I appreciate the detailed replies. Although it will take me some time to fully digest all of the above information, I now get the gist of it.

It would be extremely helpful if somewhere there were a simple, concise explanation, possibly in chart form, for various types of common income (US-source bank interest, US-source stock dividends, US-source mutual fund dividends, US-source CGD, US Social Security, Japanese nenkin, US-source retirement annuities, Traditional IRA withdrawals, Roth IRA withdrawals, 401k withdrawals, government pension income, etc) so each individual expat taxpayer didn't have to go through such time-consuming, convoluted logic/linguistic gymnastics simply to know what to do.

Like the OP on this thread, all I want to do is properly report my income to both countries, pay my fair share of tax, not have to pay for both a Japanese and US tax preparer (each of whom is often expensive yet unacquainted with the tax laws and reporting requirements of the other country), and -- most importantly -- stay out of trouble. Has anyone ever seen such clearly-presented information? If so, where?

And thanks, again!

[Tkydon]

Thank you.

I appreciate the detailed replies. Although it will take me some time to fully digest all of the above information, I now get the gist of it.

It would be extremely helpful if somewhere there were a simple, concise explanation, possibly in chart form, for various types of common income (US-source bank interest, US-source stock dividends, US-source mutual fund dividends, US-source CGD, US Social Security, Japanese nenkin, US-source retirement annuities, Traditional IRA withdrawals, Roth IRA withdrawals, 401k withdrawals, government pension income, etc) so each individual expat taxpayer didn't have to go through such time-consuming, convoluted logic/linguistic gymnastics simply to know what to do.

Like the OP on this thread, all I want to do is properly report my income to both countries, pay my fair share of tax, not have to pay for both a Japanese and US tax preparer (each of whom is often expensive yet unacquainted with the tax laws and reporting requirements of the other country), and -- most importantly -- stay out of trouble. Has anyone ever seen such clearly-presented information? If so, where?

And thanks, again!

I agree.

[Deep Blue]

And something similar for us Brits who couldn't care less about all the US stuff...

[Tkydon]

And something similar for us Brits who couldn't care less about all the US stuff...

I agree.

And the Canadians, and the Australians, and don't forget the ...s...

https://www.mof.go.jp/english/policy/ta ... st_en.html