US Government Pension Loophole

[richwings]

Background: I'm a former city employee who retired before moving to Japan on a spousal visa. I haven't been paying Japan's National Income tax but do pay City tax and Health Insurance to the tune of over 1 million yen/year. I was audited by the equivalent of the IRS last year and was told I owed a little more to the tax system. (no big deal). However, my tax accountant found during his research, that the majority of my income falls into a loophole in the US/Japan treaty, whereby the income from my pension will not be counted in Japan. I've already received a refund from the Japanese city I live in, of close to 3 million yen for the last two years of contributions. Going forward, my pension income will not count against me as income, which takes me down to the point where my wife is able to include me on her Health Insurance at no extra cost. All of this sounds good but I fear that years from now, I find out that all of this is a mistake and I will owe an exorbitant amount of back taxes. Is anyone out there a former US government pensioner who falls into this loophole?

[Snowcountry]

May I ask how long you have lived in Japan under your spousal Visa? I ask because if it is under 5 years, your US pension, income, whatever is not taxable in Japan as you are considered a Non-Resident.
However once in Japan past 5 years, and regardless of whether you renew your Spousal Visa or obtain a PR, your US income becomes taxable in Japan as a Resident. Pensions and Social Security Benefits also become taxable.
Is this the "loophole" to which you refer?
Because if not, I'd sure appreciate knowing what this loophole is.

[Tkydon]

However once in Japan past 5 years, and regardless of whether you renew your Spousal Visa or obtain a PR, your US income becomes taxable in Japan as a Resident. Pensions and Social Security Benefits also become taxable.
Is this the "loophole" to which you refer?
Because if not, I'd sure appreciate knowing what this loophole is.

In this case, this is incorrect.

This is NOT a loophole. This is the way the Tax Treaty works.

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf

Under Article 18 of the US Japan Taxation Treaty, all Government Service Pensions of any kind, National or Local Government, Military, Public Teaching, etc., are ONLY Taxable in the US, and are NOT Taxable in Japan, unless you are a Japanese Citizen, in which case they are only taxable in Japan.

You can go back and amend your Japan Tax Returns for the last 5 years and remove all Government Pension Income from the Returns, and receive a full refund for taxes paid on that income.
You will not receive a Foreign Tax Credit in the US, as no taxes should be paid on that income in Japan.


On the contrary, under Article 17 of the US Japan Taxation Treaty, other Pensions including US Social Security and other Pensions and Annuities are ONLY Taxable in Japan unless you are a US Citizen, in which case, under Article 1-4(a) they also become taxable in the US.
In this case, under Article 23-3(c), you have to reassign US Social Security Income from 'US Sourced Income' to 'Japan Sourced Income' using Forms 1116 and 8854 for the purpose of claiming the Foreign Tax Credit in the US against your US Taxes for the Taxes paid on your US Social Security Income in Japan.

In this case, US Social Security qualifies as a Public Pension for the purpose of claiming the Public Pension Deduction, upwards of Y1M in addition to your other Deductions and Allowances.

See Page 8 (Page 12 of the PDF) - Calculating the Public Pension Plan Deduction (Calculation Table)

https://www.tax.metro.tokyo.lg.jp/book/ ... k2024e.pdf

or Pages 22-23 here:

https://www.nta.go.jp/english/taxes/ind ... 024/01.pdf


Your Accountant should know this.

[Snowcountry]

Thank you. I have in fact read that Article 18 of the US-Japan Tax Treaty relieves the obligation to pay income tax on US Social Security benefits if one is a US citizen and not a Japanese national.
However I have tried countless times to find this wording in Article 18 to no avail.
Would you be good enough to post the relevant text? And where that can be found?
Thank you very much

[Tkydon]

Thank you. I have in fact read that Article 18 of the US-Japan Tax Treaty relieves the obligation to pay income tax on US Social Security benefits if one is a US citizen and not a Japanese national.
However I have tried countless times to find this wording in Article 18 to no avail.
Would you be good enough to post the relevant text? And where that can be found?
Thank you very much

No. I don't know where you read that, but that is categorically incorrect.

US Social Security does not qualify as a Government Service Pension, and as specifically stated in Article 18, is NOT covered by Article 18, but instead falls under Article 17.
Government Service Pension refers to any Pension payed by any Government Authority; Federal, State or Local Governent, to Retired Government Workers, Public Sector Teachers and Retired Military Personnel and Veterans (Military Pensions).

US Social Security is covered under Article 17, which says you MUST pay Japanese Taxes on US Social Security and any other US Pension or Annuity portion of your Income, with the exception of a Government Service Pension. If you were not a US Citizen, you would ONLY have to pay taxes on this income in Japan, BUT if you are a US Citizen you must also pay Taxes on US Social Security and other Pension or Annuity portion of your Income in the US..

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf

(bracket contents) included by me for clarity...

"ARTICLE 17
1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration, including Social Security payments, beneficially owned by a resident of a Contracting State (Japan) shall be taxable only in that Contracting State (Japan).

2. Annuities derived and beneficially owned by an individual who is a resident of a Contracting State (Japan) shall be taxable only in that Contracting State (Japan). The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during the life of the individual, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration, other than services rendered (employment income)."


So, if you were not a US Citizen, you would ONLY be taxed on US Social Security, Pension and Annuity Income in Japan.

However,

"ARTICLE 1
...
4. (a) Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4) and, in the case of the United States, its citizens."

So, the US Can Tax you US Citizens AS WELL! ;-(

Therefore, Article 23-3(c) Applies to reduce Double Taxation.

"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;

(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

(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)."



US Social Security is NOT covered by Article 18 which says, unless you are a Japanese Citizen, you ONLY have to pay taxes on the US Government Service Pension portion of your Income in the US, and that the US Government Service Pension portion of your Income in completely Tax-Free in Japan.
If you are a Japanese Citizen resident in Japan, you Only have to pay taxes on the US Government Service Pension portion of your Income in Japan, and that US Government Service Pension portion of your Income in completely Tax-Free in the US.

Again, Government Service Pension refers to any Pension payed by any Federal, State or Local Government Authority to Retired Government Workers, Public Sector Teachers, Retired Military Personnel, Veterans, etc..
It does not refer to US Social Security and any other US Pension or Annuity portion of your Income from any other sources.


"ARTICLE 18
...
2. (a) Any pension and other similar remuneration paid by, or out of funds to which contributions are made (funded) by, a Contracting State (US Federal Government) or a political subdivision or local authority thereof (State or Local Government in the US) to an individual in respect of services rendered to that Contracting State (US Federal Government) or a political subdivision or local authority thereof )State or Local Government in the US), other than payments made by the United States under provisions of the (so NOT) Social Security or similar legislation, shall be taxable only in that Contracting State (US).

(b) However, such pension and other similar remuneration shall be taxable only in the other Contracting State (Japan) if the individual is a resident
of, and a national of, that other Contracting State (Japanese Citizen residing in Japan).

3. The provisions of Articles 14, 15, 16 and 17 shall apply to salaries, wages and other similar remuneration, and to pensions and other similar remuneration, in respect of services rendered in connection with a business carried on by a Contracting State (US Federal Government) or a political subdivision or local authority thereof (State or Local Government."


Therefore, an employee of a business or company run by the government is not considered a 'Government Employee', but an employee of that business or companyand is therefore NOT covered under Article 18, but is instead considered an employee of that business or company and is therefore covered under Article 17.


I hope that clarifies the issue.
If you have lived in Japan for more than 5 years in the last 10 years, OR if you have lived in Japan for less than 5 years in the last 10 years but you remit funds to Japan in the Tax Year, US Social Security IS taxable in Japan.
A US Government Service Pension, US Military Pension or US Veteran's Benefits are NOT taxable in Japan.

[captainspoke]

Minor point, but social security--while not exempt as described above--is (at least?) classed as a public (公務的) pension.

[Snowcountry]

Thank you for the lengthy explanation. It corresponds to my understanding of US Social Security benefits and Japanese Income Tax Return.

[Tkydon]

Minor point, but social security--while not exempt as described above--is (at least?) classed as a public (公務的) pension.

Yes, explained in Message 3 in the thread.