Tax treaties: Avoiding double taxation

Have you ever heard of a tax treaty before?

In Japan when you are considered a resident you need to pay taxes on the total amount of income from within Japan and from any other countries you have sourced income.

You may be wondering - if your a resident of Japan and have some income in the US - do you have to pay taxes both in Japan and the US?   

The answer is half YES, half NO.

Yes because when you calculate your taxable income in Japan, each time you need to combine your US income and Japanese income. This process is important as the system of income tax is progressive taxation (the tax rate increases as the taxable amount increases.)

No, if; a portion of the tax that you have already paid in the United States can be specially deducted from the income tax within Japan. It falls under the prescribed details of the 'Tax Treaty'.

When tax treaties are applied as below for individuals:

                          Income source (country)       Japan       USA

    Country        Japanese resident                       -            〇

of resident      American resident                        〇            -


The consideration of tax treaties applies when the country of resident and the country where you earn your income (referred to as source country) are different.

It should be noted here that the examination standard is not based on nationality. For example, if you hire a person from the US, you do not have to consider tax treaties if he/she is a Japanese resident and has income only in Japan.

It's a popular misconception lately for some people to decide several things based only on contents of tax treaties, ignoring Japan’s domestic law. Certainly, tax treaty provisions override conflicting domestic law provisions. However you should revise decisions based on tax treaties after considering the domestic law, otherwise you may end up paying more than the tax you avoided.   

The purpose of the tax treaties are to provide relief from double taxation but be careful about exemptions of tax.

David Otani