1 What is credit for foreign taxes?
Basically, residents have an obligation to pay income tax on incomes derived from both sources in Japan and sources abroad (See the “INCOME TAX GUIDE FOR FOREIGNERS” for resident status and the scope of taxable income.).
If a resident pays foreign income taxes in accordance with foreign laws and ordinances on the same income from sources abroad, there’ll be international double taxation.
In order to adjust this double taxation, a certain amount of foreign income taxes can be credited against Japanese income tax.
This system is called credit for foreign taxes.
2 Calculation of credit for foreign taxes
Foreign income taxes can be credited against Japanese income tax for the year in which foreign income taxes are to be paid.
However, the credit for foreign taxes is limited to the amount calculated by the following formula (hereinafter referred to as a “credit limit”). This means that the credit for foreign taxes is the amount of foreign income taxes to be paid in the year or the credit limit, whichever is smaller.
Note 1: The “Amount of Japanese income tax for the year” is the amount after applying tax credits such as credit for dividends, special credit for loans relating to a dwelling, and credit for officially proclaimed natural disasters.
Note 2:The “Total amount of income for the year” is the sum of the total income subject to aggregate taxation and incomes subject to separate taxation by filing (prior to applying special exemption).
If a resident has applied carry-over of net losses, carry-over of casualty losses or other carry-overs of losses, incomes concerned will be the ones before applying these deductions.
If the “Total amount of income for the year” is less than the “Total amount of income from sources abroad for the year”, the “Total amount of income for the year” will be treated as the same amount as the “Total amount of income from sources abroad for the year”.
Note 3: The “Total amount of income from sources abroad for the year” is the sum of the total income subject to aggregate taxation (excluding income from sources in Japan) and incomes subject to separate taxation by filing (excluding income from sources in Japan).
In the case of a non-permanent resident, the “Total amount of income from sources abroad for the year” is limited to income on which Japanese income tax shall be imposed.
Note 4: “Foreign income taxes” qualified for the credit for foreign taxes are taxes that are imposed on individual income by foreign governments or its local authorities in accordance with foreign laws and ordinances.
But the following taxes are not included in “foreign income taxes”, for example.
(a) A tax which a taxpayer can voluntarily claim a refund of after the tax was paid.
(b) A tax whose period of grace for payment can be decided voluntarily by a taxpayer.
(c) A certain amount of tax whose rate was determined from among multiple tax rates based on agreement between a taxpayer and foreign governments or its local authorities and so on.
(d) A tax which is equivalent to additions to a principal tax such as penalty and delinquent tax.
(e) A tax which is imposed on income derived from certain transactions which can’t be considered as usual ones.
(f) If a resident has a non-resident taxpayer period in and before the year, a tax which is imposed on income arising during this period.
(g) A tax which is not taken into account for calculating the credit for foreign taxes by a provision of tax treaties.
(h) If a tax rate applied to a certain income exceeds a limited tax rate provided by tax treaties, the excess amount of tax over the amount calculated by using the limited tax rate.
(i) In the case of a non-permanent resident, a tax which is imposed on income on which Japanese income tax is not imposed.
3 Credit for foreign taxes by carry-over
A certain amount of foreign income taxes can be credited against Japanese income tax for the year in which foreign income taxes are to be paid.
But a year in which income from sources abroad arises and a year in which foreign income taxes are to be paid do not always correspond with each other.
In order to adjust such mismatch of years, the difference between foreign income taxes and credit limits can be carried over to the following three years.
(1) If the conditions mentioned in both (a) and (b) below are met, the credit for foreign taxes by the carry-over mentioned in (c) below can be applied.
(a) Foreign income taxes to be paid in the year exceed the sum of the credit limit and the credit limit for local tax (30% of the credit limit for the year) for the year (the excess amount hereinafter referred to as an “excess over credit limits”).
(b) There is the credit limit within the preceding three years which is carried over to the year (hereinafter referred to as a “credit limit carried over”).
(c) The excess over credit limits for the year can be credited against Japanese income tax within the credit limit carried over.
[ Illustration ]
(2) If the conditions mentioned in both (a) and (b) below are met, the credit for foreign taxes by the carry-over mentioned in (c) below can be applied.
(a) Foreign income taxes to be paid in the year are less than the credit limit for the year (the balance hereinafter referred to as a “remaining credit limit”).
(b) There are foreign income taxes to be paid within the preceding three years which are carried over to the year (hereinafter referred to as “foreign income taxes carried over”).
(c) The foreign income taxes carried over can be credited against Japanese income tax within the remaining credit limit for the year.
[ Illustration ]
4 Adjustment when foreign income taxes are abated
If foreign income taxes are abated in and after the following year of a year in which credit for foreign taxes was applied to those foreign income taxes, the following adjustments are necessary in applying the credit for foreign taxes in the year in which the foreign income taxes are to be abated.
In the case of foreign income taxes abated on and after April 1, 2009, the adjustments are necessary, if foreign income taxes are abated within seven years from the following year of a year in which credit for foreign taxes was applied to those foreign income taxes.
(1) When there are foreign income taxes to be paid in the year and the foreign income taxes are more than the abated amount
(a) Deduct the abated amount from the foreign income taxes to be paid in the year.
(b) Then, apply the credit for foreign taxes to the result of (a).
(2) When there are no foreign income taxes to be paid in the year or foreign income taxes to be paid in the year are less than the abated amount
(a) Deduct the foreign income taxes to be paid in the year from the abated amount.
(b) Then, subtract the result of (a) from the excess over credit limits within the preceding three years.
(3) If there is still unadjusted amount in the abated amount after applying (1) and (2)
The unadjusted amount will be included in gross income of miscellaneous income for the year.
5 Procedure for applying credit for foreign taxes
(1) In order to apply the credit for foreign taxes, it is necessary to state the amount to be credited in the final tax return, the amended return or the request for a correction to the tax return (hereinafter referred to as “returns, etc.”) and attach the “Detailed statement for the credit for foreign taxes”, documents proving that foreign income taxes were imposed and a statement for the calculation of total amount of income from sources abroad, etc.
(2) In order to apply the credit for foreign taxes by the credit limit carried over or the foreign income taxes carried over mentioned in 3 above, the following procedures are needed:
(a) Have filed returns, etc. every year since the oldest year of years in which the carry-over has arisen and have stated the credit limit for each year and foreign income taxes to be paid in each year in each returns, etc.
(b) State the amount to be credited by the carry-over in the returns, etc. for the year in which the credit for foreign taxes by the carry-over is applied.
(c) Attach the “Detailed statement for the credit for foreign taxes” and appropriate documents mentioned in (1) above.
Note: As for the application of credit for foreign taxes for or before 2010, it is applicable only if the amount to be credited are stated in the final tax return and certain documents are attached to it.
（上記 国税庁ＨＰより引用）