Today, I’d like to explain about “Credit for Foreign Taxes” in a simple way.
1. What is credit for foreign taxes?
Credit for foreign taxes is a system that helps avoid double taxation. If you earn income in another country and pay income tax there, Japan allows you to subtract some or all of that foreign tax from your Japanese income tax. In other words, if you pay income tax to another country, Japan may let you use that amount to reduce your Japanese tax for the same year.
2. Limit on the amount you can claim
There is a limit to how much you can claim as a credit for foreign taxes.
It is calculated using this calculation method:
Limit = Your Japanese income tax × (Your foreign income / Your total income)
Only foreign taxes that meet certain conditions can be used as a credit for foreign taxes.
3. Carryover rules
If the foreign tax you paid is more than the limit, you can carry over the extra amount to future years(upto3years). If the foreign tax you paid is less than the limit, you may also use unused amounts from the past 3 years.
Here are two examples:
If the foreign tax you paid is higher than your credit limit, you may carry the extra amount forward and use it in the future.
If the foreign tax you paid is lower than your credit limit, you may use unused amounts from the past to fill the gap.
4. What you need to submit
To use the credit for foreign taxes, you must attach the following documents to your Japanese tax return:
A detailed statement for foreign tax credit (in Japanese: 「外国税額控除に関する明細書」)
A statement of credit for foreign taxes — a document that proves you paid tax to a foreign country, such as: a tax certificate or withholding slip from the foreign country
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