Withholding tax on fees paid by Japanese clients

Which work is covered

The scope is defined by a list in the Income Tax Act rather than by a general principle, which is why it can seem arbitrary. Fees to individuals for the following are typically within scope.

• Writing, translation and editorial work
• Design, illustration and photography
• Lecturing, teaching and appearance fees
• Licensed professional services such as tax accountants, lawyers and judicial scriveners

General software development is not on the list and is normally paid gross. Neither is consulting in the broad sense. Where a single engagement mixes covered and uncovered work, the split matters, and the client will usually ask you to itemise it.

Payments to a company rather than an individual are generally outside the domestic withholding rules. If you invoice through your own corporation, the deduction usually does not apply.

How the rate works

The rate is 10.21% on the portion up to one million yen, and 20.42% on the portion above it. The 0.21 and 0.42 are the special reconstruction income tax added to the underlying 10% and 20%.

The common error is applying the higher rate to the whole amount once the total passes a million yen. Only the excess is taxed at the higher rate.

Whether the calculation runs on the amount before or after consumption tax depends on how the invoice is presented. If the fee and the consumption tax are shown as separate lines, the withholding applies to the fee alone, which is the outcome you generally want.

Showing it on the invoice

Put the withheld amount and the net payable on the invoice itself. Doing so has two effects: the client's accounting department can process the payment without asking you to confirm the figure, and the amount that arrives matches a number you have already stated.

EchoInvoice calculates both when you enable withholding on the invoice form, including the two-tier rate above one million yen.

Getting it back

The withheld amounts are credited against your income tax when you file your return. If more was withheld during the year than you finally owe, the difference is refunded. For many freelancers with deductible expenses, a refund is the normal outcome.

Keep the payment statement each client issues. You will need the totals when filing, and reconstructing them from bank records alone is tedious.

If you are not resident in Japan

Different rules apply to non-residents and foreign companies, with rates that vary by the type of income. A tax treaty between Japan and your country may reduce or remove the deduction, but the relief usually requires a form to be filed with the payer before payment rather than claimed afterwards.

If you are invoicing from outside Japan, raise this before the first payment. Recovering an over-deduction after the fact is considerably harder than preventing it.