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How to deal with corporate taxes, payroll and accounting in Japan (Part 2 of 2)

Human Resources in Japan.

Welcome to our second part of this current overview of Japan’s corporate taxes, payroll and accounting. This post puts the focus on HR and payroll. As a small reminder from the previous post on the topic: Not only is the Japanese language a challenge to get around, but there is also a reason why no-one is interested in importing Japanese bureaucracy. Quite different from Kai Zen, JIT and other excellent Japanese inventions that are attractive to import and integrate by so many organizations. But, Japanese bureaucracy: No please. Be prepared and allow a minimum of two months to establish a payroll in Japan.

It is important that all business owners have at least a basic understanding of Japan payroll because:

  1. Your business must comply with all legal obligations.
  2. Japanese employees will have more confidence in your management team if you have a basic grip on how this works. How else will you be able to fruitfully discuss this vitally important topic?
  3. Understanding the Japanese payroll system is the foundation for tax planning for both expatriates and locally hired employees. (See a great link for tax-planning in Japan in the resource section below!)

Our conclusion is: Outsource your Japanese HR, payrolls and be done with the headache!

Like all countries, Japan has laws regulating labour and protection of employees. This will be more or less different from your country. The four main acts regulating the Japanese workplace are the following:

  • The Labor Standards Act
  • The Industrial Safety and Health Act
  • The Minimum Wage Act
  • The Equal Employment Opportunities Act

The Labor Standards Act sets out the rules for the working conditions. The Industrial Safety and Health Act aims at the workplace-safety and health of all workers in Japan. The Minimum Wage Act regulates the minimum wage that companies can pay their employees and the number differs in between different geographical regions. The Equal Employment Opportunities Act takes aim at removing inequalities of sex, age, ethnicity etc.

These laws apply to all enterprises in Japan. It makes no difference if the ownership is non-Japanese: if you’re on Japanese soil, you must play by the Japanese rules. These rules also apply to foreign workers in Japan provided that the foreign workers meet the criteria for workers under Japanese regulations.

Labour standards inspectors patrol workplaces in order to make sure that Japanese workers are safe and that all necessary systems are in place.

Recruiting empolyees in Japan – Hello Work

Hello Work is Japan’s government-run employment agency. They have offices throughout Japan and offers free support both for people looking for work and companies looking for employees. Hello Work covers all industries.

There are also some regional public organizations and educational institutions such as universities who also provide employment services for free.

There are also many privately-run employment agencies and head-hunters. The different flavours include executive search consultants, industry-specific agencies and general-purpose agencies. They come large and small. Often these companies will charge you on a contingency basis. Japan also has a wide range of job-transfer magazines that are made available in train stations and other places with a high throughput of people. There are also a number of Internet services where companies can advertise career opportunities and vacancies.

Contingency based fees: You pay when you hire someone from their database.

Recruitment restrictions in Japan

In most cases, as an employer, you are limited to selection criteria to be wholly based on whether the applicant has the necessary qualifications for the job you’re offering. An applicant’s nationality, family, religious beliefs etc can’t be used as standards when hiring.

Checklist for what needs to be in your Japanese job advertisement

  • Job description
  • Wage
  • The period of the agreement
  • If there’s a probation period, it must be specified
  • Workplace address
  • Start and finish times, overtime, breaks, days off and vacation.
  • Employee’s health insurance, pension, industrial accident compensation insurance and employment insurance
  • Name of the person who offers the job
  • If the employer recruits employees for worker dispatching undertakings, the fact that the employer does so.

It’s important to note that if you decide to not go along with an employee after the probation period, it will be seen as a dismissal. This means that you, as an employer, must have valid reasons on a higher level.

Japanese Law

Re-assignment, external assignment, and dispatch of workers to other companies

Reassignments where employees changes both cities and companies are common in Japan. It’s almost expected. However, you need a license for Worker Dispatching. Without such a license, you will be committing a crime if you engage in Worker Dispatching!

Worker dispatching, Contracting and Temporary Transfer are all possible and common in Japan but need to be carried out in complete accordance with laws and the local union.

Guarantee and guarantor for employees

When you hire someone, you can require that a guarantee of good conduct be provided by a relative of the worker or other guarantor. Such a guarantee is legally valid in Japan. A guarantee is deemed to be three years if not specified. The maximum time for a guarantor to take responsibility is five years.

Severance Pay Systems in Japan

In Japan, it’s customary with a severance pay system in place in companies. In Japan, this is triggered when an employee leaves a workplace and is a one-off payment. Such payments are also treated very favourably by the taxation laws.

Statutory working hours and statutory days off in Japan

The law states that statutory working hours should not exceed 40 hours per week or eight hours per day (excluding breaks). However, some businesses (retail, health, small restaurants etc) are permitted to have their employees work more.

Employees are granted statutory days off for at least one day per week, or four days off in any four-week period. Worth noting is that Sundays or public holidays are not by any means automatically days off. Any weekday may be selected as individual employees’ regular day off.

Requirements for having your Japanese personnel work extra overtime

If you need your personnel to work outside of the statutory working hours and days off, you must submit a Notification of Agreement on Overtime and Work on Days off. This means up to 15 hours a week or 360 hours in a year.

Overtime payment follows a strict percentage increase depending on many factors. It commands an increase in salary between 25% to 75%. It’s worth mentioning that executives and managers are excepted from the rules surrounding overtime.

Maternity, childcare and family care leave in Japan

Expectant mothers can request a leave of absence six weeks before the expected date of delivery and as an employer, you must approve such a request. Employers are also prohibited to make a woman go to work before eight weeks after giving birth.

Childcare leave in Japan means that a mother has the right to stay home up until 14, 18 or 24 months depending on circumstances.

An employee with a child aged less than three years old can request to be exempted from non-scheduled work and is allowed to request short-time working.

An employee who has a family member with nursing care can request permission for a leave of absence to provide the care. It’s legally capped at three times and a total of 93 days per family member concerned.

Up to 10 days per year, employees can be absent on order to nurse a child or to take care of family members.

Worth noting, all the mentioned periods of leave may be unpaid by the employer but can reap some benefits under the health insurance coverage employment insurance coverage.

Work rules in Japan

Each workplace sets its own working conditions such as working hours and wages, as well as general rules. If you have over 10 regular employees, you must submit the work rules to your local Labor Standards Inspection Office.

Work rules in Japan have the same legal force as labor contracts.

A checklist for your minimum Japanese Work Rules:

  • Start and finish times, breaks, days off, leave of absence (including childcare and family care leave), and work shift arrangements where work is to be performed by two or more teams of workers.
  • Methods of determining, calculating and paying wages (excluding special bonuses and other pay), wage closing day of payroll and payday, as well as matters pertaining to wage raise.
  • Matters pertaining to resignation or dismissal (including grounds for dismissal).
  • Any arrangements established regarding the following matters must be included in the work rules:
  • Retirement allowances
  • Extraordinary wages, etc.
  • Responsibility for meal expenses, etc.
  • Safety and hygiene
  • Job training
  • Workers’ accident compensation
  • Awards and disciplinary measures

Safety and hygene in the Japanese workplace

All new employees must have a health-check that is then carried out annually or biannually depending on a number of circumstances. If you have over 50 employees, you need to appoint a Health Officer and hire an Industrial Physician for various matters. With over 50 employees you also need to perform annual stress checks on your personnel.

Resignation and dismissal of employees in Japan

Resignation can be done by two weeks notice unless a reasonable time-frame is stipulated in other ways. Resigned workers are prohibited by law to help competitors by sharing company secrets.

Dismissal of employees is difficult in Japan and in case of a dispute, it is always the employer who carries the burden of proof. The dismissal comes with a number of vague rules and very real potential legal challenges. The general advice is to get thorough advice before attempting to dismiss an employee protected by Japan’s legal system. There are four legally approved grounds for dismissal of personnel:

  • Necessity from business circumstances, with the company showing that redundancies are unavoidable and necessary.
  • An effort to avoid redundancy. The company must prove serious undertakings to avoid redundancies.
  • Reasonable selection. The company must prove fair and reasonable selections of redundancies.
  • Reasonable process. This means sufficient consultations were made with workers and labour unions.

Dismissal can not be carried out in case an employee is absent because of disease, caring for children or family members. Whistle-blowing is not a reason for dismissal.

In all practicality, dismissals in Japan are usually by an employee’s free decision and usually comes with added bonuses and a severance pay with a golden tinge.

Resignation and dismissal of Directors in Japan

The office of directors in joint-stock corporations terminates upon expiration of their term of office. Directors may also resign at their own discretion. However, if it causes a vacancy in the position, a director may not be released from his/her obligations until a new director takes office.

Directors might be dismissed by the General Meeting of Shareholders regardless of reasons. However, a premature dismissal of a director without any justifiable reason means the company must pay for damages.

The Social Security System of Japan

Many countries have Social Agreements already in effect with Japan. The agreements cover pension and medical insurance. Each country has different agreements and you can find your own country in the list of Table 4-9 here. Furthermore, your embassy or international trade organization can provide you with the exact details.

This heading is in itself enough to write several books about. We, therefore, provide only a bullet-list in order to help you as a reader to draw your own conclusions on what must be managed and find the specific information you need using search engines.

  • Labour and social insurance systems
  • Workers’ Accident Compensation Insurance
  • Employment Insurance
  • Health Insurance and Nursing Care Insurance
    • Medical expenses
    • Overseas expenses
    • Excessive medical expenses
  • Employees’ Pension Insurance
    • Old-age pension
    • Disability pension
    • Survivor’s pension
  • National Health Insurance Scheme
  • Corporate Expenses for employee-related taxes, insurances etc

There is a great and comprehensive overview available on this topic on Jetro’s website that you can visit here including highly useful flowcharts on Insurance and Annual procedures.

Payroll in Japan, the perks and the jerks

Paying your Japanese employees their salary

Employees are usually paid on the 25th of the month in Japan but your company can fix a different date if you so wish.

Employees also usually get reimbursed for their commuting costs. However this is not an obligation, but may be expected.

Salaries and bonus in Japan

The minimum wages in Japan can be found here!

Salary Revision is performed once per year.

It’s customary in Japan to pay monthly salaries and two yearly bonuses: One Summer bonus and one Winter bonus. The monthly wage usually includes a basic wage and a range of allowances. The amount paid in bonuses may come as a shock: it makes up a high proportion of the total wages paid, equalling on average across industries almost 5 months of wages.

The Japanese employee expects both Summer and Winter bonuses, totalling somewhere around 5 months of ordinary monthly pay.

average over a range of industries

The high proportion of the wages made up of allowances and bonuses lower the rate of pay for overtime pay. Yearly wage systems are in place, but mainly for management-level employees.

Japan yearly bonus system for dummies

The Japanese bonus system often causes confusion for non-Japanese companies attempting to understand the Japan payroll system. First of all, the traditional Japanese Summer and Winter Bonus system is deeply rooted in tradition and has nothing to do with any kind of performance bonus systems. According to some sources, Japanese companies take an employee’s annual compensation and divide it by 16. The employee then receives 1/16th of their annual salary each month except in June and December. In June and December (or January), the summer and winter bonuses are paid. meaning that, in June and December, employees receive 3/16ths of their annual salary.

Please note that there are other ways of calculating the Japanese summer and winter bonuses! There are also differences between different industries and between different types of employees.

Foreign firms in Japan often simply divide the annual compensation by 12 and pay the same amount every month. This is not met with any kind of concerns or negativity from Japanese employees. Meaning, you are welcome to do what suits you the best.

Don’t forget: bonus or no bonus must be indicated in your employment agreement.

Year End Bonus payment and Year-End Adjustment

In Japan, you must calculate the tax liability of each employee at the end of each year and adjust for the tax due on the last salary payment. This is called Year-End Adjustment. Since this process is complex and takes time, the common practice for December bonuses is to pay the December bonuses early in the month as in before December 8. Many companies instead chose January for the Winter bonus payments. A Winter bouns paid in January can still be considered as an expense for the previous fiscal year even if the company ends its fiscal year in December.

Year-End adjustment on employee withheld income tax

The Year-End Adjustment is for the calculation of the income tax due by the employee. During the year, employee tax is withheld each month from employee salary based on the rates published by the tax office. At the end of the year, we calculate the exact tax liability of the employee based on her/his special situation (such as the number of dependents) and we make an adjustment so that the total amount of tax withheld during the year equals the tax liability of the employee. The amount of tax withheld from employees is reported annually in the withholding tax report “Gokeihyo” filed in January.

There are three main payroll taxes in Japan: National and Local tax, Social Insurance and Labour Insurance

  1. Japanese individual income tax, national tax and Residential (local) tax
  2. Japanese social insurance.
  3. Japanese labor insurance.

Employee National tax liability is calculated by the company, deducted from the salary and paid to the proper authorities.

Employee Residential tax liability. This is a local tax that is calculated by each employee’s respective ward office of the residence of the employee. This tax can be paid by the employees themselves. However, employees usually ask their companies to have this tax deducted from their salary instead.

Social Insurance mainly consists of a statutory retirement contribution, National Health Insurance, and a long-term care premium. The employer generally matches the employee contribution. This provides your employees with Social Insurance cards that give them a 70% discount on any medical health care costs. This universal coverage for employees in Japan is very good and your employees are usually satisfied with it. This means that your employees will not need any additional health care benefits. There are two prominent groups of the Japanese social insurance system: 1) Social insurance which is consisted of Health Insurance, Nursing Care Insurance, and the Welfare Pension Insurance, and 2) Employment Insurance and Worker’s Compensation Insurance.

Health Insurance and Welfare Pension need to be paid in Japan as soon as your company has more than one employee, including officers. However, if you have a representative office in Japan, this limit is from 5 employees and participation in the Japanese Social Insurance before that is voluntary.

Japanese labour insurance is a program that consists of workers’ accident insurance and unemployment insurance. Employers and employees both contribute to this program, but not equally.

Payroll taxes are paid monthly and Labor Insurance is paid on a yearly basis.

Paying the taxes for your employees. The set date is the 10th of the month following the salary payment. If your company has less than ten employees, you can make a request to your tax office called “noki no tokurei” and instead pay the tax only twice a year.

Resident tax adjustment

For your employees with monthly resident tax, new resident tax payment slips are delivered by your tax office. This is done in June each year, meaning that you can update the amount of resident tax to be deducted from each employee’s salary. The resident tax deduction is based on the taxable income for the previous year. Resident tax is usually somewhere around 10% of the previous year’s taxable income. Resident tax is paid only for employees who were residents of Japan on January the 1st and had a taxable income in Japan in the previous year.

Tax returns in Japan

Unlike most Western countries, a majority of Japanese employees do not need to file annual individual income tax returns. This is because all of your employee’s tax obligations are already managed via your corporate payroll.

Paid Vacation in Japan

In article 39 of the Japanese Labor Law, it states that there’s a minimum amount of paid vacation that you, as an employer, must grant your employees. The number of days of paid vacation earned is based on how long someone has worked in your company:

If you have worked for at least: 6 Months, you get 10 a minimum of days paid vacation.
1.5 Years -> 11 days
2.5 Years -> 12 days
3.5 Years -> 14 days
4.5 Years -> 16 days
5.5 Years -> 18 days
6.5 Years -> 20 days

Nota bene: An employee must have worked over 80% of the time he/she has been hired.

Employees may accumulate up to two years of unused paid vacation. After two calendar years, any unused paid vacation is forfeited. For example, an employee with two and a half years of employment may accumulate a maximum of 23 days of paid vacation.

Public holidays in Japan

January
1st New Year’s Day
9th Coming-of-age Day
February
11th National Foundation Day
March
20th Vernal Equinox Day
April
29th Showa Day
May
3rd Constitution Memorial Day
4th Greenery Day
5th Children’s Day
July
3rd Monday of July Marine Day
August
11th Mountain Day
September
3rd Monday of September Respect for the Aged Day
22nd Autumnal Equinox Day
October
2nd Monday of October Health-Sports Day
November
3rd Culture Day
23rd Labor Thanksgiving Day
December
23rd The Emperors Birthday

The Japanese corporate taxation calendar

Monthly

10th Withheld national tax, local tax and Social Insurances are paid to your Japanese tax authority.

15th Provide the current month’s payroll information to your Japan payroll provider.

20th The Japan payroll provider sends a breakdown of that month’s payroll and instructs the funding needed for the payroll account.

25th (at the latest) Funds are required to be in place.

25th (or other decided date) Funds are remitted directly to each employee’s personal bank account. Pay-slips are provided to each employee.

Annualy

January: Filing your annual withholding report of the amounts withheld from employees’ salaries (for both national and local taxes) during the previous calendar year.

May: Annual labor insurance report.

May: Annual labor insurance premium is paid from the company’s bank account. This is paid as a prepayment of one year’s estimated labor insurance premiums.

August: Filing of the annual social insurance report.

December: Year-end adjustment of the Japan payroll. This is very important as, for most of your Japanese employees, it replaces the need to submit a personal tax return.

Payroll conciderations for non-Japanese employees and expatriates

If you expect to employ non-Japanese expatriates, you could consider paying them offshore. Your expatriate employees may enjoy significant individual tax benefits in this way. This way of paying salaries are covered in the Japan taxing system: Tax Planning for Foreigners Working in Japan. (See very useful link in the resources below!)

It’s important to keep in mind that your employees who are paid offshore are not considered to be a part of the Japanese payroll system. Meaning that you need to make arrangements for matters such as health insurance, pension etc. One important addition is that employees paid offshore usually need to submit Japanese individual income tax returns by March 15 regarding their earnings etc from the previous calendar year.

As your employee’s home country may have tax laws either prohibiting such measures or making them costly, special care needs to be taken before deploying this solution.

Checklist: Registrations your company need to make in Japan

Registration for Withholding Tax is a notice to the Japanese tax authorities. Your company will be assigned a withholding tax number upon registration with both the national and local tax offices.

Registration for Japanese Social Insurance is managed by the Japanese Social Insurance Office. Under normal circumstances, both the employer and employee make contributions to the program in equal amounts. Social insurance is very important. Your employees will expect that you manage their social insurances through the company payroll. Please remember that it can take up to two months to register your company for social insurance, your employees may be left without coverage during the application period. You need a solution for that! Here are two possible solutions:

  1. Health insurance coverage through your employees’ former employer. This can be possible for up to two years.
  2. Coverage through the national system for individuals. Your employees may receive interim coverage as individuals. Application is submitted at their local city office.

Registration for Japanese Labor Insurance is with the Labor Insurance Office for Japanese Labour Insurance. This system requires contributions from both the employer and employee. Registration is a relatively fast process.

Your company will need a Bank Account in Japan. It’s used to transfer the salaries to your employees. It’s also necessary for your payments to the Japanese tax authorities as these costs are deducted directly from your company bank account. Japanese bank accounts can be difficult and time-consuming to establish for new companies. It is strongly recommended that you ask your accounting firm or lawyers for a referral. A small note on Japanese corporate banking: There is more than one story out there mentioning “alternative service” and inefficiency from within Japanese banks, so prepare well and in good time! To my knowledge, there aren’t any Japanese banks that provide their Corporate Internet services in English. Go figure!

The solution is of course to use a non-Japanese business bank present in Japan. However, you will still need a Japanese bank account for tax payments and salaries.

Conclusion

As Japanese HR comes with what may very well be this World’s most complicated grounds for the calculation of wages, allowances, bonuses, a plethora of insurances to manage with taxes and social payouts on top of that, there is a reason why many non-Japanese entities decide to outsource this part. If payroll isn’t part of your core business and doesn’t add value to your operations, maybe you should join the outsourcing companies. Keeping a strong focus on what really drives your business forward is usually the best choice.

It is also our standard recommendation to outsource this bureaucracy together with the rest of your corporate taxation and accounting.

The perfect HRM, accounting and payroll shortcut: WeConnect Japan

The perfect shortcut

To make sure that your HMR and payroll are managed properly we suggest taking a look at weConnect Japan: https://goweconnect.com/japan These guys have over a decade of experience in helping foreign companies navigate setting up entities in Japan and dealing with all the local tax, finance, payroll, HRM and corporate secretarial compliance. Their services take management of the back office to the next level by using the latest international and domestic technology to create a customer experience never thought possible from an outsourcing provider.  Whether you are in the market for a provider or not, a 30-minute call with weConnect will leave you comfortable to take the next step in entering Japan. They’re Americans, meaning you will not be lost in translation.

(Manifestum currently has no affiliation with WeConnect Japan, we simply like them as they provide the best available outsourcing solution in Japan today.)

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from qualified professionals.

Great resources:

Tax Planning for Foreigners Working in Japan

weConnect Japan

JETRO

EU-Japan Centre

Japan’s 2015 Tax reform outline (pdf, 127 pages).

Featured image byline:

Attribution: Alpha Stock Images – http://alphastockimages.com/

Original Author: Nick Youngson – http://www.nyphotographic.com/

Original Image: http://picpedia.org/handwriting/h/human-resources.html

Author: (C) Copyright Manifestum AB

Our mission is to help European companies establish presence, products or services in the Japanese market. We help you with what you need: research, due diligence, analysis, strategies, networking, opening doors, certification, conformity, meetings, preparations, bureaucracy etc. Manifestum AB is a Swedish company. This means co-operation is simplified for our European clients in areas such as payment (invoicing in €uro) and cultural aspects.