Points to note for tax returns from 2016 onward
Under the 2015 tax reform, when claiming dependency deductions and similar deductions (dependency deductions, spouse deductions, disability deductions, or special spouse deductions) for relatives residing outside Japan in year-end adjustment, it became mandatory to submit (or present) to the withholding agent “documents proving family relationships” and “remittance-related documents” for those relatives. This time, I will explain the details as they stood at the time of the 2015 reform.
Background to the stricter verification of dependents
A dependency deduction is intended to ease the tax burden on people who support relatives. Supporting relatives who meet certain requirements allows individuals to deduct amounts from their income for income tax, resident tax, and similar purposes, reducing the tax payable.
When a relative for whom a dependency deduction is sought resides in Japan, local governments can determine such facts as the family relationship and whether the relative has income, regardless of whether the taxpayer and relative live together, because the relative is in Japan. When the relative resides outside Japan, however, it is difficult to verify the actual support provided, or even that the relative exists. Nevertheless, until then there had been no obligation to submit supporting documents for relatives living abroad, and there was no way to confirm the truth of the self-reported information in the “Declaration for Exemption for Dependents, etc.” Thus, in practice, the declarations were handled on the assumption that the information reported was true.
This issue had been pointed out for some time. In its Fiscal 2013 Audit Report, the Board of Audit of Japan, which audits national receipts and expenditures and other accounts, published findings on the dependents of about 1,300 people claiming income-tax deductions for supporting relatives abroad: Japanese nationals married to foreign nationals, and foreign nationals working in Japan. As a result, it became clear that about 69% had so many dependent relatives and such high deductions that they paid no income tax at all. In one case, income exceeded ¥10.62 million, and dependency deductions and the like for 21 relatives living abroad reduced taxable income to ¥0, resulting in a refund of more than ¥1.11 million in withholding tax, while remittances totaled only a little more than ¥730,000. By number of people, the Philippines accounted for about 70%, overwhelmingly the largest share (it is unknown which country was largest by amount). Furthermore, the Board of Audit formally pointed out that, because the submission of documents confirming family relationships and the like was optional, it was not possible to adequately confirm whether the deductions were appropriate. This led to the present reform.
So, specifically, what documents are now required to be submitted?
What are “documents proving family relationships”?
“Documents proving family relationships” are documents in either category 1 or 2 below that prove that a relative living abroad is a relative of the resident.
- Documents issued by a national or local public body, such as a copy of the supplementary family register, together with a copy of the passport of the relative living abroad.
- Documents issued by a foreign government or foreign local public body (hereinafter, “foreign government, etc.”), limited to documents stating the name, date of birth, and address or residence of the relative living abroad. If all of these are not stated in a single document, it is OK as long as every required item becomes clear by combining multiple documents! Examples include family register certificates, birth certificates, and marriage certificates.
Please note that “documents proving family relationships” must be submitted or presented in their original form, except for copies of a passport of the relative living abroad. In addition, where one document alone cannot prove that a relative living abroad is a relative of the resident, multiple documents must be combined to establish that the person is a relative of the resident. Furthermore, when they are prepared in a foreign language, a translation must be attached. Please also note that even for a dependent relative residing abroad who is under 16 years old (a dependent relative not eligible for the dependency deduction), submission or presentation of documents proving family relationships and the remittance-related documents below is required when claiming a disability deduction.
What are “remittance-related documents”?
“Remittance-related documents” means the following documents that make clear that the resident, as needed, made payments to each relative living abroad during the year to cover that person’s living expenses or educational expenses.
- Documents from a financial institution, or copies of them, that make clear that the resident made a payment to a relative living abroad through a foreign-exchange transaction conducted by that financial institution. Specifically, this includes a copy of a foreign remittance request form, but it must be a copy of a foreign remittance request form for a remittance made during that year.
- Documents from a so-called credit-card issuer, or copies of them, that make clear that, because the relative living abroad presented a card issued by the credit-card issuer and purchased goods or the like, the issuer received, or was to receive, from the resident an amount of money equivalent to the price of purchasing those goods or the like. Specifically, this includes a credit-card statement.
- Documents from a provider of transactions involving electronic payment instruments, or copies of them, that make clear that the resident made a payment to a relative living abroad through the transfer of electronic payment instruments conducted by that provider at the resident’s request. These constitute “remittance-related documents” when filing an income tax return for the 2024 tax year or later.
However, this refers to a statement for a credit card for which the resident (the taxpayer) entered into a contract with the credit-card issuer, which was issued for use by a relative living abroad, and for which the resident is to pay the card charges (a so-called family card). In this case, the statement is treated as a remittance-related document for the relative living abroad who is the named holder of the family card. Also note that a credit-card statement is a remittance-related document for the tax year in which the card was used, and is not a remittance-related document for the tax year in which the card charges were paid (withdrawn).
“Remittance-related documents” are not limited to originals; copies may also be treated as remittance-related documents. In addition, if there are multiple relatives living abroad, remittance-related documents are required for each individual relative living abroad for whom dependency deductions and the like are claimed. For example, if there is a spouse and child living abroad and remittances are made collectively to the spouse, the remittance-related documents for those remittances are treated as documents only for the spouse (the remittance recipient), and cannot be treated as remittance-related documents for the child. Furthermore, all documents for remittances and the like made during the year for which dependency deductions and the like are claimed must be submitted or presented. However, if remittances and the like to the same relative living abroad are made three or more times in a year, submission of a statement containing certain items and submission or presentation of remittance-related documents for the first and last remittances and the like to each relative living abroad in that year allow the submission or presentation of the other remittance-related documents to be omitted. In this case, the resident themselves must retain the remittance-related documents whose submission or presentation was omitted.
Summary: stricter documentation for verifying dependents
This reform applies to salaries and the like and public pensions and the like that are to be paid on or after January 1, 2016. If you have dependent relatives abroad, the required attachments have increased, so it is important to prepare early for the year-end adjustment for the 2016 tax year.
In addition, when claiming dependency deductions and the like for relatives living abroad in a tax return, depending on their classification, “documents proving family relationships,” “remittance-related documents,” “study-visa or equivalent documents,” or “documents proving remittances of at least ¥380,000” must be attached to the tax return or presented when the tax return is filed. However, these documents do not have to be attached to or presented with the tax return if they were submitted or presented to the withholding agent at year-end adjustment.
If schemes such as adopting someone, remitting money abroad, and then having it flow back to Japan are used, the game of cat and mouse may begin again, but perhaps this will settle things down for the time being.