Terrie's Job Tips -- Negotiating Initial Terms and Conditions: Part Five: More Expat Perks

By my estimate, considering the number of members of chambers of commerce and the Tokyo American Club, there are probably around 12,000 – 15,000 expatriate employees of Multinational Foreign Corporations (MNFCs) in Japan – most of whom are based in Tokyo. This week we finish up with some of the additional benefits that only expats can enjoy and the rest of us can look on in wonder.

Foreign schools scholarships. Following on from the Japanese government’s benevolent attitude of presumed “helplessness” of foreigners temporarily dispatched to Japan, another major perk – both financial and emotional – is international schooling for the children. Sending your kids to an international school is no cheap exercise. Regardless of age, schools typically charge around JPY2m per child per year, and on top of this cost there are the inevitable school outings and materials for projects, uniforms, etc. I once met an expat with 5 school-age children – resulting in a burden of JPY10-12m for the family if they accepted the Japan posting.

There is no tax-deductible means of paying for international schools. Actually this is a big deterrent for senior foreign managers to bring their families and I think the government needs to change the rules – following the spirit of the other concessions that are made. In the meantime, however, there appears to be a “gentleman’s agreement” between major firms and the tax office that allows expat kids to be sent to international schools on a “targeted” scholarship paid for by the firm. Different schools have different scholarship systems but all depend on the idea that such payments are a type of donation to the school and thus not taxable income for the executive involved.

I have read in the Japanese press that the government is considering limiting the access to international schools to foreigners who are residing in Japan for less than 10 years. It seems to me that if a foreign parent has the financial wherewithal, they should be allowed to send their kids wherever they like, so long as the child has sufficient schooling to meet international standards. However, the government’s position is that if families choose to live in Japan for a longer period than 10 years, they should be forced to integrate, and sending your kids to a Japanese school is certainly one way to do this. But I can’t help feeling that the proposed law is heavy handed and is yet another reason for a talented executive to refuse a posting to Japan.

Tax equalization. For companies and senior executives who can’t be bothered with tax structuring, some MNFCs give their staff consistent tax treatment wherever they are in the world. This is called tax equalization, and consists of the company paying additional salary to negate the effects of the higher Japanese income taxes. There are no tax benefits in doing this; it’s purely a case of corporate largess for its up-and-coming managers.

Overseas compensation. From here, tax planning gets more complicated and you really need a tax expert to advise you. However, thanks to the Japanese tax rules about overseas income not being taxed in Japan for the first 5 years of a foreigner’s stay in Japan, there is scope to take advantage of this by having the executive work in two locations. Smaller companies may struggle to do without their senior executive for some days or weeks every month, but for larger multinationals, working in two jurisdictions isn’t such a stretch. I have heard of companies that shuttle their top people between Hong Kong and Tokyo, and having the person work in both locations for two salaries. While this may seem complicated, if you have an executive on a JPY75m a year salary or more, the tax benefits of paying Hong Kong income tax, currently just 17.5% at the top rate, are significant.

As a quick calculation, flying between countries on a regular basis, so long as you complied with the tax regulations in Japan would result in JPY75m/2 x 17.5% = JPY6.4m in tax, compared to around JPY15m if the person was taxed in Japan only. Why not just have the person reside in Hong Kong all the time? Well, it could be that as a director the person needs to be resident in Japan in order for the company to be compliant with the commercial code, or because the quality of life is perceived to be better in Japan and thus the family is located here in preference to Hong Kong.