Countries all over the world are looking to close tax loopholes as a way to boost revenues, and Japan is no exception. A new law targets locals and foreigners alike.
Anew law that came into effect on July 1 means that those with financial assets exceeding ¥100 million could be subject to an “exit tax” of a little over 15 percent if they leave Japan. The rules were designed to prevent wealthy Japanese moving to lowtax territories in order to realize capital gains and avoid high rates of inheritance tax. However, they also apply to foreigners on spousal visas or permanent residency holders who have been living in Japan for five of the last 10 years. Combined with new international initiatives on sharing of financial information and the prospect of Japanese accountants having to report the tax planning advice they give their clients, the savings situation for foreign residents of Japan looks set to undergo some major changes.
Given the dire straits of Japan’s public finances, with slim prospects of improvement being delivered by a shrinking tax base, it is little surprise the government is making efforts to close loopholes and steer more of the country’s still considerable wealth into its coffers. But the Abe administration is also making a lot of noise about attracting overseas investment and businesses to Japan, and that could be hampered by the prospect of an exit tax payable by foreigners when leaving the country.
The plan for the exit tax went from idea to legislation in an unusually short time, given the glacial pace at which initiatives often move in Japan. Some observers believe that in the rush to slam the door on yen escaping to lower tax pastures, all the implications were not fully considered one of those being the considerable number of non Japanese potentially affected.
A statement issued by the Ministry of Finance noted that according to its own estimates the new law would affect a total of only approximately 100 people, Japanese and for eigners combined.
“The Japanese government says that the exit tax should only apply to a very limited number of people, but I think that is unrealistic. I’ve already found a number of my clients who will be affected,” said a partner at a Tokyo accounting firm, who asked not to be named in order to protect the identity of the company’s customers.
The government failed to get the message out that similar rules are already in effect in a number of other major economies, or to get sufficient information out in a timely fashion about the new Japanese rules, according to the partner. “And although the tax now only applies to financial assets like stocks and bonds, people are worried it may be widened in the future to include things like property,” he added.
Following lobbying by groups representing overseas business interests in Japan, foreign residents have now been given a fiveyear “grace period” before they will become liable for the tax in July 2020, points out Marcus Wong, partner at Pricewater houseCoopers’ Tokyo office. “The clock on that five years residency in Japan starts ticking on July 1, 2015,” he notes, and suggests “there is plenty of time to plan.”
Those who leave Japan and intend to return are required to put up collateral that would cover the exit tax. If those assets are then sold, however, they become liable to pay the exit tax plus a small amount of interest. For assets that are held on to, a report must be filed on them every year to the Japanese tax authorities.
“One thing that is sometimes missed is that the exit tax of 15.315 percent [the odd percent age is accounted for by the supplementary portion for Tohoku reconstruction] also applies to gifting or the bequest of financial assets to nonresidents of Japan,” adds Wong.
This means that a foreign resident of Japan who wants to give shares or other financial instruments to offspring, or anyone else, in their home country as part of their inheritance planning, will find those assets are potentially liable for the exit tax.
With the Japanese tax authorities set to begin looking at foreign residents in July 2020, and assessing whether they have been a holder of a spousal or permanent resident visa for a total of five of years during the last 10, changing visa status is one option, according to Hans Peter Musahl, partner at Ernst & Young Tax Co. in Japan. “If they give up their permanent residency in 2015, then they would not have been resident for five years in 2020,” points out Musahl.
One misconception that has arisen around this issue is that if a foreign resident is married to a Japanese national then they would be deemed to be on a spouse visa; that is not the case. Nevertheless, giving up a spousal visa or permanent residency will not solve every tax problem.
“Even if you give up your permanent residency, you are still liable to pay tax on income from assets overseas if you have been resident in Japan for more than five years,” says Musashl.
The issue of overseas assets is one that is set to loom larger for many people in the coming years, particularly for those living and working in countries other than the one they were born in. As people, capital and assets have become far more mobile in recent decades, it is no secret that many companies and individuals have gone to considerable lengths to take advantage of this.
“As of 2014, foreigners who have stayed in Japan five years and own foreign located assets worth more than ¥50 million must file foreign asset statements,” says Musahl, who notes that this year it became a criminal offence to either not file these statements or file them inaccurately.
While similar forms do exist in other countries, the Japanese versions require reporting a wider range of assets as well as details such as the names of stock brokerages and the original costs of shareholdings, according to PwC’s Wong.
Japan has been updating tax treaties, including or strengthening the parts around cooperation on collection of taxes, as well as implementing self reporting of over seas and worldwide assets for domestic filings, notes Wong. “These two forces are working together: the international agreements that Japan could utilize if they want to find out more information and also the domestic self reporting requirements now for taxpayers,” says Wong. “I’m sure that with the advances in technology, the sharing of information will become easier.”
The authorities of many OECD member countries have already started sharing data on financial income and assets, points out E&Y’s Musashl. “The Japanese fiscal authorities will join this automatic information exchange process in 2018 and be able to reassess income tax going back up to five years,” he says.
Those who leave Japan and intend to return are required to put up collateral that would cover the exit tax.
The U.S. Foreign Account Tax Compliance Act (FACTA) set the ball rolling for international cooperation on financial information disclosure in 2010, with Japan agreeing to comply in June 2013. Since then, more than 60 countries have joined an OECDled initiative based on its Standard for Automatic Exchange of Financial Information in Tax Matters, with more than 90 expected to be signatories by the time it is implemented.
At June’s G7 summit, the participating countries’ leaders issued the following statement: “We commit to strongly promoting automatic exchange of information on cross border tax rulings. Moreover, we look forward to the rapid implementation of the new single global standard for automatic exchange of information by the end of 2017 or 2018, including by all financial centers subject to completing necessary legislative procedures.”
Japan is set to introduce its “My Number” system, the local version of a social security or national insurance number, by the end of this year. This will be used to facilitate the automatic international sharing of information linked to bank accounts, holdings of stocks and bonds, as well as any property registered in people’s names.
The first port of call for people affected by any of these changes is usually their accountant. However, the way that accounting firms in Japan operate may be about to undergo a major change. “New measures are being discussed by the government that would force accounting firms to explain to the Japanese tax office what kind of advice they have given clients to help them reduce their tax exposure,” explains the partner at the Tokyo accountants who does not wish to be identified.
The discussions about the new rules were covered on the front page of the Nihon Keizai Shimbun at the end of May, and have accountants concerned about how it will affect their ability to do business, according to the partner, who is worried a new law could be on its way sooner rather than later.
“The exit tax was passed in six months, so if they are eager to pass these new rules, they could come in just as quickly.”
Gavin Blair covers Japanese business, society and culture for publications in America, Asia and Europe.