Tax and Trends
Understanding Japan’s asset-related taxation system and shifts in audits
Understanding how income and assets are taxed in Japan can be a challenge for anyone, whether citizen or non-Japanese resident. And for those with significant wealth, investments, and real estate, a lack of understanding can lead to higher-than-expected taxes. Finding your way around the meshwork of regulations and calculations can be difficult, however, as most documents published by Japan’s National Tax Agency are only available in Japanese. Likewise, filings must be done in Japanese.
Yamada & Partners can help non-Japanese better understand how their assets are taxed and assist them in reducing their tax liability while accurately reporting income and assets.
“The tax system in Japan is one of the most complex in the world,” said Saori Koiso, an Osaka-based certified public accountant and senior tax manager with Yamada & Partners. The firm, founded in 1981, specializes in international tax consulting, inheritance and real estate, and tax compliance, among other services. Koiso hosts the webinar which covers:
- Individual income tax
- Inheritance tax
- Gift tax
- Audit trends
Individual Tax on Financial Investments and Real Estate
Individual income tax in Japan ranges from 15.105 to 55.945 percent. In the webinar, Koiso explains the brackets, deductions, and how capital gains, foreign assets, and real estate are taxed.
Capital gains derived from the sale of land and buildings are taxed separately from other income, and at different rates depending on whether they are considered short- or long-term. Various other factors, such as location of the property, residency status of the owner, and how the lessee uses the property also play a role.
Assets and liabilities—both domestic and foreign—must also be reported. The value of those assets at the time of taxation could be impacted by the international currency market, which has seen great turmoil with regard to Japan in 2022. On October 20, the Japanese yen slipped past ¥150 against the US dollar for the first time since August 1990, and there are warnings that it could slide to ¥170. This dramatic shift in currency value can have a significant impact on taxation for those who hold financial assets or own real estate overseas.
Understanding value thresholds and who must report what, and when, can make a big difference in minimizing the chance of an audit and avoiding penalties for misreporting. In the webinar, Koiso explains the key points of the system.
Inheritance Tax
Planning for the future is also important, but can be tricky when dealing with an unfamiliar system and language. If you live in Japan and continue living here, and one day pass away here, then your family members will be responsible for paying inheritance tax in Japan.
Japanese inheritance tax rates are among the highest in the world, Koiso said, in some cases reaching 53.2 percent. Understanding the rules that determine this amount is vital to minimize the impact, but can be difficult when most documents explaining the system are only available in Japanese.
Yamada & Partners’ on-demand English webinar will help you understand the rules contained in these documents.
An important thing to note is that individual heirs are taxed rather than the estate itself, as is done in the United States and many other countries. What’s more, the scope of the tax depends on a variety of factors, including:
- Whether or not the heir lives in Japan
- The heir’s visa status
- The nationality of both the heir and decedent
Another factor that has been used to determine inheritance tax liability is the period of residence, but changes were made to this in the 2021 tax reform. Under the new rules, those who have maintained a domicile in Japan for fewer than 10 of the past 15 years are only taxed on assets located in Japan rather than worldwide, as was the case before. This applies to particular types of visas, as defined by the Immigration Control and Refugee Recognition Act, but many categories are applicable to American Chamber of Commerce in Japan members, including investor/business manager, legal/accounting services, researcher, and intracompany transferee.
Also important to consider are ways to ease the process for a spouse or children left behind. Japan has rules which differ from those of the United States and other countries, and inheritance tax in Japan is calculated in accordance with the statutory inheritance ratio set forth in the Japanese Civil Code. And because there is no probate system in Japan, transferring money from a bank account can be complex for heirs if there is no will.
There are many more complexities to navigate when planning for the eventual inheritance tax, and this on-demand English webinar will help you better understand the rules and plan accordingly.
Tax Audit Trends
There have also been changes in how the National Tax Agency approaches audits. Due to the growing diversification and internationalization of asset management, the agency has increased active investigation of high-net-worth individuals with an eye towards overseas assets. Those with significant securities, real estate investments, and particularly high ordinary income have been on the radar.
The number of incorrect declaration cases grew each year from 2016 to 2019 before dropping in 2020 due to the coronavirus pandemic curtailing investigations. Of the 4,463 audits of personal income tax filings by wealthy individuals conducted in 2019, incorrect declarations were found in 3,837. The average amount of underreported income per case was ¥17.67 million and additional tax levied was ¥5.81 million. And while audits dropped to 2,158 in the first year of the pandemic, the average unreported income rose to ¥22.59 million, an increase of 127.8 percent year over year. Additional tax averaged ¥5.43 million.
As has been the trend in the past, cash and deposits are the most common underreported assets, and North America is the top region in which these assets are located.
The National Tax Agency is using the Standard for Automatic Exchange of Financial Account Information, better known as the Common Reporting Standard (CRS) to obtain data about individuals’ overseas transactions and assets by effectively utilizing the CRS system. And while the United States has not adopted the system, it does participant in the Global Forum on Transparency and Exchange of Information for Tax Purposes and has a tax treaty with Japan which allows the National Tax Agency to obtain information.
Be Prepared
Whether misreporting involves ordinary income, inheritance or gifts, capital gains, foreign assets, or real estate, understanding the system and rules—and working with professionals who know how to ensure that you are in compliance—is a must in today’s complex and interconnected world of global finance.
For more information, please visit Yamada & Partners at www.yamada-partners.jp/en/
