2023 Tax Reform Proposals
On December 16, 2022, the Government of Japan released its 2023 tax reform proposals. The amendments contain changes to the rules related to gifts and inheritance tax. The proposals are usually promulgated into law by the end of March and enter into force on April 1. Here is an overview of what to expect.
How changes to gift tax rules and audits may impact you
On December 16, 2022, the Government of Japan released its 2023 tax reform proposals. The amendments contain changes to the rules related to gifts and inheritance tax. The proposals have been promulgated into law and entered into force on April 1. Here is an overview of the changes.
Seven Year Lookback for Gifts
Currently, gifts bestowed within three years of the giver’s death are added back to the estate of the deceased for Japan inheritance tax (IHT) purposes. The value of the assets is reduced by any gift tax paid at the time the gift was received, and this amount is then subject to IHT along with the other assets of the deceased.
To offset this, one aspect of long-term estate planning is to make small annual gifts which are taxed at gift-tax rates lower than the effective IHT rate that would be levied if the gifts had remained part of the estate.
The reforms increased the lookback period to seven years for gifts made on or after January 1, 2024. This brings Japan in line with countries such as the United Kingdom.
Unlike the UK, however, there is no gradual reduction in the value of the gift over the seven-year period. One hundred percent of the gift’s value is added back to the taxable estate, regardless of whether it was made seven years or one day prior to death. A ¥1 million deduction is allowed for gifts made between three and seven years prior to someone’s passing.
The chart below shows this in action:
This change has a significant impact on lifetime estate planning, as gifts made on or after January 1, 2024, will be subject to a seven-year lookback for inheritance tax purposes.
For expats, discussion about Japan IHT planning with overseas parents can be difficult—especially if being subject to the Japanese rules would impact overseas planning. However, these proposed changes will accelerate the need for gift planning during 2023.
Valuation Methods for High-Rise Apartments
Although there are no specific amendments, another issue that needs to be considered in the near future is the government’s discussion of amending the rules surrounding the IHT valuation of apartments in high-rises.
Currently, there can be a large disparity between the fair market value of an apartment and its tax basis for IHT purposes. This is due to the use of various tax valuations that reduce the IHT value. For apartments in certain parts of Tokyo, the IHT value can be significantly lower than the fair market value. This disparity can be used to reduce the value of an estate considerably for IHT purposes. The government has indicated that it will look to close this avenue for tax planning in the future.
Tax Audit Statistics
The government also released its tax audit statistics in December, covering audits conducted between July 2021 and June 2022. Direct comparisons to previous years are unreliable due to the impact of the Covid-19 pandemic on the tax authority’s ability to conduct audits. However, the number of audits involving overseas assets increased by 20 percent over the previous year and is approaching the level seen prior to the pandemic. About two-thirds of the cases involved undisclosed assets in North America or Asia.
Additionally, the number of simple inquiries where the tax office contacts a taxpayer by post or phone increased by eight percent over the previous year and is 40 percent higher than pre-pandemic levels. This indicates that the tax office has shifted to less formal inquiries as a means of identifying taxpayers who require a full audit.
Summary
The increase in the lookback period for gifts accelerates the need for planning before the end of the year. This will be necessary to ensure that gifts fall out of the scope of IHT sooner. Current planning utilizing high-rise apartments may also need to be revisited in light of the anticipated changes.
As always, with any informal contact from the tax office, it is wise to consult with your tax advisor before submitting a response.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en
Tax and Trends
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.
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/
Trusts and Audits
In December 2021, the Japanese government revealed its proposed changes to tax legislation. Some of these proposals affecting individual taxpayers are discussed in this column, together with an update on how Covid-19 has impacted the tax authority’s approach to inheritance and gift tax audits.
How changes to Japan’s tax rules may impact individuals
Listen to this story:
In December 2021, the Japanese government revealed its proposed changes to tax legislation. Some of these proposals affecting individual taxpayers are discussed in this column, together with an update on how Covid-19 has impacted the tax authority’s approach to inheritance and gift tax audits.
Assets and Liabilities Statement
The rules surrounding this reporting obligation, which was introduced in 2015, have been amended to increase the scope of taxpayers subject to the requirements.
The additions are aimed at minority shareholders of large family corporations, such as an owner’s Japan-resident spouse or children. If the shareholder receives dividends and has no other source of income, the income tax can be settled through withholding and no return is due. Previously, they would not have met the requirement to file an assets and liabilities statement, regardless of the value of their shareholding and other assets, but the proposed changes would bring them within the scope of the report.
The changes are due to apply to income and assets beginning January 1, 2023 (January 1, 2024, for mitigating factors) with the first reports due in 2024.
Trust Reporting Requirements
Another proposed amendment is to the trust reporting requirements that apply to Japan-resident trustees and trust corporations of domestic and overseas trusts. Previously, if it was difficult to estimate the value of the assets within a trust, then the assets did not need to be included in the filing. The reports are required within one month of:
- Establishment or closure of a trust
- Changes in beneficiaries
- Changes in beneficial rights
Although there are no penalties for failure to file, individual trustees should pay attention to any filing requirements triggered by this amendment, which will apply to reports due beginning January 1, 2023.
Audit Focus
In December 2021, the National Tax Authority (NTA) released its annual audit statistics for 2020, showing the impact of Covid-19 on its approach to onsite audits. During 2020, the number of inheritance tax audits fell by 52 percent, from 10,635 to just 5,106. Of these, 551 related to overseas assets, with the NTA utilizing tax treaty information exchange provisions and Common Reporting Standards information to gather details of the assets. The average tax raised was ¥9.4 million per audit opened, a 47-percent increase in the average compared with the previous year’s ¥6.4 million.
The decrease in audits was countered by a 58-percent increase in the number of simple investigations, consisting of telephone inquiries and correspondence with taxpayers. There were 13,634 such instances in 2020, compared with 8,632 in 2019, while ¥650 million in additional tax and penalties were levied. The move from onsite audits to simple investigations shows that the pandemic has caused the NTA to focus personnel on audits with a higher chance of levying tax. The remainder are being handled with remote inquiries, seemingly a more efficient use of resources.
Takeaways
The tax reform proposals will affect individual taxpayers in different ways but, for most, the change to the filing deadline will reduce the administrative burden of filing asset and liabilities statements and overseas assets reports. Trustees of overseas trusts will have to pay attention to the changes in reporting requirements and be prepared to file reports containing estimated valuations. Finally, the increase in simple investigations is likely to mean that more taxpayers receive calls from their local tax office. In such cases, as always, seek professional advice on how to respond to such requests.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en
Added Disclosures
The journal entries used to record the transactions of a typical trading company seem basic and are usually taught in introductory accounting classes. But while simple, when coupled with financial management concepts such as reverse factoring, supply chain finance, or supplier finance arrangement, these entries may require additional disclosures for financial reporting purposes. In November, the International Accounting Standards Board (IASB) proposed additional disclosure requirements to enhance the transparency of supplier finance arrangements.
Proposed reporting rules eye supplier finance arrangements
The journal entries used to record the transactions of a typical trading company seem basic and are usually taught in introductory accounting classes. But while simple, when coupled with financial management concepts such as reverse factoring, supply chain finance, or supplier finance arrangement, these entries may require additional disclosures for financial reporting purposes. In November, the International Accounting Standards Board (IASB) proposed additional disclosure requirements to enhance the transparency of supplier finance arrangements.
The Transaction
A trading company generally purchases on account from its suppliers, and is invoiced after the receipt of goods. This poses no issues if the company is in good financial condition, but it can be a challenge if the company has liquidity concerns. When a company cannot pay the invoiced amount, as a rule the supplier will decline further transactions with the company or will impose stringent credit measures. This may disrupt the company’s supply chain. To avoid this and secure the supply chain, the company may enter into a supplier finance arrangement with a financial institution.
Under such an arrangement, the financial institution pays the supplier at a discounted rate and the company later reimburses the financial institution. This may sound like factoring, but it differs in that factoring is normally initiated by the supplier, who sells its accounts receivable. Here, reverse factoring is initiated by the buyer obtaining a loan to defray payables.
A supplier finance arrangement is beneficial for both supplier and buyer. The former is assured of payment and can collect the amount due earlier than the due date of the invoice, while the buyer benefits from an extended due date.
Accounting Concerns
But there are things to consider. On the supplier’s side, such an arrangement is like selling accounts receivable to a financial institution, only it is buyer initiated. In other words, like a factoring of receivables, this can be viewed as off-balance-sheet financing that allows a company to increase its cash without reporting a corresponding increase in liability or equity.
On the buyer’s side, a supplier finance arrangement adds another layer to the purchase-to-pay cycle. Instead of the usual buy and pay, it becomes buy, loan, and pay. The issue here is whether accounts payable must be converted into loans payable and disclosed in financial statements.
International Financial Reporting Standards 7 Financial Instruments: Disclosures (IFRS 7) requires an entity to disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period.
International Accounting Standards 1 Presentation of Financial Statements (IAS 1) requires companies to distinguish financing from working capital purposes.
A company that is protecting its current ratio would like the payable, arising from the supplier finance arrangement, to be classified as loans payable instead of trades payable. This is because loans payable can be reported as non-current when they are to be settled more than 12 months after the reporting period. This cannot be done for trades payable, which are always reported as current liabilities even if they are due to be settled more than 12 months after the reporting period. Thus, a disclosure requirement for supplier finance arrangements is necessary to understand the transaction and standardize the financial reporting requirements.
As IASB Chair Andreas Barckow explained: “Investors require more detailed disclosures about companies’ supply chain finance arrangements, as these funding practices are becoming increasingly common. The proposed requirements are designed to give investors the information they need to assess the effects of such finance arrangements on a company’s liabilities and cash flows.”
Proposed Solution
The IASB plans to amend IFRS 7 and IAS 7 Statement of Cash Flows, to require buyer companies to disclose information that enables investors to assess the effects of a company’s supplier finance arrangements on its liabilities and cash flows.
The proposed rule requires an entity to disclose, at the beginning and end of the reporting period, the line items in the statement of financial position in which the entity presents financial liabilities that are part of a supplier finance arrangement.
The proposed financial reporting requirements for supplier finance arrangements are still on the IASB’s exposure draft and are open for comment until March 28, 2022.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en
CPA and 4IR
The Fourth Industrial Revolution is bringing great opportunities and challenges to many business sectors, including accounting and auditing. This requires employees to be more knowledgeable about their area of expertise and proficient in languages, as well as to develop soft skills. Here are some key things that certified public accountants (CPAs) need to know to thrive in the years to come.
What accountants need to know to thrive during the Fourth Industrial Revolution
The term Fourth Industrial Revolution (4IR) was first used in English in 2016 by Klaus Schwab, the founder of the World Economic Forum, inspired by the German “Industrie 4.0,” coined in 2011 at Hannover Messe by Professor Wolfgang Wahlster, director and CEO of the German Research Center for Artificial Intelligence (AI). In his book of the same name, Schwab describes how the 4IR is being ushered in by shifts and trends. These include AI, Big Data, the Internet of Things, blockchain, and machine learning—all of which allow us to automate and gain greater insight from many traditional processes.
The 4IR is bringing great opportunities and challenges to many business sectors, including accounting and auditing. This requires employees to be more knowledgeable about their area of expertise and proficient in languages, as well as to develop soft skills. Here are some key things that certified public accountants (CPAs) need to know to thrive in the years to come.
How is 4IR changing accounting and auditing?
Instead of manually dealing with traditional bookkeeping and auditing tasks, CPAs are learning to use new software and technologies. The benefits are numerous and could improve relationships with clients by:
- Reducing repetitive tasks, leaving more time for other work and interaction with clients
- Allowing files to be accessed, edited, and controlled from anywhere via cloud-based systems
- Providing greater ease, speed, and accuracy when managing client data
- Greatly enhancing security and compliance
- Equipping CPAs to answer client questions, provide feedback, or give advice instantly
- Bringing greater transparency to a client’s financial insights
How might the professions change?
Accountants may leave bookkeeping and stewardship to become strategic business partners. As automation increases, CPAs will need the ability to analyze, interpret, and use the output generated by these technologies to make strategic and operational decisions.
Auditors won’t be left behind in the 4IR. Instead, technology will not only assist in improving the quality of audit performance and data analysis, but also in giving clients better value-added feedback and superior recommendations.
How can CPAs adapt to the change?
1. Keep learning
Rapid changes in accounting and auditing practices, as well as in technology, require that individuals continuously learn. As a result, they can achieve their career goals, contribute to the organization, and provide value to clients.
As an international auditing firm, Grant Thornton is taking the lead in utilizing new technology to enhance audit quality and efficiency. Grant Thornton also annually provides training programs to help employees update their knowledge of tax regulations, financial reporting standards, auditing best practices, relevant laws and regulations, and technology.
In my opinion, the 4IR will bring more opportunities for accountants and auditors with international qualifications. Certificates such as those from the Association of Chartered Certified Accountants, CPA Australia, and the American Institute of Certified Public Accountants allow accountants and auditors to maximize their abilities and improve the competitiveness of human resources in the field of accounting and auditing.
2. Think radically
As professionals, we need to be open to profound changes. Research shows that humans and computers working together produce better results than computers alone. Moreover, we need to think about how we are going to take advantage of technology to maximize traits such as skepticism, leadership, teamwork, personal relations, and creativity that are beneficial to auditing and accounting careers.
3. Be adaptable
To remain relevant in an ever-evolving digital world, we must embrace these changes. Therefore, adaptability and agility are considered the most important soft skills for accountants and auditors. These skills play a vital role in ensuring that accountants and auditors can adapt to a changing working environment and to the challenges emerging from evolving business models.
To become a future-proof professional, we need to be flexible and embrace innovation.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en