Tax Surge Ahead
An increase in taxes on high-net-worth individuals is on the horizon. Here's how it will impact business and real estate owners beginning January 1, 2025.
How an upcoming income tax increase will impact high-net-worth individuals and business owners.
A new measure to be introduced in 2025 will increase taxes on high-income individuals. With the effective income tax rate set to rise to 22.5 percent or higher, business and real estate owners who plan to realize gains from the sale of real estate or stocks should be aware of the impact on their taxable income after January 1, 2025.
Income tax in Japan consists of aggregate taxation on certain types of income. These include employment income, business income, and real estate income. The total from each type is summed and taxed at progressive rates. The national income tax rate ranges from five to 45 percent (plus 10 percent for local taxes).
Income from the transfer of real estate, and some financial income, is subject to separate taxation. Income from the transfer of real estate (long-term holdings) and stocks is taxed at a flat rate of about 15 percent (plus five percent local tax).
This can give rise to a phenomenon where the portion of total income derived from the transfer of real estate and stocks increases while the actual overall tax rate decreases, thus lowering the effective income tax burden for high-income earners. From the viewpoint of a fair taxation system, the tax burden rate will be raised to 22.5 percent (for the national tax portion), and possibly higher for incomes above a certain level.
How It Works
First, the standard income amount is calculated by totaling the amount of income (both aggregate assessment income and separate income) for which a tax return is filed each March and adding financial income that is not included on the tax return. This includes income where the withholding tax suffered is treated as the final liability, such as dividends from listed stocks, small dividends from unlisted stocks, and income from special accounts.
Special accounts are those which the taxpayer has selected to hold listed stocks. The dividend income, as well as income from the transfer of listed stocks, suffers withholding tax at the source. This is treated as the final liability for these types of income, so they are not included on an income tax return.
Next, the standard income amount is multiplied by 22.5 percent (national tax) after deducting the special deduction (¥330 million). If the total exceeds the regular tax amount, the difference will be levied as additional tax due.
In addition to those who plan to sell real estate or stocks, individuals with high financial income from special accounts will be affected by this amendment.
Even for non-residents of Japan, the tax increase will apply to transfers of real estate located in Japan and transfers of Japan-sourced stocks.
Corporate owners and major investors who plan to sell their companies, individuals who plan to sell their real estate, and high net worth individuals who have large amounts of financial income are advised to understand the impact of this tax increase and consider how to respond.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en
Disclaimer: Opinions or advice expressed in the The ACCJ Journal are not necessarily those of the ACCJ.
Japan Unlocked
Looking to enter the Japan market? Want to improve your existing operations? As part of Kreston Global, the world’s 13th-biggest accounting network and 10th-biggest in Japan, Kreston ProWorks helps companies establish a foothold in Japan.
Kreston ProWorks opens doors with local expertise and global reach.
Kreston Global, the world’s 13th-biggest accounting network in terms of revenue according to UK-based trade magazine International Accounting Bulletin (IAB), is now the 10th-biggest in Japan per the IAB, up one spot from the year before.
With 160 independent member firms and 25,000 experts across 750 offices in 115 countries, Kreston Global provides unparalleled access to a wealth of international resources and expertise.
There are three member companies in Japan. Two provide audit services and the third, Kreston ProWorks, offers a full slate of inbound accounting, payroll, tax, and corporate services.
Established in 2007 by Marek Lehocky, the firm has built a strong reputation as an indispensable partner for companies looking to enter the Japanese market. “Our mission is to make setting up and operating businesses—including immigration, accounting, payroll, labor, and tax compliance—as easy as possible in Japan, so our clients can focus on building their business,” Lehocky told The ACCJ Journal.
Full Slate of Services
Kreston ProWorks delivers a nimble team of bilingual experts with intimate knowledge of how processes in Japan differ from those in other countries. Specialists in inbound accounting, tax, payroll, and human resources, Kreston ProWorks offers a much wider range of services than other companies:
- Company formation and corporate services
- Employer of record (EOR)
- Immigration and business license support
- Legal and transactional support
- Nominee representative
- Virtual office services
- Market entry and business consulting
EOR, for example, is especially helpful, as it allows companies to come in for a short time and deploy resources quickly to complete a specific project. It is also a way to test the waters when considering Japan market entry without investing in a full move.
“With all the requirements and steps involved, it can take at least seven or eight months before people can come into the country,” Lehocky said. “We can cut that to just three or four months with foreign employees and a few weeks with local hires.”
Local Knowledge Matters
Just as understanding the local market is key to a business’s success, so are local operations. While many companies provide services offshore, Kreston ProWorks does everything in Japan.
“Clients want to have closer proximity to Japan, because Japan is a black box of sorts, and they want to make sure that the people who are handling their operations actually understand the intricacies and nothing is being lost in translation,” Lehocky explained. “We act as our clients’ internal team of experts and ‘goalkeepers’ for each of the service areas that we provide. We stay on our client matters and drive the parts that we are in charge of so our clients can focus on other parts of their business. Communication and getting things done is a key to success.”
If you are interested in exploring market entry or are already here and wondering if you are doing everything the right way, Lehocky invites you to get in touch.
“Reach out,” he says. “We would be happy to arrange a time to introduce ourselves and get to know you and your needs. You always have alternatives.”
Get in touch today for a free consultation:
Carla Willmes, business growth and communications lead
cwillmes@krestonproworks.com
03-4520-5530 • www.krestonproworks.com
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
It’s a New World for JCT
Beginning in October 2023, major changes to the laws governing Japan’s consumption tax system will likely impact a wide variety of businesses. Consumers need not worry—there is no rate hike included in these changes—but companies doing business in or with Japan will have more to consider. Companies will have to register, pay any output JCT collected to the tax authorities, and issue a qualified invoice (with certain required items stated correctly) in order for their customers to claim input JCT credits on their purchases.
How will changes to Japan’s consumption tax rules affect your business?
Presented in partnership with PwC
Beginning in October 2023, major changes to the laws governing Japan’s consumption tax system will likely impact a wide variety of businesses. Consumers need not worry—there is no rate hike included in these changes—but companies doing business in or with Japan will have more to consider.
Japanese consumption tax (JCT) is Japan’s version of a value-added tax (VAT) or sales tax. The current rate of 10 percent (up from eight percent as of October 2019) is generally applied to goods and services provided in Japan. There are some major differences between JCT and other VAT systems around the world, however, particularly concerning a company’s ability to claim input JCT credits on purchases or expenses.
In a nutshell, the current system:
- Allows purchasers to claim an input JCT credit even if the credit relates to goods or services from companies not registered for JCT purposes
- Permits companies, not registered for JCT purposes, technically not to be required to pay the output JCT they collect to the tax authorities
- Has no strict invoicing requirements, and businesses can rely on their accounting records in some circumstances
In 2023, all the above will change. Companies will have to register, pay any output JCT collected to the tax authorities, and issue a qualified invoice (with certain required items stated correctly) in order for their customers to claim input JCT credits on their purchases.
Real-world Impact
What does this mean for companies doing business in Japan? First, it is important to note that these changes will impact not only businesses with a physical presence in Japan but also those providing certain digital services to Japanese customers. (In some cases, digital services may be taxable for JCT purposes in Japan, even if the provider is located overseas.)
While at a high level many of the changes may be operational in nature, there are some more nuanced impacts that should be considered. As a first step, companies should begin to think about whether they are going to apply for the new registration.
While the application itself is not overly complex, the decision to register may be a difficult one for those businesses that are not otherwise obliged to remit the output JCT they collect to the tax authorities.
If businesses choose not to register, they will need to consider the resulting impact on their relationship with customers, who will lose the ability to claim an input JCT credit.
Next, companies may need to reexamine certain administrative processes to ensure that they can accommodate the changes. The new rules will bring additional bookkeeping and record-keeping requirements, so companies should make sure their enterprise resource planning systems are set up to handle them. The needs may include alignment of accounting systems with invoicing systems, alteration of electronic data interchange systems, and more. This may also be a good time for companies to consider whether their systems and processes are compliant with Japanese e-storage rules if accounting records are being maintained in soft, rather than hard, copy.
More Things to Consider
Apart from the need for registration and to make changes to the content of a qualified invoice, complying with the new invoicing system is likely to be easier for sellers than purchasers. More changes will be required on the purchase/expense side, as receiving and maintaining appropriate invoices will be mandatory to claim input JCT credits.
Under the new system, companies will need to reconsider the adequacy of their internal procedures—including those for employee expense reimbursements—as the system will require invoices to be maintained in cases where there was no such requirement previously.
In addition, businesses will also have to check the invoices actually received from vendors, registered or non-registered, to confirm all necessary content is included, e.g., the vendor’s registration number. This review process may already be a regular procedure in other VAT jurisdictions, but it is not currently so in Japan.
Further, the legal changes may impact the preparation of JCT returns, as the new system will require some decision-making around how the final JCT liability will be calculated.
While the qualified invoice system itself will go live in October 2023, the tax authorities began accepting applications for registration by vendors on October 1 of this year. As the tax authorities will also begin to publish information about registered companies on a dedicated website, the expectation is that many will opt for this early registration. For companies that wish to be compliant with the new system by October 2023, the application should be submitted by the end of March 2023 at the latest.
The new rules will have a pervasive influence over operations and systems. Given that businesses are likely to need professional support to prepare for all the changes, and with the application window for vendor registration having opened on October 1, now would be a good time to begin preparation.
Covid-related Financial Relief
As relief from economic and financial distress caused by the coronavirus pandemic, you may have received subsidies or grants from the national and/or local government. You may be wondering if you must declare this assistance on your income tax return. Here is a summary of tax treatment and revenue recognition timing published by the National Tax Agency of Japan.
What tax liabilities come with coronavirus help?
As relief from economic and financial distress caused by the coronavirus pandemic, you may have received subsidies or grants from the national and/or local government. You may be wondering if you must declare this assistance on your income tax return. Here is a summary of tax treatment and revenue recognition timing published by the National Tax Agency of Japan.
Non-Taxable
Payments received from the support fund set up in response to the new coronavirus (article 7 of the temporary special provisions of employment insurance)
Funds received from the allowance set up to support leave taken in response to the new coronavirus (article 7 of the temporary special provisions of the employment insurance law)
Special Fixed Amount Cash Payout (tentative name) of ¥100,000 per household member (article 4, paragraph 1 of the special measures concerning taxation regarding the coronavirus)
Special Cash Payout for Families with Children in Year 2020 (article 4, paragraph 2 of the act regarding coronavirus-related special taxation measures)
Emergency handouts to help support students (Article 9, Paragraph 1, Item 15 of the Income Tax Act
Temporary Special Cash Payout for Low Income, Single-Parent Households (Article 9, Paragraph 1, Item 17 of the Income Tax Act)
Provider Relief Fund related to the coronavirus (Article 9, Paragraph 1, Item 17 of the Income Tax Act)
Discount coupons provided as Support for Users of Company-Sponsored Babysitters (Article 9, Paragraph 1, Item 17 of the Income Tax Act)
Subsidy under the Babysitter Support Project of Tokyo (Article 9, Paragraph 1, Item 17 of the Income Tax Act)
Taxable
Treated as business revenue. Based on:
Payment decisions
- Covid-19 subsidies (for those who are self-employed and sole proprietors)
- Tokyo Metropolis Infection Spread Prevention Support Fund
Payment decision or expense incurment regarding:
- Employment adjustment subsidies
- Elementary school closure support
- Rent support
- Sustaining subsidies for small businesses
- Business continuity subsidies for agriculture, forestry, and fishing enterprises
- Subsidies for medical institutions and pharmacies helping to prevent coronavirus spread
Expenses incurred in connection with:
- Relief provided under the coronavirus-related supplementary aid to offset interest payments
Treated as Occasional Income
Occasional income (revenue–expenses, maximum ¥500,000 special deduction). Based on revenue recognition timing.
Covid-19 subsidies (for employment income earners)
- Payment decision
Go To Travel Campaign
- At end of travel or on use of coupon tickets
Go To Eat Campaign
- On use of meal tickets
Go To Event Campaign
- On use of event tickets
Treated as Miscellaneous Income
Based on revenue recognition timing.
Covid-19 subsidy (for miscellaneous income earners)
- Payment decision
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en