The Journal The Authority on Global Business in Japan

In 2017, Japan’s National Tax Agency (NTA) conducted 12,576 inheritance tax audits, an increase of 3.8 percent over the previous year. Why is this significant? Well, of those audits, the number focusing on international inheritances has increased by 23 percent, highlighting a significant shift in the NTA’s focus1. Although the amount of additional tax can vary greatly depending on each individual case and the assets involved, nearly 84 percent of audits resulted in additional tax being levied on the taxpayer. This success rate for the NTA is higher than for corporation tax audits (74 percent) and individual income tax audits (62 percent). In recent years there has been a reduction in the number of NTA officials, so it’s no wonder resources are being allocated to audits with a higher chance of levying tax.

TWO KEY POINTS
In its International Strategic Total Plan, published in 2017, the NTA described 14 areas on which it will focus to ensure the fair and correct collection of tax. Three of those relate to inheritance and gift tax on overseas assets: two regarding undisclosed foreign assets subject to inheritance and gift tax, and one relating to those assets and the income arising from them. Tax information exchange agreements are now being used more efficiently, so that taxpayers under audit are finding that the tax office already has information on their undeclared overseas assets at the first meeting. If you have ever been through a tax audit, this may explain the auditor’s attitude of “What else is this person hiding?”

Failing to disclose an overseas inheritance can have the following knock-on effects:

  • If a taxpayer is correctly disclosing overseas assets in an annual overseas assets report, the sudden inclusion of the overseas-inherited property will trigger a letter from the tax office inquiring into the source of those funds.
  • If an overseas assets report is not filed, then declaring income from these assets—or transferring the funds into Japan—will raise flags, again resulting in a letter from the tax office.

These letters from the tax office help them to identify taxpayers that warrant a proper audit.

In either case, an undisclosed over­seas inheritance is unlikely to remain off the tax office’s radar for long—especially given their stated objectives on tax collection above and the tools at their disposal. And an audit based on suspicion is always going to be more stressful and time-consuming than a routine one.

BE TRANSPARENT
What can a taxpayer do to prevent the disruption caused by these audits?

As ever, the key to an easy life is transparency. If you inherit overseas assets, your first step should be to seek professional advice from a tax advisor, as tax may be due in Japan as well as in the other country. A credit is available in most circumstances for tax paid overseas and so the Japan liability, if any, may be lower than expected. For inheritances that fall under the exemption threshold, a simple disclosure report can be filed to inform the tax office. Although this may cause the tax office to raise questions, no additional tax would be due, and this filing can be relied on if the source of overseas assets is later queried. These simple steps can help you avoid unnecessary future headaches with the tax office

1. Heisei 29 Inheritance tax audit details report,
NTA: www.nta.go.jp/information/release/pdf/3012_02.pdf