The Journal The Authority on Global Business in Japan

Recently, the National Tax Agency of Japan (NTA) has focused on tax avoidance by high-net-worth individuals (HNWIs). To aid with this, several new compliance obligations have been introduced, such as the Overseas Assets Report Kokugai Zaisan Chosho, the Assets and Liabilities report (Zaisan Saimu Chosho), and the exit tax for people leaving Japan (Shukkokuzei Kazei).

Japan is one of the countries that operates an inheritance and gift tax levy, in addition to income and capital gains taxation. Under Japan’s tax laws, if the recipient of a gift or inheritance resides in Japan, they are taxed on all the property they receive regardless of its location and regardless of whether the donor, or decedent, lived in Japan or not. The tax rate for inheritance tax (IHT) and gift tax is progressive up to 55 percent, and foreigners and expats living in Japan face the same treatment as Japanese nationals.

Given the potential tax windfall involved, the NTA has been increasing the number of audits for HNWIs, especially when overseas property is involved. According to the NTA press release titled “Tax Audit Conditions for High-Net-Worth Individuals,” the number of IHT audits involving offshore properties was 753 for FY2013 and 847 for FY2014. This includes situations in which: a) the taxpayer holds offshore properties; b) the successor or decedent (or the donee or donor) reside overseas; and c) the taxpayer holds accounts with offshore financial companies.

A taxpayer’s liability to Japanese inheritance tax and gift tax is indicated in the above chart.

sc-tax

THE PANAMA PAPERS
The Panama Papers were featured heavily in the news, and have highlighted the use of family companies incorporated in tax havens such as the Caribbean. Japan’s tax haven rules apply equally to Japanese nationals and non-Japanese residing in Japan. Family companies set up in tax havens, with no business operations, are caught by the tax haven rules and the annual income of the company is attributed to the individual owners and included in their taxable income.

Although both corporations and individuals use tax havens, the tax issues for individuals can be far more serious. Under Japan’s individual income tax law, income from tax havens is categorized as “other income” (Zatsu Shotoku), which is taxed under the aggregate taxation system where the highest tax rate is over 55 percent. Further, for individuals, losses generated from tax havens cannot be offset against other types of income such as salary and real estate income, and losses from “other income” cannot be carried forward to future years. As a result, for individuals, income being classified as “other income” has significant disadvantages.

With all these opportunities to levy additional tax on HNWIs, the NTA is keen to use the recent reporting obligations and new information exchange provisions of tax treaties to gather more information on various categories such as income tax, capital gains tax, inheritance tax, and gift tax.

For more information, please contact your Grant Thornton representative at +81 (0)3 5770 8829 or email us at
tax-info@jp.gt.com

Eiji Miura is a partner at Grant Thornton Japan