The Journal The Authority on Global Business in Japan

Tax | Overseas Assets

November 2013
COMPLIANCE: NEW RULES
Certain residents must now disclose overseas assets to authorities

By Nasir Majid

To improve income and inheritance tax compliance relating to overseas assets, permanent residents who hold overseas assets may be required to report these to the Japanese tax authorities commencing in FY2013.

The requirement will apply to Japanese nationals who are resident in Japan and foreign individuals who have been in Japan for more than five of the preceding 10 years.

It will apply when a permanent resident holds assets, including non-financial assets, outside Japan that exceed ¥50 million in gross value (liabilities such as home loans will not be considered) as of December 31 each year. Individuals must disclose such assets, for the purpose of income and inheritance taxes, by submitting an annual report to the tax office by March 15 of the following year.

The disclosure obligation must be filed regardless of whether an individual income tax return is required.

In addition, assets jointly held outside Japan must be reported separately by each asset holder, based on their portion of the assets. For example, a non-working spouse or child with no Japan tax return filing requirement must submit the report if they have overseas assets worth more than ¥50 million.

Definition of an asset and valuations
For the purpose of reporting overseas assets, an asset is defined as something for which the economic value can be estimated in monetary terms.

Unlike offshore asset disclosures in other countries, the reporting in Japan will have a broader scope and will cover more than just financial assets. Examples include:

  • Real estate
  • Bank accounts
  • Brokerage accounts
  • Bonds
  • Stock shares
  • Insurance products
  • Vested equity awards that are not yet paid/exercised (such as stock options)
  • Interests in partnerships and trusts
  • Antiques
  • Jewelry and other valuables

Assets for both business and personal purposes need to be included.

Overseas assets are those located outside Japan. Values for the purpose of reporting overseas assets are fair values or estimated values as of December 31 of that year.

The fair value is a value that is commonly established through a transaction between unrelated parties, while the estimated value is a value computed in a rational manner based on the asset’s acquisition price, or a sample selling price of a similar asset.

Penalties and tax audits
The penalty for fraudulent reporting is imprisonment for up to one year, or a fine of up to ¥500,000. The same penalty is applied to those who do not submit a report on their overseas assets by the due date without any allowable reasons.

This penalty provision will be applicable for reports submitted on or after January 1, 2015.

Overseas assets reports are subject to auditing by Japan’s National Tax Agency. The tax authorities are empowered to inspect reports submitted. This means that, during the course of a tax audit, the tax auditor is entitled to inspect the form, even though it is not part of the tax return.

There are special applications of penalty tax on unreported income or inheritance tax due in connection with the new requirement.

If the penalty tax is due to an understatement of income from overseas assets that have been properly disclosed on the report of overseas assets, the penalty tax rate will be reduced by 5 percentage points.

However, if the penalty tax is due to an understatement of income from the overseas assets that have not been properly disclosed in the new report on assets, or a report has not been filed, the penalty tax rate will be increased by 5 percentage points. This penalty will apply from the initial tax year (2013).

The takeaway
The overseas assets reporting requirements will provide the Japanese government with more information on sources of offshore income and an inventory of foreign-based assets for potential inheritance taxation. Individuals should start planning to obtain year-end valuations for each of the reportable assets.

Nasir

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Nasir Majid, the lead tax partner of PricewaterhouseCoopers International Assignment Services in Tokyo, is a frequent speaker at the ACCJ on tax issues.

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