The Financial Tax Review Committee (FTRC) (link in Japanese), one of the tax committees within the Japanese Ministry of Finance, commenced reviewing the feasibility of introducing a Japanese Individual Retirement Account (‘Japan IRA’) at their meeting of 29 July 2010. Professor Morinobu Shigeki of Chuo University and Chairman of the Japan Tax Institute (link in Japanese) was a proponent of the introduction of the Japan IRA and has published (link in Japanese) and written extensively (link in Japanese) on the topic. An outline of a potential terms for a Japanese IRA system together with some issues identified at this stage discussed at the meeting are listed below.
- From a tax perspective, support people in the formation of their financial assets through their own efforts without their having to rely on business or the state.
- Allow the management of financial assets at the level of the individual, this solving problems arising from either insolvency of an enterprise or issues relating to portability [of the pension plan between employers etc].
- Solve problems arising from lack of fairness in the provision of pensions between different businesses or individuals in the same generation and respond to greater diversity in employment.
- Given a rationalization of the current public individual pension system, establish a vessel to take over the current system, that is split into three different means of pension provision, once reorganized.
Persons qualifying for the IRA
- Individuals resident in Japan between the ages of 20 and 65, equally and without regard to their work or the business they belong to.
Means of investing; target products
- Establish as special account at a financial institution.
- A wide range of products, but those that are being discussed for inclusion in a system for unified taxation of financial income.
- Managed or invested for five years or more, so from age sixty onwards over a set period when payments are made further to agreement under contract with a financial institution.
- If the above conditions are violated, then apply taxes through going back five years from the date of the last payment and taxing the investment income that arose (although excluding use of funds for unavoidable conditions such as expenditure needed for health or care).
Method of taxation
- Taxed at the time of contribution [editors note – presumably paid out of taxed income], exempt through period of investment and exempt when receiving benefits (TEE style).
- Amounts of interest and distributions of profit or discount from financial assets contributed to individual IRA accounts would be exempt from tax,
Limit on amount of contributions
- Approximately JPY1,200,000 per year. Amounts of contribution limit that were not used in a particular year would be carried forward.
Time for introduction
- Looking at the need for system development in financial institutions, 2012 or later.
- Relationship to the current system of three level individual pension provision.
- Production of a realistic and concrete timetable for the reorganization and unification of the current three level pension system.
- A system to transfer pension assets into the new system at current values (without additional taxation)
- Determination of the Ministry responsible for jurisdiction over the system.
- The contribution method – accumulation at a voluntary time ? Or accumulation at set periods of time? To be discussed along with the system functions required for management of contribution limits and expenses.
The Japan Tax Site will continue to report on how the proposal develops.