An objective of Japan’s 2010 tax reform program has been the extension of the network of tax treaties that allow Japan to exchange taxpayer information with tax authorities in other jurisdictions. Such extension should be of help in allowing Japan to more effectively pursue international tax evasion.
Domestic law and treaty based information exchange
One part of Japan’s effort has also been the re-negotiation of the information exchange articles in its treaties to clarify how they interact with the domestic law of the other treaty countries in order to ensure that the Japanese authorities can obtain information required.
An issue that tax authorities have faced in recent years is conflict between the domestic law of a country which governs the information that can be provided on its citizens to institutions of other sovereign states and the terms of information exchange articles in tax treaties that the country has entered into.
The best known recent example of such conflict arises from the US Swiss tax treaty. This states at Article 26 para 3 that:
“…In no case shall the provisions of this Article be construed so as to impose upon either of the Contracting States the obligation to carry out administrative measures at variance with the regulations and practice of either Contracting State or which would be contrary to its sovereignty, security or public policy or to supply particulars which are not procurable under its own legislation or that of the State making application….”.
The concern in Switzerland was that the provision of information to the US tax authorities may be in breach of its regulations regarding banking confidentiality such that the Swiss authorities required a resolution in its executive body in order to meet information exchange requests initiated by the IRS. Japan’s revisions to its tax treaties should help mitigate concerns the authorities may have in this area.
Japan’s information exchange program
The new Singapore Japan protocol provides a good example of a comprehensively updated information exchange article in an existing tax treaty. The signing of new agreements with the Bermudan authorities and the announcement of the planned treaty with the Cayman Island authorities are examples of new tax agreements mainly aimed at information exchange. As reference for Japanese speakers, Japan has also revised its domestic procedures (link in Japanese) relating to exchange of information under its tax treaties.
Links to some existing or proposed information exchange articles are as follows. These are awaiting ratification unless otherwise indicated. Please be sure to check for the latest status as this article may not be maintained and up to date.
- Swiss comprehensive proposed revisions including information exchange and exchange of notes
- Malaysian protocol revising information exchange article
- Singaporean protocol revising information exchange article
- New Bermudan protocol on information exchange (effective from 1 August 2010)
- Belgian protocol revising information exchange article
- Luxembourg protocol revising information exchange article
- Jersey information exchange treaty
- Isle of Man information exchange treaty
- Guernsey information exchange treaty
- Bahamas information exchange treaty
New treaties or protocols likely to include information exchange clauses are pending with Hong Kong, Kuwait, Cayman Islands, Saudia Arabia, the Arab Emirates but the text of these agreements or drafts may not yet be in the public domain.
More flexibility in structuring investment into Japan?
Japan’s expansion of the scope of its information exchange network may be helpful to some foreign investors. For example, under the new Netherlands Japan tax treaty where a Dutch investor forms a fiscally transparent entity under the law of a country other than the Netherlands or Japan, the treaty recognizes the look through of the entity to the underlying Dutch investor, provided that Japan has concluded an information exchange agreement with the third country concerned.
Accordingly the new treaty may allow a Dutch investor acting through a third country fiscally transparent vehicle access to treaty benefits if the investor meets other conditions, such as those in the new limitations of benefits clause. Once Japan signs its treaty with the Cayman Islands this could include Cayman vehicles as well.
Countries with information exchange agreements with Japan
The NTA web site includes a convenient listing of countries that have concluded information exchange agreements with Japan (link in Japanese) that is reproduced below. Kazahkstan and Brunei should be added to the list.
|Countries with information exchange articles included in NTA list|
|Ireland||Egypt||Sri Lanka||New Zealand||Vietnam|
|Armenia||The Netherlands||South Korea||Hungary||Poland|
|Italy||Kirgiz||Czech Republic||Fiji||South Africa|
|India||Georgia||China (excluding Hong Kong and Macao)||Philippines||Mexico|