Measures in the 2012 Japanese Tax Reform have also introduced a requirement for tax residents of Japan (excluding non-permanent residents) to file an additional schedule declaring assets held outside of Japan and have amended how tax penalties may apply in order to encourage compliance with the regulations concerned. The new regulations include both “carrot” – reduced penalties for tax assessments on income generated from assets on the report and “stick” – harsher penalties for non-compliance.
This article outlines this new reporting requirement and the penalties that can be imposed when the reporting requirement has not been met.
Where an individual Japanese tax resident (not including non-permanent residents) owns assets outside Japan having a value greater than fifty million Japanese Yen (around USD625,000 at USD1=JPY80) during a calendar year ended 31 December then the individual is required to prepare a schedule of those assets (below a “Foreign Asset Report” and in Japanese “外国財産調書” or gaikoku zaisan chousho) that should be submitted to the relevant tax office by the 15th of March after the year concerned. 15 March is also the final due date for submission of a Japanese individual income tax return.
Note that this reporting requirement applies even if the individual has foreign assets within the scope of the reporting requirement but does not receive any taxable income from them during the year concerned.
Where to file
In a year in which the individual has taxable income and has to file the Foreign Asset Report it should be filed at the tax office to whom the individual files or would file their Japanese individual tax return. Other individuals, (for example those not receiving any income and hence who may not have a Japanese tax return filing requirement for the year but who own assets outside Japan over the fifty million Japanese Yen threshold) are required to file the Foreign Asset Report at the tax office having jurisdiction over their place of residence in Japan.
An individual who either dies or leaves the country prior to the 15th of March deadline for submission of the report is exempt from the submission requirement.
Existing reporting requirements
The Japanese tax return includes an existing schedule listing up assets and liabilities – linked here (in Japanese), below the “Detailed Schedule of Assets and Liabilities”) and when assets are recorded in the Foreign Asset Report then, regardless of the other relevant regulations under the income tax law the Detailed Schedule of Assets and Liabilities can simply state “as recorded in the Foreign Asset Report”.
The report has to state the types of foreign assets, their amount, their value and other necessary items that will be determined in regulations in due course. Either market value or estimated value have to be reported depending on the asset concerned.
Penalties for under-reporting income or failing to file
When an individual is either subject to a tax assessment or is required to file an amended return further to a tax audit (below where they are subject to “Tax Adjustment”), the individual will generally be subject to interest and penalties for either under-reporting income or more severe penalties for failure to file a tax return, with the amount of penalty calculated based on the amount of underpaid tax.
Where the Tax Adjustment was in respect of income or gain from the assets listed on the Foreign Asset Report the level of penalties imposed on underpaid tax can be mitigated to some extent. Broadly speaking, where the report is filed meeting the 15th of March deadline and the assets or matters that gave rise to the tax Adjustment were reported on the Foreign Tax Report then related penalties and interest may be reduced by five percent.
Conversely, however, if an individual is subject to a Tax Adjustment and the assets given rise to that additional tax payment were not reported on the Foreign Asset Report, then penalties and interest levied will be increased by five percent.
Submission of the foreign asset report not in anticipation of tax audit
Where an individual misses the deadline for submission of the Foreign Assets Report but submits it prior to any indication that a tax audit will take place, then the report will be deemed to have been submitted on time.
Especially given the subjectivity of determining whether or not an individual had any indication that a tax audit would take place taxpayers should ensure that the Foreign Asset Report should be submitted by the normal deadline.
Falsification and intentional non-submission
When an individual falsifies entries on the Foreign Asset Report, they will be subject to penal servitude for a period of one year or less and a fine of 500,000 yen or less.
Where an individual fails to submit the report within the required time limit, they are also subject penal servitude for a period of one year or less and a fine of 500,000 yen or less. However in these circumstances, the tax authorities may mitigate or exempt such penalty.
Note that criminal penalties already apply to falsification or deliberate non submission of tax returns.
Implications for expatriates
Expatriates in Japan who have become permanent residents, for example though spending five years or more in Japan, should pay close attention to the new requirement to file a Foreign Asset Report.
For some of such residents the requirement to list up the market value of all foreign assets may be very onerous. It may be difficult to value illiquid assets and movements in exchange rates may impact whether or not a report is required.
Individuals for which this would be a very difficult task may wish to consider the implications for their long term residence in Japan and consider moving to a country less severe reporting requirements.
Timing of implementation.
The requirement to complete and submit a foreign asset report commences from 1 January 2014. Expatriates would be well advised to seek advice from a qualified Japanese tax accountant well in advance of the first filing date.