To tax or not to tax? Japan debates how to handle bitcoin
TOSHIHISA KINOUCHI, Nikkei staff writer
TOKYO -- Calls are mounting in Japan to exempt bitcoins from consumption tax. Critics argue that taxing bitcoins hurts Japan's competitiveness. But financial regulators have gone only so far as to propose to give bitcoins pseudo-currency status, not tax-free status.
"Can't you consider not imposing consumption tax on bitcoins in line with the international trend?" Tsukasa Akimoto, a member of the ruling Liberal Democratic Party, asked Finance Minister Taro Aso at a lower house budget committee meeting on Feb. 5. "Japan is not alone" in taxing bitcoins, Aso responded, citing Australia and other countries that tax virtual currencies.
Although Aso defended bitcoin taxation, Japan is clearly bucking the trend. Last year, the European Court of Justice ruled that bitcoins should be exempt from value added tax, treating the virtual currency as a means of payment similar to other forms of legal tender such as bank notes and coins. Among the Group of Seven major industrialized countries, only Japan taxes bitcoins.
"Japan is going against the world," said Yuzo Kano, head of the Japan Authority of Digital Assets, an industry group for virtual currencies. "The taxation is bad for Japan in terms of its competitiveness," he said, calling for an end to bitcoin taxation.
The bitcoin taxation is affecting both consumers and dealers. When individuals living in Japan buy bitcoins with yen through a domestic exchange, their purchase is subject to the 8% consumption tax rate, just as when they buy physical goods. The tax saps people's willingness to use the virtual currency.
Dealers worry that discouraged consumers may turn to outside exchanges to escape the consumption tax. Under Japanese law, imported goods are subject to consumption tax and the tax is collected at customs. However, imported bitcoins can slip through a loophole and enter Japan without being taxed because they are electronic information and "do not come through customs," explained Hiroyuki Nishida, a partner at Ernst & Young ShinNihon, a Tokyo-based tax accounting firm.
Some overseas companies are already taking advantage of this loophole, selling bitcoins to Japanese buyers at cheaper rates. "We need a level playing field that lets Japanese dealers compete fairly with outsiders," Kano said.
Meanwhile, the Financial Services Agency is set to submit to the current Diet session its first-ever plan for regulating virtual currencies. By revising rules on payment services, it hopes to recognize bitcoins as having functions similar to those of conventional currencies rather than treating them as objects.
If passed into law, it will be a step forward in establishing a healthy regulatory environment for virtual currencies. But the law will still fall short of granting bitcoins the same tax-free status as other "means of payment" defined in the Foreign Exchange and Foreign Trade Act. That is, bitcoins will still be treated as "objects," at least for tax purposes, and thus be subject to consumption tax. Electronic money, in contrast, is exempt from the tax because the consumption tax law recognizes its potential use as an alternative to conventional currencies for paying for goods and services.
Expectations are growing among industry people for the Group of Seven summit, to be held in Japan in May, and a meeting of finance ministers and central bank governors ahead of the summit, also in Japan. "The promotion of fintech (financial technology) will be a common understanding among the heads of the state, which will in turn prompt talks in Japan to rethink the bitcoin taxation," predicted one.
Aso defended the tax on bitcoins at the Budget Committee meeting, but said that that he "will work to create the necessary environment" to prepare for the expected fintech boom.