TOKYO -- As Japan prepares to raise the consumption tax for the first time in half a decade next year, the Ministry of Finance worries that gold smuggling will also get a boost.
When the tax was last increased in 2014, to 8% from 5%, smuggling of the precious metal jumped as criminal organizations quickly realized how to game the system for their own enrichment.
The scheme works like this: Procure gold in places like Hong Kong, which does not tax it. Have mules hide it in their luggage and blend in with tourists, traveling to Japan to sell to stores that buy gold from the public. The stores pay for both the gold itself and the consumption tax. The tax component becomes pure profit.
And with the consumption tax set to rise to 10% in October 2019, margins will grow even fatter.
Japan has an unflattering reputation as a "go-to place" for gold smugglers. In 2017, there were 1,347 cases discovered by law enforcement -- 112 times the tally from 2013, the year before the last tax hike. Seized gold last year amounted to 6,236 kg, a 47-fold increase.
"It looks like the break-even point for smugglers is between 5 and 8%," a government source said of the sudden spike.
Japan even "exported" 215 tons of gold in 2017, despite being a producer of only tens of tons domestically. That was almost double the 114 tons exported in 2014.
Official gold imports, meanwhile, dropped to 5 tons in 2017 from 16 tons in 2014. The scale of smuggling is said to exceed 150 tons.
The Finance Ministry acknowledges that more than 60 billion yen ($540 million) could have gone to criminal organizations via the scheme. "We only know the tip of the iceberg," an official said.
But the government is not sitting idly by. April's revised customs law strengthened penalties for smugglers and distributors engaged in illegal activities. Airports in Japan are being outfitted with new gates that can detect small amounts of metal.
While Japan is not alone in taxing gold, the spike here is more clear than elsewhere. Weak supervision and a lack of measures to crack down hard may make it an easy target for criminal organizations, a government source notes.