December 7, 2017 4:00 pm JST

Japan's taxman tightens scrutiny on wealthy

Authorities bolster project teams to unravel complex avoidance schemes, identify international assets

TOMOSHIZU KAWASE, Nikkei staff writer

Japan's National Tax Agency

TOKYO -- Japan's taxation authority is tightening scrutiny on wealthy people who have large amounts of assets domestically and overseas.

This past summer, the National Tax Agency set up project teams to look into the income and assets of rich people. Personnel in the teams, located across Japan, has since increased fourfold.

The tax authority is bolstering its ability to identify attempts to conceal assets or use of dubious international transactions to avoid taxation. This is happening just as the government has grown watchful about behavior of the wealthy since the 2015 leak of the so-called Panama Papers has shed light on the tax avoidance behavior of the wealthy worldwide.

The government also needs to boost revenues, as Japan's finances are saddled with debts exceeding 1 quadrillion yen ($8.85 trillion).

Over 20,000 rich people

The project teams, initially set up in 2014 at regional taxation bureaus in the three biggest Japanese cities of Tokyo, Osaka and Nagoya, were expanded to all 11 regional taxation bureaus and the regional taxation office in Okinawa in the summer. A total of about 200 staffers now serve on the teams, who are supervised under the director of international taxation, a post newly set up at the agency.

The agency's tighter scrutiny on the wealthy actually started a few years ago. In the last administrative year ended June 2017, there were 4,188 cases in which wealthy taxpayers were investigated. These exposed about 44.1 billion yen in unreported income.

According to knowledgeable sources, the agency a few years ago had multiple criteria for putting individuals in the wealthy category. In 2015, about 17,000 would have been categorized as wealthy if one of these criteria -- annual income totaling 100 million yen or more -- were applied on data from a 2015 survey by the agency.

But the actual number the agency deems wealthy should total at least 20,000 if other criteria, such as having inherited assets totaling 500 million yen or more, are also applied, according to former agency officials.

The agency has never disclosed information about cases that the project team exposed, but a disclosed internal document has shed light on some of the cases.

The document the Nikkei obtained from the agency is about the agency commissioner's staff commendations on probes that successfully cracked income-reporting irregularities committed using highly complex schemes or those demonstrating creativity.

In the heavily censored document was visible text describing a case at the Osaka regional taxation bureau in which the staff "took a strict taxation action amid the public's increasingly critical eye on the wealthy's tax avoidance."

According to agency insiders, the case involved a failure to pay 150 billion yen in gift tax by some members of an electronics maker's founding family, for which they used a complex scheme. The group had a nonpublic asset-management company -- which was the top shareholder in the electronics maker -- issue convertible bonds and used them to fund a second nonpublic company that controls the first. The individuals then made a gift of this new company's shares to their relatives.

The Osaka bureau staff decided the reported appraised value of the new company's shares was significantly lower than what they deemed a fair value, and imposed about 30 billion yen in back taxes on the recipients.

The tax avoidance scheme involving issuance of convertible bonds is said to have been a convenient tax loophole for those who have means to use it, but the exposure has made it difficult to use in the future.

Another case revealed in the disclosed document is a case in which agency staff "identified a bid to avoid taxation using an international scheme" by a shipping company. When it became clear the company had been evading taxes, it was made to pay about 300 million yen in back taxes. The document said the agency staff detected an intentional concealment of income at an affiliate, deemed the company's virtual subsidiary, registered in Panama, a known tax haven.

Wealthy people are increasingly holding their assets overseas and they take complex forms. The agency plans to introduce the Common Reporting Standard, an international rule for tax authorities in different countries to exchange information on financial accounts held by nonresidents.

Under this rule, aimed at enhancing the grasp of rich people's assets, the authorities collect from local financial institutions information such as the name of the account holder, the holder's address of residence, the balance of the accounts and the amount of interest and dividends received. They automatically share such information with each other.

Exodus overseas

The tax authority's increased scrutiny has prompted some rich people to move not only their assets but their residency overseas to lighten tax burden, according to an attorney versed in international taxation processing.

"I get two calls or so each month from wealthy people, and these are people whose assets total billions of yen, asking about relocating to overseas locations" where taxes are lighter than in Japan, the attorney said.

One of their potential destinations is Singapore, where, unlike in Japan, there are no levies on inheritance or gift giving. The Southeast Asian country does not impose tax on investment gains, and its corporate tax rate is also more generous at less than 20%.

According to the Japanese Foreign Ministry, about 35,000 Japanese were staying in Singapore for extended periods as of October 2016. The figure is up about 30% from four years ago, and is thought to include wealthy individuals who were avoiding taxation back home.

"We don't mean to overly focus on the wealthy -- they include people who drive the Japanese economy," a senior Japanese tax official said. "But I do believe it is unfair that the wealthy are able to avoid taxes using the means only available to them."

A private banker, a licensed professional in Japan supporting wealthy clients' asset management, warned, however, that excessive scrutiny of the wealthy may do more harm than good.

"If they develop the notion that it doesn't matter how hard they work because taxes will take away a large part of their revenues, then it may discourage them to innovate, and I think that could dampen economic growth," the person said.

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