In the Japanese government’s attempts to revitalise the economy, political leaders have been taking great pains to attract foreign investment. Efforts have included rewriting regulations and liberalising government practices that were clogging the business environment.
At the same time, a gap in the tax law allowed rich taxpayers who left Japan to take up residence in lower-tax locations and take substantial capital gains with them, to avoid being taxed on their gains.
In an attempt to rectify this problem, the government has announced a new exit tax, to take effect on July 1, 2015. Under the new legislation, any Japanese national — and foreign long-term resident with a permanent or spouse visa — would be subject to a 20.4% capital gains tax on assets of ¥100 million or more when leaving Japan. For Japanese, this means the tax loophole is closed. For foreign nationals, this is effectively an “exit tax” imposed when they return to their home country or their next assignment overseas.
The problem is that wealthy foreigners (e.g., European spouses and taxpaying citizens) get swept up in the letter of the law along with the scofflaws, and sometimes get taxed twice — by Japan when they leave and by their own country when they arrive home.
This is not fair, according to Hans-Peter Musahl, chairman of the EBC Tax Committee. Musahl believes the tax violates the government’s efforts to attract investment, since it could discourage people from moving here. “As Europeans, we have to admit we have such laws as well,“ says Musahl.
The problem is not the exit tax itself, but rather the legislation as written that could lead to premature taxation of foreign residents on profits they have not even realised. And this, in turn, could result in highly skilled or wealthy individuals opting not to come here, in effect undermining the Abe government’s efforts to revitalise the economy. The EBC, therefore, is calling for foreign nationals to be exempt from the new exit tax.
The Japanese government believes that the new tax will impact only about 100 people, Japanese and foreign. However, the EBC notes that there are more than 1 million foreign residents in Japan, among them 7,000 Europeans who hold visas in the target categories, which include holders of spouse visas and permanent residents.
“If only 1% had, or will have saved, financial assets of ¥100 million by the time of their exit from Japan, more than 1,000 people would be affected by the new exit tax rule — not only a few foreigners among the total number of 100 Japanese and foreigners assumed by the Ministry of Finance,” Musahl says.
He is quick to point out that people who trusted in the law as written to avoid taxation in the past should not be called tax “cheats”. “If you have taxation rules not addressing an exit, and people follow these rules, then it’s not cheating,” he continues. “The government needed to change the rules, and they did; but they overdid it, in our view.”
Under domestic tax law, Japan retains the right to tax capital gains when its residents depart to foreign countries, as do most countries. Tax treaties, concluded for the avoidance of double taxation, often provide that where a taxpayer moves from one country to another, only the country to which the taxpayer has moved is allowed to tax the capital gains.
As Paul Hunter of the International Banking Association notes: “We are concerned that the [new law] might lead to a fragmented system, and does not take into account how the country and economy might — and should — develop.”
For example, Hunter says the new regulations apply to people in all sectors, but the financial industry will be disproportionately affected — again, undermining the government’s efforts to energise the economy. “In an environment in Japan where we are encouraging people to invest in financial instruments, it seems odd to penalise people for embracing this new environment,” he adds.
The government is considering amendments to the new legislation that would exclude people with certain types of visa, such as intercompany transfers, management and business. “We think this is a good step to exclude a range of people who might get caught up by this tax law [and] who it is not intended to capture,” says Musahl. This would include people who could contribute to the growth of Tokyo as a financial centre, as well as foreign nationals who may want to engage in further direct foreign investment in Japan. “We think this will … discourage them from contributing to the growth of Tokyo as a financial centre and from galvanising the wider economy.” It could also, in some cases, keep people from accepting assignments in Japan, if there could be difficulties leaving with their assets intact.
“Foreign [people] should be able to go home at any time without being accused of tax avoidance,” Musahl says. “Tax law shouldn’t be telling me where to spend my time.”
The government has announced modifications to the exit tax legislation:
Foreign residents under visa category II (e.g. permanent resident, spouse visas) may apply for a category I visa (e.g. investor, intra company, etc) — and thereby avoid the exit tax — if their period of stay was prior to July 2015.
Only those who will have lived in Japan for more than five years from July 2015 (under visa category II) will be liable for the tax.© Japan Today