A new reporting requirement has been introduced for individuals with overseas assets valued above JPY 50 million at the end of a calendar year. These more stringent disclosure requirements reflect a more aggressive approach by Japan’s National Tax Authority (NTA) to ensuring that all overseas assets are correctly reported for the purposes of establishing overseas income for income tax purposes and recording the value of overseas assets for inheritance tax.
The requirement applies to permanent residents in Japan and came into effect from 1 January 2014. These individuals will need to submit an annual statement of overseas assets giving details of assets held overseas in each period for which the individual is covered by the requirements. The statement must be submitted to the tax authorities by the 15 March following the calendar year end. Statements of overseas assets held on December 31st, 2020 will therefore be required by March 15th, 2021 from individuals falling within the legislation.
A permanent resident is any Japanese resident who is not within the definition of a non-permanent resident. A non-permanent resident is a Japanese resident without Japanese nationality who has lived in Japan for five years or less within the past ten years. Non-permanent residents are not required to submit the statement of overseas assets.
Permanent residents are therefore individuals who have been present in Japan for more than five of the last ten years. These permanent residents must submit the statement of overseas assets if they have assets valued at more than JPY 50 million. The statement of overseas assets must be submitted whether or not the individual is obliged to submit an income tax return. However an individual who has left Japan before 15 March following the calendar year is not obliged to submit the statement of overseas assets.
The definition of an asset for the purposes of the statement includes anything whose economic value can be estimated in terms of monetary value. The scope of the reporting for the purposes of this legislation is much broader than just financial assets. The obligation to report overseas assets would include assets such as real estate, brokerage accounts, stocks, bonds, bank accounts, insurance products, an-interest in a partnership or trust, jewelry or antiques. Also included in the definition of an asset is a vested equity award that has not yet been paid or exercised, for example a stock option. The assets to be reported include both business assets and personal assets and the nature of the asset would need to be specified in the statement.
For the purpose of the legislation overseas assets are defined as assets located outside the country. Some detailed rules have been included to define where an asset is located. For example, movable and immovable property is located where the property is situated; a deposit with a bank or other financial institution is located where the office accepting the deposit is located; a bond is located at the place of the head office of the entity that issued the stock or bond; or a loan claim is located where the head office of the obligatory is domiciled.
Valuation
The overseas assets should be declared on the statement at fair market value or at their estimated value at the calendar year end. The market value would normally be established by looking at transactions in the asset taking place between independent parties. The estimated value would be calculated in a reasonable manner based on the acquisition price of the asset or on the basis of the price for which similar assets are being sold. The value of the taxpayer’s debts cannot be used to offset the value of overseas assets.
Their value needs to be translated to Japanese yen at the foreign currency exchange rate on the relevant day. The statement requires a declaration of overseas assets by category, type, business or private use, location, number and value. Certain movable assets valued at under JPY 100,000 per unit do not need to be declared but all overseas holdings of cash and precious metals must be declared.
If assets located outside Japan are jointly held by two or more persons they must be reported separately by each of the holders of the asset based on that person’s portion of ownership of the asset.
Some people may be obliged to submit more than one statement of assets. Under existing legislation any individual who has to submit a tax return and has total income above JPY 20 million must submit a statement of assets and liabilities with the tax return. This discloses the type, number and value of all assets held and the liabilities at the calendar year end. If the individual also needs to submit the statement of overseas assets there is some overlap between the requirements. In this case the individual does not need to complete details of the overseas assets as part of the statement of assets and liabilities but only needs to include these details in the statement of overseas assets.
The NTA is given the right to inspect the statement even though it is not part of the income tax return, so the statement of overseas assets will be subject to tax audits.
Penalties
Additional tax may apply where there is an understatement of assets. For statements of overseas assets due after 1 January 2015 penalties may also apply to individuals who fail to submit the statement.
The normal penalty for the failure to disclose income is to be increased by between 5% and 15% in a case where an underlying asset has not been disclosed in the statement of overseas assets. If the asset is disclosed on the statement the penalty tax rate is to be reduced by 5%. If there is fraudulent reporting or the statement of overseas assets is not filed at all there could be criminal penalties amounting to up to a year in prison or a fine up to JPY 500,000.
Action to be taken by taxpayers
Taxpayers who are permanent residents of Japan should establish whether they fall under the requirements of the legislation. They therefore need to arrive at a realistic estimate of the value of their overseas assets to establish if this is above JPY 50 million. Taxpayers need to establish that they have traced all their overseas assets and that there are no omissions from the statement of overseas assets.
Taxpayers should also be aware of the penalties for non-filing of the statement or non-disclosure of assets. Individuals needing to file the statement should note the compliance work required and ensure that this is done in time to enable a timely submission of the statement before the 15 March deadline.
Taxpayers must realize that the statement of overseas assets provides the Japanese tax authorities with a view of their sources of overseas income and the NTA will therefore be more easily able to trace any overseas income that has not been disclosed in the income tax return. The tax authorities will also have in their possession a summary of the overseas assets that would be taken into account for inheritance tax purposes.
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