Tax – Smart Money Asia

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Benjamin Franklin said that there are two things certain in life: death and taxes. Following a change in Japan inheritance tax law in April 2017, those two things may have come into sharper focus for some foreign residents. You may have come across this Bloomberg article on the “bizarre” death tax that deters expats. It certainly seems that Japan does not make it easy for people to come and live and work here long term.

So what do expats need to know about the recent changes to inheritance tax law Japan?

Short term residents: Foreigners staying temporarily in Japan have been excluded from gift and inheritance tax on overseas assets. Staying temporarily is defined as residing in Japan for not more than 10 of the last 15 years and holding a “table 1 visa”, such as a work visa. If you are in this category and you receive an inheritance from a family member overseas, for example, it is not subject to inheritance tax in Japan. This also applies if the transfer of overseas assets is between you and another “temporary resident”. However, if you die and transfer your overseas assets to a Japanese national there is no exclusion. The transfer of Japanese assets will be subject to Japan gift or inheritance tax.

To keep it simple, if a relative dies and leaves you a house overseas – no tax in Japan. If you die and leave another temporary resident heir a house overseas – no tax in Japan. If you die and leave another temporary resident heir a house in Japan – taxed in Japan. If you leave a house overseas or in Japan to a Japanese heir – taxed in Japan.

Long term residents: If you hold a “table 2 visa”, which is a spouse visa or permanent residence, and/or have lived in Japan for more than 10 of the last 15 years, you are a long term resident. You are therefore considered an unlimited taxpayer. This means that any transfer of assets, in Japan and worldwide, will be subject to Japan gift and inheritance tax. This also comes with the controversial “look back” rule, whereby even after leaving Japan, the tax on worldwide asset transfers continues for 10 years. So a situation could arise, for example, where a long term resident leaves Japan, dies within 10 years, and an heir who has never lived in Japan will be subject to Japanese inheritance tax on the donor’s worldwide assets.

So what can you do?

If Japan inheritance tax is a concern, and you are currently a short term resident, then the number one thing you can do is leave Japan before you reach the 10 year mark. (this is quite sad when you consider Japan’s long term demographic problems – you would think that encouraging productive foreign residents to stay and contribute to the economy would be a good idea, but there you go…)

If you are a short term resident with a table 2 visa, such as a spouse visa, you might consider changing to a table 1 visa if possible.

If you are a long term resident, you have some thinking to do, particularly if you have significant worldwide assets. Retiring in Japan may not be so attractive when it comes with up to a 55% tax bill on handing down everything you own. If you are going to leave, you will want to do it while you are still healthy and confident of surviving the 10 year lookback.

The April 2017 reform was essentially implemented to counter wealthy Japanese from moving abroad and passing on assets to heirs who were not born in Japan, or had given up Japanese nationality, but unfortunately the new rules will deter long term foreign residents from living out their life here.

Regardless of tax considerations, writing a will is something everyone should consider, particularly those with assets spread around the world. Most people would prefer to make clear “who gets what” after they are gone rather than it being dictated by local laws.

Further reading: this PWC report on the April 2017 reform is both clear and comprehensive.

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By now I’m sure one of the banks or other financial institutions you use have asked you for confirmation of where you are tax resident, and for your tax ID number. In fact, you may have been asked for this information multiple times. So what is it all about and who knows what you have got, so to speak?

You may want to read up on the Common Reporting Standard (CRS). Developed by the OECD in 2014 to combat tax evasion, CRS involves the automatic exchange of tax and financial information globally. 83 countries have already signed up for the agreement and first reporting begins this month, September 2017.

What this means, in practical terms, is that every financial institution in these jurisdictions is required to collect information on their customers country or countries of tax residence, including their Tax ID number(s). Hence the requests you have probably already received from some or all of the institutions you have accounts with. This information will be provided to the local tax authority in the institution’s jurisdiction, who will then share the information with the country you are tax resident in.

The information exchanged will include:

Name, address, DOB and Tax Identification number of reportable person
Account number
Name and ID number of financial institution
Account balance of value at end of calendar year

So, for example, if you are from the UK and currently live and work in Japan, your country of tax residence will most likely be Japan. If you have a bank account in the UK, then the details and balance of that account will be shared with the Japan tax office. The same applies to accounts in any other participating countries. In case you are wondering, your tax ID number in Japan is the recently introduced My Number.

CRS was initially based on the USA Foreign Account Tax Compliance Act (FATCA) and therefore it’s interesting to note that the US, which is already receiving information about foreign accounts held by its citizens through FATCA, has not signed the CRS treaty.

So what does this mean for you? Well mostly it means more and more disclosure related to international financial transactions. You are already required to provide certified ID and proof of residential address in order to open accounts and move money, and now you will also need to provide your tax ID. If you have transferred money overseas recently, you may have noticed that the amount of information you have to provide is increasing, especially for larger amounts. What it also means is that, in order to catch people who are hiding money and evading taxes, people who are doing nothing wrong are steadily losing the ability to keep their financial data private. Like it or not, that is the world we are living in so plan accordingly.

Here is a useful list of participating countries, and to what degree they are implementing CRS.