Owning assets overseas can sometimes be an effective strategy for reducing your tax burden in your country of residence. However, foreign residents of Japan may not be so lucky, and thanks to the country’s reporting requirements on sizable foreign assets, you may have an obligation to share your personal information with the Japanese taxman. So, how do you know if you are required to report your overseas assets when living in Japan, and what happens if you don’t?
How It All Started
In 2014, significant changes were introduced to the Japanese tax law concerning overseas assets. Starting from that year, permanent residents of Japan holding overseas assets valued at over JPY50 million as of December 31 were – and continue to be – required to file a “Statement of Overseas Assets”. This annual requirement is enacted to ensure transparency of overseas holdings and must be filed by 15 March of the following year.
The Japanese tax authorities have stringent penalties for non-compliance. What’s more, the tax office simultaneously ramped up its monitoring efforts for overseas income and transactions, including a couple of distinct measures for taxpayers to be aware of:
- -Obligations for Japanese Banks: Since the changes, banks in Japan have been required to report international money transfers to the tax office if the transferred amount equals or exceeds 1 million yen.
- -Increased Access for Tax Authorities: Japanese tax authorities also gained the ability to access and inspect bank accounts without requiring permission from the account holders.
In 2020, the Japanese government decided to tighten the rules on this reporting requirement. The updated measure now requires individuals with overseas assets exceeding the threshold to maintain records of transactions made using their foreign bank accounts. This addition aims to give tax authorities a clearer insight into the movement of funds, particularly for those who might be utilizing offshore tax havens or evading taxes through overseas transactions.
Now, many foreign residents who don’t hold a “permanent resident” visa may think that these reporting requirements don’t apply to them. Unfortunately, these people may be wrong, as the terms “permanent residents” and “non-permanent residents” take on different meanings when applied to this tax law.
How Do You Know If You Have To Report Your Overseas Assets in Japan?
There are a few key points to note when it comes to determining who is beholden to the overseas reporting requirements of the 2014 law. First is the aforementioned “permanent resident” versus “non-permanent resident” distinction. According to the reporting law, these terms are defined as follows:
- -Permanent Resident: In this instance, the term “permanent resident” refers to any individual currently living in Japan and who has resided in Japan for over 5 years in total within the past 10 years.
- -Non-Permanent Resident: In contrast, the term “non-permanent resident” as applied to this rule refers to anyone who does not meet the requirements to be considered a permanent resident (i.e. anyone who has lived in Japan for 5 years or fewer out of the past 10.)
If you can count yourself as a non-permanent resident by the above standards, congratulations. You can go ahead and breathe a sigh of relief knowing you aren’t obligated to report your overseas assets when filing your taxes in Japan.
Those who meet the requirements to be considered “permanent residents” may not be out of the woods. You may have already noticed the other significant factor in determining your reporting obligations: the JPY50 million threshold. To determine whether overseas assets meet this threshold for the “Statement of Overseas Assets” requirement in Japan, the value of the assets is assessed as follows:
- -General Assets: The value of assets is determined based on their market price. This means that if an asset is publicly traded (e.g. stocks) or has an easily ascertainable market value, that value is used for the purposes of the report.
- -Real Estate: If the market price for real estate isn’t publicly available or easily ascertainable, the tax base for the real estate tax is employed as a surrogate for the market price of the property. This provides a standardized and more consistent method of valuation for properties overseas, ensuring that taxpayers use a similar approach in determining the value of their real estate holdings.
One should note that it is the cumulative value of these assets that must be taken into account when assessing whether or not the reporting requirement applies. If, as of December 31st, the total value exceeds JPY 50 million, you will be obligated to file the “Statement of Overseas Assets”.
Which Assets Count As Overseas Assets For Japanese Tax Purposes?
Overseas assets for the purposes of reporting in Japan are broadly divided into two primary categories: “Financial Assets” and “Non-Financial Assets”. Financial assets are primarily monetary in nature or are related to financial institutions, such as stocks, bonds, or bank deposits. Non-financial assets, on the other hand, refer mainly to real estate or land.
The location, or jurisdiction, of these overseas assets plays a crucial role in the reporting process, as it establishes where the asset exists and hence, falls under which country’s regulatory ambit. Fortunately, determining the location of both financial and non-financial assets is fairly straightforward:
- -Financial Assets:
- Bank Deposits: The address of the foreign financial institution where the deposit is held.
- Stocks/Bonds: The address of the financial institution or entity that manages or holds these securities.
- -Non-Financial Assets:
- Real Estate: The physical location or address of the property.
So, now that you know who is required to report their overseas assets and which assets must be included in the assessment, what happens if you fail to be compliant with this tax law?
Penalties For Not Declaring Your Overseas Assets To The Japanese Government
Failing to declare overseas assets and produce the necessary transaction records during an audit can lead to stringent scrutiny. If someone intentionally tries to deceive the tax authorities or knowingly hides information, they could face substantial penalties, including hefty fines of up to JPY 500,000 or even a potential prison sentence of up to one year.
However, in a bid to encourage compliance, the tax authorities offer offenders a reprieve under the right circumstances. Penalties for noncompliance vary depending on an individual’s intent. If someone doesn’t disclose due to genuine oversight or extenuating circumstances, the tax authorities might be understanding and might offer a bit of leniency. And if individuals willingly submit their undeclared records, the tax authorities might reduce the penalty taxes.
Maintaining Compliance While Protecting Your Overseas Assets
If you are a foreign resident of Japan with substantial overseas assets, you are navigating a complex regulatory landscape, faced with stringent rules regarding the reporting and taxation of your overseas assets. So how do you protect these assets without finding yourself at risk of non-compliance in regard to Japanese tax law?
Most people in this situation will benefit significantly from seeking advice from financial advisers who are versed in both domestic and international tax planning and asset management. These professionals can offer strategic insights on tax-efficient ways to manage and optimize your overseas holdings, ensuring that you remain compliant while also maximizing your financial gains.