MW-78 -- Japan's Tax System

J@pan Inc Magazine Presents:
Weekly Financial Commentary from Tokyo

Issue No. 78
Monday, May 31, 2004

@@ VIEWPOINT: Japan's Tax System

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@@ VIEWPOINT: Japan's Tax System

A common observation by foreigners in Japan is that there is a lack
of tax planning options, and if they do exist, there is difficulty in
obtaining good advice about them. This is particularly frustrating
for people from parts of the world where people pursue tax minimization
with the same passion and concentration with which they pursue their
favorite sport, or others where tax products used to come with every
tenth cup of Starbucks coffee. So what is the reason for so much apathy
about taxes in Japan? There is little point in arranging your affairs
to maximize your economic returns if most of that is left in the hands
of the tax man, and the apathy can't be explained by low tax rates.

There are some basic reasons: of the 39 million taxpayers in 2001, only
7 million need to file a tax return. More than 80 percent of taxpayers
have their tax deducted from their salaries and forwarded to the
tax authorities by their employer. Although just a brief look at
their salary statements would confirm they are paying taxes, this method
of paying taxes doesn't require a person to file a tax return in the
vast majority of cases, and therefore reduces their consciousness of
the burden they are bearing. And to be fair, nearly 37 million out of
the 39 million taxpayers had less than 10 million yen of income: a
salaryman with no dependents earning 10 million yen has an effective
tax rate of less than 24 percent, about half of that social insurance
and pension premiums, falling to less than 20 percent for a family of
four. More than I want to pay, but not outrageous for some, and
fiscal heaven for a salaryman in Sydney.

Another reason for the lack of tax planning is the poor state of the
profession. Like most professions in Japan, the tax accountant system
is controlled through a difficult exam system with only about 650 new
zeirishi qualifying every year. Most of these zeirishi are happy to
operate a small office in the suburbs or amongst the rice paddies
helping companies to comply with the requirements of the tax authorities.
We've heard the complaint that the tax advisor seemed to be working for
the authorities and not for the client. Fortunately, we personally
know many exceptions to this general characterization (and are happy
to provide introductions), but with such a small number of active tax
advisors across the country, the good ones are naturally in demand
and often have trouble keeping up with their clients requirements.

A final reason I want to raise for the lack of tax planning in Japan
is the interpretation of the tax law by both the authorities and the
profession. A good friend of mine in the profession commented to me
last year that the tax law is written on a substance over form basis,
but practiced on a form over substance basis. With the existence of
such a basic dichotomy, it's not surprising that different tax
authorities can have different interpretations of the same issue and
can rule against taxpayers in ways that sometimes seem arbitrary,
contradictory and irrational. For example, the Nagoya regional tax
bureau recently disallowed deductions for depreciation claimed by
an investor in property in the US through a limited partnership.
At the same time, the Ministry of Finance (MoF) boldly announced
that there was no way to impose Japanese tax on the original
investors in Shinsei Bank who held their shares through a limited
partnership. We don't believe that those investors should be taxed,
either on general principles or based on the information available
about the structure of their investment. But what made the MoF's
announcement even more troubling was that it appeared to be for
the wrong reason. What hope have the rest of us got when the
authorities behave like this?

Fortunately there is some hope. As I said there are plenty of
good advisors that are creative and will help you understand the
financial as well as the tax risks of an investment; also, there
are opportunities for tax planning, and often you don't have to dig
that deep. Another reason for hope, although it might be wishful
thinking, is in some of the changes in the new tax treaty between
Japan and the US effective from July this year. The removal of taxes
on royalties and, in some cases, dividends, is sure to have a
positive impact on trade and investment between these countries.
We understand that, even if there is any uncertainty now, US
investors using a structure identical to that used by the Shinsei
investors would clearly not be subject to tax (although we were
warned about a catch for investors in banks where the Japanese
Government retains an interest). The MoF has just announced that
it is starting treaty negotiations with a number of Asian countries
and that these negotiations will be based on the new
treaty with the US.

We believe these developments will slowly move Japan towards a more
transparent system of taxing individuals and corporations, which
will give us all greater confidence in our ability to achieve our
target returns ・ after tax.

-- John Charles-Decourcy

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Written by John Charles-Decourcy (

Edited by J@pan Inc staff (


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