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Friday, April 21, 2017

Japan Has Something Worse than the FBAR

The US Foreign Bank Account Report (known as the FBAR) is an annual report that Americans and Green Card holders must file if they have more than 10,000 USD (about 9,000 Euros and about 1 million Japanese Yen) in the foreign-to-the-US-but-local-to-those-of-us-living-abroad banks .  I bank at a branch of the BNP a couple of hundred meters from my house in France, but for the US this is "offshore" and must be reported as if I were banking in the Cayman Islands. It's a tedious exercise but failure to file incurs stiff penalties.

However, compared to the Japanese Overseas Assets Reporting (OAR), the FBAR is a model of simplicity.  I had no idea this existed because I'm only a part-timer in Japan and it doesn't apply to me.  However, it would apply to a lot of the foreigners I have met in Japan and it's worth a look.  This is not an attempt to say that the FBAR is a better beast (I don't think that at all) but it gave me some idea of how the FBAR and form 8938 could evolve.

The OAR forms are here. They are in Japanese as are the instructions.

The scope of the OAR is greater than that of the FBAR.  Japan wants to know all about your overseas assets:  banks accounts, homes and other property, jewelry, antiques, trusts.  It's basically anything with monetary value.

Who has to file?  A couple of very good articles in the Japan Times by Louise George Kittaka gives the particulars without inundating you with too much information. She writes:

"In a nutshell, the OAR law applies to foreign nationals who have been in Japan more than five years within the last 10, and whose overseas assets have a combined value of ¥50 million or more. Those who fall outside this group have nothing to worry about, for now at least."

50 million Yen is about 460,000 USD and about 427,000 Euros.  This is a higher threshold than both the FBAR and form 8938.  However, there is more work involved because it's the agregate (combined total) of all the assets, not just the combined balances of the financial accounts.  It does exclude those who came to Japan with little or no assets back in the home country.  But it will hit those with a house they might be renting while they are abroad, those who have retirement accounts, and those who inherit assets in the home country while they are living in Japan:  the family home in France, mother's jewelry, plus a PEA and a company retirement account or stock options  might take a French in Japan over the threshold faster than she thinks.  It's also not clear to me how Japan will handle currency fluctuations.  Depending on how the Yen does relative to the British Pound or the Euro may mean an individual has to report one year and then falls under the threshold the next year and can skip the exercise.

I see a real bonanza here for the compliance industry because it's not easy to comply. With the FBAR the American abroad just takes the bank statements and determines the highest value of each one and fills in the form.  But how do you accurately report the value of a home in the UK?  What is the value of mom's jewelry in Canada?  Things like that make this a real headache.

Like the FBAR there are stiff fines for non-compliance.  Kittaka quotes a tax expert in this article:

“The penalty for noncompliance is ¥500,000 [about 4,000 Euros] or a year in jail, irrespective of any earnings derived. This person should definitely file, even if a tax return is not required to accompany it,” Tong advises."

Looking beyond the reporting, is the income from these assets taxable in Japan if you are a resident?  The answer is Yes.  See the 2016 Income Tax and Special Income Tax for Reconstruction Guide for Aliens which says on page 3  "Any individual who has a domicile or owns a residence continuously for one year or more is classified as a resident. Residents, except for those classified as “non-permanent residents” have an obligation to pay the income tax and special income tax for reconstruction for whole domestic source income and foreign source income."  (The Foreign Asset reporting guidelines are on page 16.)  So if you are getting rental income in the home country or former country of citizenship, it is both reportable and taxable in Japan.

Which creates the same problem that Americans have with the FBAR.  If you are a permanent resident of Japan and you start reporting on income-generating assets that you have never reported on your Japanese income tax declaration in previous years, well you've just outed yourself as a "tax evader" in Japan.  What happens next?  An audit?  Fines? Jail time? Deportation?  The US has an amnesty program called Streamlined which again is not perfect but can be used by some to get out of the trap.  If Japan has something similar please let me know.

Having learned this relatively bad news, there are people asking on forums about the risk of being caught if you don't comply.  How will Japan know that you inherited something in the UK, France, South Korea?

In the past I would say that it would have been very hard for Japan to track assets and income abroad.  Today, well, things have changed.  Concerning FATCA, the Japan/US IGA calls for Japan to report to the US and not the other way around.  So FATCA is mostly a concern for Americans in Japan who have not filed in the US. However, the basic tax treaty does allow for information exchange.  In fact, as of 2017 Japan has 68 of these agreements with 110 jurisdictions.    It was not automatic, Japan has to make the request to the other tax authority.

However, Japan has signed on to something called the CRS (Common Reporting Standard).  This is the OECD version of FATCA.  I went looking for how this actually works and I found this FAQ by the Canadian Bankers Association.  They say:

"The CRS expands upon FATCA by requiring Canadian financial institutions to identify and report to the CRA [Canada Revenue Agency] information about accounts held by persons who are resident for tax purposes in any country other than Canada or the U.S. The CRA will then exchange this information with tax authorities of the countries with which Canada has entered into an agreement."

So if you have accounts in Canada (or any other country that has signed onto CRS like France, Japan, Korea, India, UK  (full list is here), your accounts are reportable to the jurisdictions (yes, you can have more than one) in which you are a tax resident.  So, if you live in Japan and this is one of your residences for tax purposes then other countries will automatically report on your reportable accounts in the UK, Canada and so on. To complicate matters what is a reportable account depends on the country implementation.   KPMG has this report on how Japan will implement. Assuming that your accounts in another country are reportable,  Japan won't find all your assets abroad in the report, but it will give the Japanese tax authorities some idea of where to look and who to ask.

This means that your chances of getting caught not reporting foreign assets are getting much higher. Also look forward to future refinements.  This is version 1.0 of the net and governments everywhere are struggling to find tax revenue in the face of changing demographics, deficits and outbound migration.  They want more and more reporting, more and more information flowing on a global scale.  

To those who argue that this is "tax justice"  I would urge them to look closely at the implementation of these reporting systems to see who exactly is going to be impacted:  the whales (high earners) or the minnows (mid to low income earners)?    How much money will be coming in versus the cost of implementation and enforcement? How much will individuals have to pay to comply?  Are we filling the national treasury or are we making the lawyers and other compliance experts rich?   Are there programs for the "minnows" to get compliant without going bankrupt, getting thrown in jail or being deported?  These are all legitimate questions that should be answered in full by anyone throwing around the word "justice."   And I'm sure they'll get right on that now that I've brought it up.  

I dream.....


Ellen Lebelle said...

It's like the ISF in France, which requires declaration of all assets, worldwide.

Victoria FERAUGE said...

Ellen, Aha! I should have thought of that. Any clue as to how they enforce it when the assets are outside France?

Victoria FERAUGE said...

They are a signatory to the CRS so I imagine that will help. :-)

Maria said...

Spain is a mixed bag as far as I know. All residents, citizens or not, must file taxes on worldwide income if they have lived in Spain for six months in a calendar year. Some ultra-rich worm out of that by declaring their residence in a country that is less exacting, tax-wise. Their problem is if they leave behind a trail that lets the "fisco" see the foreign residency is a sham. Foreign citizens who live here must now file Modelo 120, and declare all foreign assets. Hacienda's trick is to not notify of the obligation and then hit the foreigner with a fine for non-compliance. It's happened to several. Spaniards must also file that form if they have money abroad.

Retirees must also now declare all foreign income, such as retirement checks. It wasn't obligatory until a few years ago, when it came into law, retroactively. Older people have found themselves faced with large fines for not reporting what they thought they had no need to report. Associations have been assembled and are now litigating with the government on behalf of these sufferers.

I will look into the book you recommended. My 20 year old daughter is a proponent of anarchism, so I'll share it with her. Anarchy is looking better day by day.

Inaka Nezumi said...

I've never had to file an OAR, but in general I have found the Japanese National Tax Agency to be very pleasant and helpful about answering questions, even somewhat complicated ones. I don't think assistance from the compliance industry would be needed if one is unsure how to value that black-velvet Elvis painting inherited from Grandma -- just ask the NTA for free. If you realize you should have been reporting something that you haven't, they are again very helpful and friendly, IF you go to them first. (I hear they are somewhat less so if they have to come to you first.) Typically I understand they will ask you to back-file for the past N years plus pay some standard penalty rate on taxes owed, but no hard feelings, as long as you are not being evasive or difficult yourself.

By the way, the IRS used to be friendly and helpful like that too, believe it or not, once upon a time.

Victoria FERAUGE said...

Maria: I highly recommend ANYTHING by Scott but this one is whimsical and fun and very wise. Looks like it's the era of big data for the tax authorities. Foreigners frequently do not get the memo - Kittaka's original article about the OAR provoked a lot of mail saying "What?!" I and my daughter still run across Americans in Japan who have no clue about the FBAR. I apoke to one retired an American in France not too long ago who didn't know that he had to declare his accounts in the US to the French, and he still doesn't believe me. :-)

Nezumi-san, That is a message the tax office needs to send ASAP. In the absence of a clear path forward people will chew their nails, suffer in silence and HIDE. They won't come out of the cold unless the know they will get help and that aren't putting everything on the line by coming forward. There are people who so afraid of getting caught that they use anonymizers to read my posts on the Diaspora Tax War. I agree with you about the IRS. The Paris office was always helpful. But now those international tax offices are closed. A real false economy if you ask me.