A recent Lifelines column covered the relatively new overseas assets reporting (OAR) law (“Long-term foreign Japan residents must declare overseas assets — and could be taxed on them,” Oct. 31).
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.
This column prompted a flurry of emails from readers, many of whom had never heard of the law and had questions about it. In this follow-up article, two tax consultants, Yuko Urushimatsu and Calvin Tong, answer some of these queries and help to shed light on the issues involved. Calvin also addresses some specific points for Americans.
The most common question from readers was how to get further information on the OAR requirements in English. As noted in the previous column, detailed information on the National Tax Agency’s website is currently available only in Japanese. There is also a brief mention on page 16 of the latest tax guide for foreign nationals in English.
Lifelines spoke to the NTA about the situation.
“At the present time, there are no plans to add more information in other languages to our website,” said Hideyoshi Tamura of the Taxation Management Division. “If your readers need help, we advise consulting with their local tax office or seeking the services of a taxation professional.” While he couldn’t promise that it would lead to any immediate changes, Tamura said he would inform the relevant departments about readers’ concern over a lack of information in English.
Before jumping into answering questions, Yuko would like readers to bear the following two points in mind: “First, the discussion will focus only on the permanent tax resident category of filers. This population, typically, has been living in Japan for more than five years within the last 10 years and are, by definition, subject to global reporting of both income and — if above thresholds — assets.
“Second,” she says, “please do not take the comments as actionable without verification from a source who can address your specific situation more fully and with competence.”
With that out of the way, here are your questions and the tax experts’ answers.
Is this only for foreign nationals whose earnings exceed ¥50 million, or for all people regardless of the amount?
The overseas asset reporting form (kokugai kaisan chōsho) applies to both Japanese and foreign residents with overseas assets exceeding ¥50 million as of Dec. 31 of any year.
Please do not confuse earnings with assets. Earnings are what you receive in any year, such as salary, interest or rental income. Assets are the things that you own that have ongoing value, such as financial accounts, real estate or antiques/artwork.
As such, the submission of the form does not of itself trigger a tax. It is to give the tax office an idea of what taxpayers have outside of the country that is potentially taxable. It came into effect in tax year 2013. The penalty component (¥500,000) started from the 2014 tax year.
We should also mention that there is another asset-related form, called the assets and liabilities reporting (ALR) form, which has a connection to the OAR. The current version of the ALR came into effect in tax year 2015. It is a revision to a form that had been in existence for decades. This new version has filing thresholds if a) income is over ¥20 million and either b1) assets with an aggregate fair market value exceed ¥300 million or b2) assets subject to a new “exit tax” total ¥100 million or more on Dec 31. If you are required to file the OAR, the details do not have to be repeated on the ALR. (For further details, please refer to the links in the sidebar.)
What should I do if I have not reported my assets since the law went into effect in 2014? Would I have to pay the ¥500,000 fine, or twice that for the past two years, if I report my assets to the tax office now?
Currently, the tax offices are sending out mailers to people whom they think may have overseas assets. This “soft” approach indicates that the iron gloves have not been put on yet. Thus, if filings are required, we might suggest coming forth sooner than later.
Does the OAR law include people here under the Status of Forces Agreement (SOFA) between Japan and the U.S.?
SOFA is a unique category, and within it there are two subcategories. They cover those employed directly by the U.S. government and those employed by private companies who are government contractors. Neither group is subject to Japanese taxes.
In principle, neither group is regarded as permanent tax residents even if they have lived in Japan for more than five years within the past 10 years. In this sense, it is our understanding that they would not be subject to the OAR.
However, this does not exempt them from taxation when they earn incomes in a way unrelated to their SOFA status. In such cases, we recommend that they consult with the tax office or a tax consultant.
How can I get a refund if there is double taxation?
Typically, a tax is being paid to one country only, with relief from the other side. This is usually done via foreign tax credits on a tax return. In some cases, unfortunately, double taxation is possible. Discussion on this topic is case by case and country by country.
In Japan the tax form must be sent to the office by March 14, but in Germany the banks send out information in April or May. Does this mean I may have to pay a fine if I’m late in reporting my overseas assets?
We assume that the reader means that they aren’t able to receive the official tax forms until April or May. He/she should, however, be able to obtain current information, such as year-end totals, via periodic statements, online or by calling the overseas bank.
American tax exceptionalism
While on the topic of asset reporting, Calvin shares the following information for American readers, for whom tax laws are a bit more complicated than most:
There is new news on the subject of asset-reporting to the U.S. government for U.S. people. The foreign bank account reporting form (FBAR), which is one of the two main forms the taxpayer needs to be aware of for reporting non-U.S. financial accounts whose combined value in any year is more than $10,000 (the other document being the Form 8938 Statement of Specified Foreign Financial Assets), will have its filing procedures changed starting next year. In the past, the due date had been June 30 for reporting accounts for the previous year, and in addition, no extensions were allowed.
Starting with the 2016 reporting year, the date will be moved to April 15 and an extension for up to six months will be allowed. When reporting for tax year 2016, the deadline will be April 15, 2017. An extension request can be submitted to extend to Oct. 15, 2017. The filing instructions on these new rules have not been published by the Internal Revenue Service/U.S. Treasury at the time of writing.
The issue of double taxation of income was also raised by American readers. The U.S. government is the only one in the industrialized world to tax its expatriates.
Questions included “Which side gets the tax?”, “How is double taxation avoided?” and “How do I show these on the respective tax returns?” Here, Calvin addresses some of those queries:
As a general rule, while both the Japanese and U.S. tax returns require reporting of income no matter where it was earned, it is the country where the income is derived from that gets the tax. To avoid double taxation, the other country allows a foreign tax credit to offset the otherwise double tax.
For example, if dividend income were earned from a U.S.-listed company, the U.S. gets first taxing rights, while the Japanese tax return allows a credit from the tax paid to the U.S. IRS. Or, if rental income is derived from a property located in Japan, that country has first taxing rights, while relief is allowed on the U.S. side via credits against the Japanese tax.
However, there are often exceptions to the general rule. These are usually addressed in the U.S.-Japan Tax Treaty of 2003 and its accompanying Technical Explanation. A feature of the TT is that it is written in a fairly heavy bureaucratic style, sometimes incomplete and lacking in necessary explanation if read alone. The TE provides additional guidance in clearer English.
One such example is the treatment of U.S. Social Security. Article 17.1, which addresses Social Security among other matters, reads quite differently if the TE and TT are read alongside each other. Discussion on this can be quite involved, and so we will only point the interested reader to the primary source documents. (See the last link in the sidebar.)
Finally, please refer to the Ernst & Young article about trends in exchange of information between the U.S. and Japanese governments.
The information in this article is offered as a general guide. Lifelines is unable to advise on individual situations. Thank you to Japanese tax consultant Yuko Urushimatsu (www.urushimatsu-zeirishi.com/english) and American tax consultant Calvin Tong (firstname.lastname@example.org). Comments and questions: email@example.com
• Recent Lifelines column on OAR
• National Tax Agency info on OAR (in Japanese)
• NTA tax guide for foreign nationals (English)
• Original JT OAR news article: bit.ly/jtoarnews
• PwC article on ALR
For U.S. citizens
• Deloitte Touche Tohmatsu FBAR article
• Ernst & Young Japan-U.S. inforation exchange article