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Country: Japan, New global exchange system to tackle tax avoidance


Added on 09/02/2017

TOKYO -- Tax authorities around the world will soon get a powerful new weapon in the fight against tax avoidance, reports Asian Review.

Next year will see the launch of the Common Reporting Standard, a new global system for the automatic exchange of financial account information between national revenue bodies. Set for launch in September 2018 the CRS has already been hailed as a game-changer.

The system represents the international community's response to criticism of rampant tax avoidance through offshore accounts in the Panama Papers.

"Assets held by wealthy people will become fully visible," said senior Japanese tax official. "Its power will be tremendous."

That view appears to be no exaggeration.

Established by the Organization for Economic Cooperation and Development, the system automatically provides for the exchange of information on accounts across jurisdictions.

The data will include the names and addresses of account holders as well as the account balances and interest and dividends earned on the holdings.

Until now, tax authorities have had to make individual requests to exchange such information. In most cases, the country making the request needs to already be in possession of specific details about the taxpayer in question. Moreover, it is a laborious process involving vast amounts of paperwork.

The CRS, in contrast, will provide instant and automatic exchange of electronic data on all reportable accounts on an annual basis.

The National Tax Agency in, say, Japan will annually receive information about accounts held by Japanese citizens at Swiss banks and brokerages from the Swiss tax authorities.

Regional taxation bureaus and tax offices will then use the information and their own records to identify possible cases of illegally concealed assets. They may find, for instance, a business owner with substantial undeclared deposits in a Swiss bank account. The bureau would then consider a full-scale investigation.

A total of 101 jurisdictions are expected to take part in the CRS. The U.S. will not join the system, but many notorious tax havens like the Cayman Islands will participate.

"For tax authorities, the reams of information to be obtained through the CRS will be a treasure trove," said a Tokyo tax accountant who has been inundated with inquiries from clients about the system.

They typically ask whether unreported assets will be disclosed. A growing number of wealthy Japanese taxpayers are showing an interest in investments in Cambodia, a nonparticipant, according to a financial industry executive.

The Japanese tax authorities have expressed high hopes over the effectiveness of the CRS as it has become increasingly tougher to probe into people's assets in recent years.

The country's on-site investigations for the collection of inheritance tax, for instance, have decreased significantly. In the 2015 operation year ended in June 2016, the number of such investigations totaled 11,935, down 20% from its peak in 1998. The total amount of undeclared inheritance tax liabilities was approximately 300 billion yen($2.67 billion), only about half the all-time high, recorded in 1995.

The emergence of sophisticated financial and investment instruments like derivatives has made it difficult for any one country to keep track of all assets held by individuals.

Another factor that has increased the burden on Japanese tax inspectors is the tighter rules on investigations introduced in 2013. One requirement is that tax authorities must now maintain records of the reasons for all punitive actions they take.

But the release of the Panama Papers last year revealed how a law firm Mossack Fonseca helped clients worldwide create offshore accounts to conceal assets or dodge taxes. The revelation led to global uproar about fairness and transparency in taxation.

"It is important to build up a tightknit network [under the CRS]," Hidenori Sakota, head of the National Tax Agency, said recently. "Making assets fully visible will serve as an effective deterrent."

In 2014, the Tokyo Regional Taxation Bureau set up a special task force to investigate wealthy taxpayers.

Operating from the bureau's headquarters near the Japanese capital's iconic Tsukiji fish market, the group is made up of 10 vastly experienced tax officers. Similar squads have also been created in the regional taxation bureaus of Osaka and Nagoya in 2014.

One of high-profile case that has been exposed by the elite investigation teams centered on over 150 billion yen of unreported gift tax liabilities owed by the founding family of Keyence, a major manufacturer of sensors and other electronic devices.

But some experts have expressed skepticism about the effectiveness of the CRS. There are questions, for example, over whether financial institutions have the ability to identify the "true holders" of accounts that have been opened under the names of other individuals or companies.

The lack of U.S. participation will also undermine the strength of the CRS.

 

The launch of the CRS will pose a test for tax authorities. They will have to demonstrate an ability to use this new tool effectively in tackling the increasingly complicated challenges of collecting taxes from individuals who are determined not to pay.