Tax Compliance Challenges to and Measures by

the National Tax Agency (NTA), Japan

Mr. Masaaki KAIZUKA Deputy Commissioner, International Affairs

National Tax Agency, Japan The Sixth IMF-Japan High-Level Tax Conference

for Asian Countries in Tokyo April 7, 2015

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Topics Covered

1. Challenges to the NTA

2. Measures by the NTA to Ensure Taxpayer Compliance

3. Recent Measures (1) Improving Taxpayer Compliance through Enhancing Corporate Governance (2) Foreign Asset Reporting System to Improve Compliance of High Net Worth Individuals (3) Exchange of Information with Tax Treaty Partners (Common Reporting Standards of AEOI)

1. Challenges to the NTA

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Challenges to the NTA

• More complicated transactions with: - wide-spread use of e-commerce - increase in cross-border transactions • Taxpayer’s incompliant behaviors including: - use of tax avoidance schemes - transfer of assets overseas for the purpose of evading tax

Precise capture of income and assets is getting more and more difficult.

53,000

54,000

55,000

56,000

57,000

58,000

59,000

60,000

元 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

FY2015 55,725

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

（Number）

（Fiscal Year）

Challenges to the NTA

5

FY1989 54,376

FY1997 57,202

The number of staff of the NTA is on a decreasing trend after its peak in FY1997.

6 （FY）

0

5

10

15

20

25

30

35

67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

by Individuals

by Corporations

millions

Challenges to the NTA

The number of tax returns filed on individual and corporate taxes and consumption tax:

27.3 million

21.1 million

The number of tax returns filed is on an increasing trend.

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（FY）

Challenges to the NTA

8.5%

3.0%2.3%

1.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

To Corporate Taxpayers

To Individual Taxpayers *

* Individual taxpayers include only those who filed tax returns with tax amount payable.

Ratio of field audits to taxpayers is on a decreasing trend since 1980s.

2. Measures by the NTA to Ensure Taxpayer Compliance

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Measures to Ensure Taxpayer Compliance

Some of traditional approaches include:

• Tax reforms

• More focus on incompliant taxpayers

• Public Relations and Education

• Enhancing capacity of tax officials

• Collaboration with stakeholders including private associations (eg. Tax Accountants Association)

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Measures to Ensure Taxpayer Compliance

More recent approaches taken by Japan include:

• Tax reforms including BEPS action plan measures

• Enhancing corporate governance to secure tax compliance

• Improving compliance of High Net Worth Individuals by use of Foreign Assets Reporting (FAR) System

• International cooperation with other tax authorities by using the tool of Exchange of Information and assistance in collection

3. Recent Measures (1) Improving Taxpayer Compliance through Enhancing Corporate Governance

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Enhancing Corporate Governance

The NTA has been implementing a program to enhance corporate governance to ensure tax compliance for more than three years. The process of the program includes: - dialogue with corporate executives - evaluation on corporate governance made by tax

auditors during tax audits - feedback to corporate top management Corporations with robust governance agreeing to disclose risky transactions will be audited less frequently in the future.

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Enhancing Corporate Governance

From 2012 onward, some corporations with robust corporate governance which voluntarily disclose high risk transactions such as business restructuring or those Incurring extraordinary losses are audited less frequently.

Field audit

Field audit

Field audit

Year 1

Year X

Year Y

Extension of an audit interval when the above disclosure is confirmed and review of tax filing does not bring any problem.

The program aims at: - reducing compliance burden on corporations, and - focusing resources of tax administration on less compliant corporations

3. Recent Measures (2) Foreign Asset Reporting (FAR) System to Improve Compliance of High Net Worth Individuals

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• Recently-introduced reporting requirement for Japanese resident taxpayers

• Requirement to disclose all foreign assets, including but not limited to financial assets, when the total value exceeds 50 million yen

• Additional taxes on underreported income will be assessed depending on whether or not FAR statements are submitted.

• Penalties for non-compliance • More than 5,500 statements reported in 2014,

totaling assets value of approx. 2,500 billion yen

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Foreign Asset Reporting System in Japan

Types of Assets Value (Billion JPY) Share (%)

Securities 1,560 62.1 Deposits 377 15.0

Buildings 185 7.4 Land 82 3.3 Loans 69 2.8 Others 239 9.5 Total 2,514 100.0

Outline of FAR submissions in 2014

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Foreign Asset Reporting System in Japan

3. Recent Measures (3) Exchange of Information with Tax Treaty Partners （Common Reporting Standard (CRS) of Automatic Exchange of Information）

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G20 Leader’s Communiqué Brisbane Summit, 15-16 Nov. 2014 “To prevent cross-border tax evasion, we endorse the

global Common Reporting Standard for the automatic exchange of tax information (AEOI) on a reciprocal basis. We will begin to exchange information automatically with each other and with other countries by 2017 or end-2018, subject to completing necessary legislative procedures. We welcome financial centres’ commitments to do the same and call on all to join us.”

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Common Reporting Standard for Automatic Exchange of Information

Common Reporting Standard Foreign Asset Reporting System in Japan

2012 OECD launched CRS work

2013 G20 summit supported CRS work OECD-AEOI group established

Legislation enacted

2014 OECD approval of CRS, subsequently supported by G20 Financial Ministers

First report with regard to 2013 calendar year (by March 15, 2014)

2015 Criminal penalty scheme introduced for non-submissions

2017-18

First reports expected to be exchanged

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Common Reporting Standard for Automatic Exchange of Information

Related Tax Reform in Japan (FY 2015) • Proposal to newly introduce a reporting system to obligate

financial institutions to submit non-residents account information to tax offices

• New provisions in the domestic law to implement the provisions of tax conventions

→ approved by National Diet on March 31, 2015 • Applicable to transactions entered on and after January 1,

2017 • The NTA expects to exchange collected data between other

tax authorities through Tax Treaty channels in 2018. 20

Common Reporting Standard for Automatic Exchange of Information

Outline of the new reporting system 1. Submission of a statement by taxpayers to financial

institutions (FIs) Name, address, date of birth, state of residence, TIN, etc.

2. Identification by FIs of resident states of taxpayers 3. Information reporting by FIs to tax offices Value of the assets in relevant accounts Annual income earned from the assets in the accounts

4. Penalties for non-compliance

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Common Reporting Standard for Automatic Exchange of Information

Implementation schedule • The first reports by FIs will be made by April 30, 2018. • The NTA expects to exchange reported data with other

tax authorities engaged in the CRS initiative during 2018.

It is critically important that as many tax authorities as possible would join the CRS initiative to make the AEOI more effective.

Peer Review mechanism will be introduced in the OECD Global Forum.

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Common Reporting Standard for Automatic Exchange of Information

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Common Reporting Standard and Foreign Assets Reporting System

CRS FAR Enforcement First exchange in 2018 From 2014 onward

Reporter Financial institutions Residents with foreign assets of more than about $500,000

Object Financial accounts held by non-residents

Foreign assets held by residents

Information Content

Account balance, annual interest, dividends, etc.

All foreign assets - type, quantity, value and place

Submission method

Electronic Paper or electronic

By matching the data of CRS and those of FAR, the NTA could have better picture of foreign assets held by Japanese residents