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EDITORIAL COMMENT: Japan Joins US In Imposing "Exit Tax"

Tom Burroughes

20 April 2015

It sometimes appears that Uncle Sam is earning all the negative publicity for its “exit tax” on those who want to remove their US citizenship and give up all the joys of filing Internal Revenue Service tax returns that come with it.

But such a conclusion is wrong.

As I was reminded recently from a succinctly-worded note from global law firm Baker & McKenzie, Japan recently created a new “exit tax”. Legislation for 2015 passed into law on 31 March introducing the system. It means that people looking to expatriate themselves – and certain long-term foreign residents – will be snagged by the tax.

The law firm says the goal of the new regime is to “prevent wealthy individuals holding securities with unrealised gain from avoiding Japanese individual income tax by moving from Japan to low-tax jurisdictions”.

The law will apply to individuals holding certain assets with a combined value of at least Y100 million (about $840,000). Not all long-term non-Japanese residents will be potentially subject to the tax, but only those in Japan on certain visa statuses.

A potentially unpleasant factor is that when the new exit tax applies to an individual concurrently with existing Japanese gift and inheritance tax laws, the new tax regime could cause double taxation when gifts or inheritance from Japanese or gifts from long-term foreign residents to offshore recipients occur, the law firm argues.

What all this means is that Japan, while it doesn’t have quite the same kind of worldwide system of tax as is applied by the US, is similar to it in key respects.

These are further attempts by governments to shut down forms not just of evasion on taxes they clearly should be paying, but taxes that they might not pay by choosing to live abroad. And while the cry of “stop the tax dodgers” is a powerful one these days – witness the furore in the UK about calls to end the resident non-domicile system – it is also concerning that people who want to quit living in a country after probably already having paid high or significant taxes are given a further kick on the way out.

Japan is often accused – sometimes rightly – for being an overly insular nation. It could and should be a more open country: that means not just letting people in but letting people out without having to incur a heavy penalty. (Even better is to reduce domestic taxes so that people aren’t so determined to leave in the first place.)