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Japan’s Tax Man Cometh

In what seems yet another example of the Japanese government following the lead of the U.S. government, wealthy Japanese overseas investors need to take note: The tax man is coming for you.

Japan’s National Tax Agency plans to cooperate with overseas tax authorities, particularly in tax havens, to gather information on residents’ overseas investments and financial holdings. The agency plans on investigating those who funnel money into assets held in tax shelters.

japan-tax-man

Clearly, the Japanese government doesn’t quite have teeth as big as America to easily force countries to rollover, so they will be working closely with the other 33 members of the Organization for Economic Cooperation and Development, as well as the British Virgin Islands, the Cayman Islands, Bermuda, the Isle of Man, and other (in)famous offshore tax domiciles.

The agency is planning to make this an annual event—peeping into people’s deposits, brokerage accounts, and various other types of financial accounts.

The reality for many Japanese overseas investors is that while it may have been entirely legal to send money offshore, the Japanese government now wants to keep track of it because sooner or later they are coming after it to help pay down all those unfunded liabilities back home.

It’s no secret Japan’s demographics are deteriorating. It’s also well-known that Japan’s domestic debt has inflated to 200+ percent to GDP and rising. The popular theory is that Japanese bondholders will be asked to take a haircut, and when that happens, expect the government to take drastic measures to protect the Japanese yen from turning into the Zimbabwe dollar. This could include shoring up foreign capital reserves in any way possible. Moreover, as Japanese pension funds are the largest holders of Japanese Government Bonds (JGBs), if they are asked to take a haircut and settle in cash, this will create a massive black hole in their unfunded pension liabilities and the Japanese government will be forced to find a quick solution.

I am sure that news of the tax man peering into their international private lives will startle many Japanese. Current capital gains taxes are around over 20% depending on the asset and longevity factors, but that percentage can and will jump in the near future when the pension debacle in Japan is brought to a boiling point.

For tax havens, I don’t see any benefit for them to share data with Japan. Nikkei Asian Review is reporting that in return the Japanese government will provide the other countries with information on Japanese accounts held by their nationals. But let’s be serious here, how many international investors have bank accounts in Japan? (Nearly impossible to get an account without a residence card.) Sure, some may hold some money in domestic funds, but you don’t need to send money to Japan to speculate in the yen or Japanese markets, so I can’t envision this data swap being very advantageous for anyone other than the Japanese government.

My guess is there will be loopholes provided by these tax havens, or they may choose to comply halfheartedly. Moreover, any bullying attempts by the Japanese government will likely end with a polite stonewall of epic proportions.

That said, Japanese overseas investors are fighting a losing battle, as well as the whole world once Japan’s bond market capitulates. Global markets will be sent reeling, and it’s a safe guess that governments will not shoulder the blame (or burden) but instead point the finger at everyone else. Basically the same m.o. that has been happening worldwide since 2008.

In other words, as the currency war heats up and all the “managed” economies start failing, expect governments everywhere to seek out scapegoats.

H/T: Nikkei Asian Review

  • Ristretto

    I don’t think BOJ will ask pensions to take a haircut. I think the BOJ will buy back all those bonds at a fixed price and then make them magically disappear on their balance sheets. Central banks are operating Ponzi scemes now. They have the ability to print, and also have the ability to do internal “debt jubilee.” Think of central banks as a more powerful Barclays Bank that’s able to print their own money. Dangerous? Maybe, but maybe not. If all Central Banks operate like this it could go on for decades. Or at least until every last resource on this planet is burned up.

    • Michael

      I don’t disagree with you.
      Economics is not a science or even math.
      “Why did God invent economists?”
      “To make weathermen feel good about themselves.”
      –David Rosenberg