Japan
This report analyses the implementation of the AEOI Standard in Japan with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
Japan’s legal framework implementing the AEOI Standard is in place but needs improvement in order to be fully consistent with the requirements of the AEOI Terms of Reference. While Japan’s international legal framework to exchange the information with all of Japan’s Interested Appropriate Partners (CR2) is consistent with the requirements, its domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) has deficiencies significant to the proper functioning of elements of the AEOI Standard. More specifically, Japan’s legislative framework is deficient as far as the definition and identification process for Controlling Persons is concerned.
Overall determination on the legal framework: In Place But Needs Improvement
Effectiveness of AEOI in practice
Japan’s implementation of the AEOI Standard is on track with respect to the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. This includes ensuring Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1) and exchanging the information in an effective and timely manner (CR2). Japan is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
Overall rating in relation to the effectiveness in practice: On Track
General context
Japan commenced exchanges under the AEOI Standard in 2018.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, Japan:
enacted the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the Local Tax Act Incidental to Enforcement of Tax Treaties (CRS Act), as amended;
introduced the Order for the Enforcement of the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the Local Tax Act Incidental to Enforcement of Tax Treaties (CRS Order), as amended;
introduced the Ordinance for the Enforcement of the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the Local Tax Act Incidental to Enforcement of Tax Treaties (CRS Ordinance), as amended; and
made reference to the Order for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds as well as the Ordinance for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds for the purposes of implementing the FATF Recommendations for the purposes of the identification of Controlling Persons under the AEOI Standard.
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 January 2017. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete the due diligence procedures on High Value Individual Accounts by 31 December 2017 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2018.
Following the initial Global Forum peer review, Japan amended its legislative framework to address issues identified, effective from 1 April 2020.
With respect to the exchange of information under the AEOI Standard, Japan:
is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2018; and
put in place two bilateral agreements.1
Table 1 sets out the number of Financial Institutions in Japan that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that Japan requires the reporting of Financial Accounts based on a prescribed list of exchange partners and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of Japan’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by Japan in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to Japan’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard, in Japan:
the National Tax Agency (the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with Japan’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place by the National Tax Agency, which ensure the validation of the data reported by Financial Institutions before it is exchanged with Japan’s exchange partners; and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of Japan’s legal frameworks implementing the AEOI Standard concluded with the determination that Japan’s domestic legal framework is In Place But Needs Improvement and its international legal framework is In Place. This has been taken into account when reviewing the effectiveness of Japan’s implementation of the AEOI Standard in practice.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for Japan are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
Determination: In Place But Needs Improvement
Japan’s domestic legislative framework is in place and contains most of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures, but it needs improvement in relation to the scope of Financial Accounts required to be reported (SR 1.2). More specifically, Japan’s legislative framework does not fully incorporate the definitions and processes related to the identification of Controlling Persons of trusts and similar legal arrangements.
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
Japan has defined the scope of Reporting Financial Institutions in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
Japan has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in a manner that is largely consistent with the CRS and its Commentary. However, deficiencies have been identified. More specifically, Japan’s legislative framework does not fully incorporate the definition of Controlling Persons as required and does not fully incorporate the due diligence procedures to identify Controlling Persons. The definition and identification of Controlling Persons is material to the proper functioning of the AEOI Standard.
Japan should amend its domestic legislative framework to require Reporting Financial Institutions to always identify and determine the reportable status of the Controlling Persons of trusts and similar legal arrangements in accordance with the AEOI Standard.
Japan should amend its domestic legislative framework to fully incorporate the definition of Controlling Persons in accordance with the AEOI Standard by including all natural persons required to be identified with respect to trusts and similar legal arrangements.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
Japan has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
Japan has a legislative framework in place to enforce the requirements in accordance with the CRS and its Commentary.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
Japan’s international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of Japan’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from Japan and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
Japan has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
Japan put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
Japan’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Assessed jurisdiction’s comments on the assessment of its legal frameworks
Japan would like to extend its sincere appreciation to the assessment team for their dedicated work and professionalism throughout the peer review process. Japan will work on the implementation of the recommendations indicated in the report taking account of further contributions toward enhancing international tax transparency.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for Japan are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
Japan’s implementation of the AEOI Standard is on track with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures and are therefore reporting complete and accurate information. This includes ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). Japan is encouraged to continue its implementation process to ensure its ongoing effectiveness.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. The key findings were as follows:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, Japan implemented all of the requirements in accordance with expectations. The key findings were as follows:
Japan implemented an overarching strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources, such as the analysis of the data submitted by Reporting Financial Institutions, information on compliance with other reporting requirements, feedback from exchange partners and a voluntary self-checklist submitted by Financial Institutions. Japan’s compliance strategy facilitates compliance and incorporates a credible approach to enforcement. Japan intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
Japan has worked effectively to understand its population of Financial Institutions, including relevant non-regulated entities, utilising various relevant information sources, such as the Financial Services Agency lists of regulated entities, the Foreign Financial Institution list for FATCA purposes and information on payment records to non-residents from third-party reporting regimes. Japan has taken action to ensure that Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. Japan intends to keep its understanding of its Financial Institution population up to date on a routine basis.
The institution responsible for implementing Japan’s compliance strategy appears to have the necessary powers and resources to discharge its functions. With respect to resourcing, Japan has assigned the equivalent of nine full time staff for compliance activities, out of which five are assigned to communication, education, verification and enforcement activities, and the other four are assigned to data analysis and other IT activities in support of the compliance activities. Overall, they appear to have effectively implemented an operational plan to verify compliance with the requirements, incorporating appropriate compliance activities.
It appears that Japan effectively enforces the requirements, including through the inspection of records of Reporting Financial Institutions and that Japan will apply dissuasive penalties and sanctions for non-compliance as appropriate. Japan has conducted compliance activities, such as desk-based reviews to verify whether the information being reported is complete and accurate and has also conducted a significant number of onsite visits. It also appears that Japan is ready to take effective action to address circumvention of the requirements if such circumvention is detected, is carrying out measures to ensure self-certifications are obtained as required, and is taking follow-up action on undocumented accounts.
Japan will also keep its jurisdiction-specific list of Excluded Accounts under review to ensure they continue to pose a low risk of being used for tax evasion purposes (it does not have a jurisdiction-specific list of Non-Reporting Financial Institutions).
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
In terms of the Financial Account information collected and sent by Japan, the collection and reporting of dates of birth was found to be in line with most other jurisdictions. However, it was found to include a much lower proportion of Tax Identification Numbers with respect to the individuals associated with the accounts when compared to most other jurisdictions (it should be noted that Japan excludes clearly wrong Tax Identification Numbers for purposes of calculating such proportion). These are key data points for exchange partners to effectively utilise the information. Information provided by Japan also showed a significantly higher number of undocumented accounts reported by its Reporting Financial Institutions, when compared to other jurisdictions, which should only occur when it is not possible for the Reporting Financial Institutions to identify whether the accounts are held by Reportable Persons. However, the number of undocumented accounts has reduced over time. Follow-up discussions confirmed that Japan is aware of these issues and is taking steps to address them.
Feedback from Japan’s exchange partners indicated that, compared to what they generally experience when seeking to match information received from their exchange partners with their taxpayer database, they achieved a relatively lower level of success when seeking to match information received from Japan. Japan noted that one of the reasons behind the low matching rates is likely related to language differences, in particular the differences between Latin and Japanese alphabet characters. Follow-up discussions confirmed that Japan is aware of these issues and is currently considering an approach that would help to improve the situation.
Furthermore, 20 (or 22%) of Japan’s exchange partners highlighted issues with respect to the information received, such as invalid Tax Identification Numbers, missing dates of birth, the use of the letter combination “NFN” instead of first names or issues with addresses. Japan has already managed to resolve some of the specific issues reported and is seeking to improve the situation more generally.
Based on these findings it was concluded that, overall, Japan is meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. It was also noted that there is room for improvement with respect to the completeness of data that is being exchanged with its partners, including through ensuring that Tax Identification Numbers and dates of birth are always reported when required. Japan is therefore encouraged to continue its implementation process accordingly, including by addressing the recommendation made.
Japan should continue to address the issues raised by its exchange partners.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, Japan implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. In particular, Japan received a notification from one partner and successfully processed it in a timely manner, resolving the issues raised. It also appears that Japan will notify its partners effectively of errors or suspected non-compliance it identifies when utilising the information received.
Based on these findings it was concluded that Japan is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. Japan is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
Japan’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). Japan is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
One exchange partner highlighted particular issues with respect to IBAN codes sent by Japan, which was in a non-compliant data format. Only one of Japan’s exchange partners reported rejecting more than 25% of the files received, but less than 50%, due to the technical requirements not being met. This is broadly in line with the general experience of other jurisdictions. It was noted that all of the issues have since been resolved.
Based on these findings it was concluded that Japan is fully meeting expectations in relation to sorting, preparing and validating the information. Japan is therefore encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, Japan linked to the CTS.
Based on these findings it was concluded that Japan is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. Japan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Two exchange partners highlighted delays in the sending of information by Japan (representing 3% of its partners).
Based on these findings it was concluded that Japan is fully meeting expectations in relation to exchanging the information in a timely manner. Japan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from Japan’s exchange partners did not raise any concerns with respect to Japan’s use of the agreed transmission methods and therefore with Japan’s implementation of this requirement.
Based on these findings it was concluded that Japan is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. Japan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
Feedback from Japan’s exchange partners did not raise any concerns with respect to Japan’s receipt of the information and therefore with Japan’s implementation of these requirements.
Based on these findings it was concluded that Japan is fully meeting expectations in relation to the receipt of the information. Japan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
Japan appears ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by Japan’s exchange partners and therefore with respect to Japan’s implementation of these requirements.
Based on these findings it was concluded that Japan is fully meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. Japan is encouraged to continue to ensure the ongoing effectiveness of its implementation.
Note
← 1. With Hong Kong (China) and Singapore. Japan has also activated a relationship under the CRS MCAA with Singapore.