Country-specific updates: Japan

National Tax Tribunal’s decision on Cayman Islands LPS

A recent decision by the National Tax Tribunal (NTT) on the application of the export exemption rules under the Japanese Consumption Tax Act was made public in October 2022. The decision holds that a Cayman Islands limited partnership (LPS) is not a legal entity for Japanese Consumption Tax (JCT) purposes and that the application of the export exemption should be examined by the relationship with each applicable partner within a LPS, instead of looking at the LPS as a whole.

This ruling by NTT is essentially in line with precedents from other courts where the entity classification was disputed in the context of income tax liability on income earned through a Cayman Islands LPS. This ruling, therefore, sheds light on the likelihood that the same approach will be widely adopted by tax authorities for JCT purposes going forward.

Strengthened Japanese Consumption Tax (JCT) Enforcement in Post-COVID Era

On 30 September 2022, the Tokyo Regional Taxation Bureau (TRTB) set up a special task force to combat fraudulent JCT refund claims against parties abusing the exemption rules, which has become quite common since the rise of the JCT rate (from 8% to 10%) in October 2019. The team consists of 130 members from the investigation, examination, and tax collection departments of the TRTB. The team is expected to prevent fraudulent refund claims more efficiently by collaborating and sharing information across different departments. The team will strengthen its audit process, review tax reports more meticulously, and conduct expedited JCT collections from taxpayers who underreport JCT taxable sales.

In addition, the Japanese tax authorities have commenced “remote” tax audits using email communication, online meeting systems (Webex), and online storage services (Prime Drive) since October 2022.