We will discuss herein a tax-saving scheme utilizing differences between the appraised values of real estate for lease based on evaluation instructions and transaction prices. Asset valuations utilized for inheritance tax are generally based upon the National Tax Agency’s “Basic Instructions on Evaluation of Assets”. The following will concern a case where the National Tax Agency refuted a declaration of zero inheritance tax after a taxpayer bought real estate for lease for 1.4 billion yen, using bank loans received shortly before the taxpayer’s death.

The Tokyo District Court adopted an evaluation by the National Tax Agency Commissioner based on Clause 6 of the Basic Instructions on Evaluation of Assets, dismissing an heir taxpayer’s appeal pertaining to the appraisal value for inheritance tax on the real estate for lease that the decedent (the benefactor) had bought using loans before the inheritance commenced. As concrete assets, the decedent had acquired the real estate using loans obtained three years and five months (41 months) & two years and six months (30 months) before the commencement of the inheritance.

Real estate acquisition	Real estate acquisition 3 years & 5 months before commencement of inheritance	Real estate acquisition 2 years & 6 months before commencement of inheritance
①Acquisition price	approx. 830 million yen	approx. 550 million yen
②Appraisal value based upon Basic Instructions on Evaluation of Assets	approx. 200 million yen	approx. 130 million yen
①÷②	approx. quadruple	approx. quadruple
Transfer price after commencing inheritance	in possession	approx. 510 million yen
Appraisal value	approx. 750 million yen	approx. 520 million yen

After the heir taxpayer’s declaration of zero inheritance tax, a tax office, based on Clause 6 (the rule to evaluate according to the direction of the National Tax Agency Commissioner, when evaluation by the Basic Instructions on Evaluation of Assets is deemed inappropriate), decided that evaluations based on appraisal values were appropriate, and in April 2016 the taxpayer was ordered to pay back taxes and penalties for the incorrect zero tax declaration. Then, after a ruling by a national tax tribunal in May 2017, the taxpayer filed a lawsuit against the government.

The Tokyo District Court recognized the appraisal values based on Clause 6 of the Basic Instructions on Evaluation of Assets, in line with the National Tax Agency’s claims. The Court compared the different values based on the Basic Instructions, the acquisition prices and the appraisal values for both properties, finding differences of approximately 4X (cf. the above table ①÷②). As a result, it decided that there were “special circumstances”, as mentioned in Clause 6 of the Basic Instructions on Evaluation of Assets. Looking also at the sequence of events as to how the properties ended up being declared as inheritances, the deceased individual had purchased them by borrowing heavily when he was 90-91 years old. Likely an important point in this case is that were it not for the loans payable and the real estate acquisitions, the assessed value of the inheritance would have exceeded 600 million yen. In addition, though the real estate acquisitions and loans were set up as part of the inheritance and business succession processes, the court likely took seriously that (according to the bank’s loan approval documents, etc.) the decedent probably was aware of the inheritance tax burden-reducing effects, and carried out the transactions in expectation of that. It would be extremely risky to attempt to easily avoid inheritance taxes by going along with such a suggestion by a real estate company or some other such entity.

Since April 1st 2019, the way consumption tax on online advertising is handled has changed. Before that date, advertisement charges paid to Google were not an object of purchase tax deductions for consumption tax, but now they can be deducted.

There are various kinds of Net advertising provided by Google. A representative type is “search advertising”, which displays ads with Google search results. Furthermore, there is “display advertising”, which indicates text advertising and banner ads on Google service screens, etc., as well as “video advertising” which displays videos to users watching YouTube, and more. Today there are numerous companies which utilize advertisements provided by Google. However, likely many people have not been concerned about whom they have been paying advertisement fees to, even as they have been using Google’s services. Actually, through March 31, 2019 those advertisement charges were paid to Google Asia Pacific Pte. Ltd., a foreign corporation, not to Google Limited Liability, Google’s Japanese subsidiary. The Google Asia Pacific Pte. Ltd. company is seemingly a subsidiary company managing accounts and payments for the Asian-Pacific region. Therefore, the ad charges paid to it were not an object of purchase tax deductions for consumption tax (reverse charge method).

The contract was transferred to Google Limited Liability Company on April 1, 2019. As the advertisement service provider has changed from a foreign company to a domestic one, fees paid have become regular domestic transactions subject to consumption tax. In other words, the advertisement charges an advertiser pay will now be objects of purchase tax deductions.

Google AdSense, in contrast to Google advertisements, has not undergone such changes. Google AdSense is an ad-serving application run by Google where website owners can enroll to enable advertisements on their website, thus generating revenue. Google AdSense doesn’t constitute domestic transactions, so its consumption tax handling is complicated; however, it seemingly will be unaffected by the contract transfer.

Google Advertisements	Due to the change of business partner to Google’s Japanese branch (a domestic company), advertisement charges paid are now an object of purchase tax deductions for consumption tax.
Google AdSense	Due to fees continuing to be transactions with a foreign entity, advertisement charges on the website will still not include consumption tax（transactions not subject to consumption tax）

The reduced consumption tax rate system has begun, so let’s verify the points we should pay attention to concerning how to indicate prices at a store.

Major restaurant chains that provide take-out services have agreed on new price- setting principles to follow from October 1 – utilizing one of these two methods: ① Standardizing prices at the new tax-included level (i.e., adjusting base prices) or ② Keeping base prices the same (i.e., changing the tax-included prices). Judging from price displays, it seems method #1 (standardizing prices at the new tax-included level) is easy to adapt. A simple display which includes the consumption tax amount allows a customer to see with one glance the total sum they’d have to spend. However, even with price displays standardized to include the tax, there are some restaurants which also display base (pre-tax) prices as a customer service, though not required under tax law to do so. If such establishments continue to display base prices after October 1st, they will have to display three prices – that is, the pre-tax price as well as two tax-included prices which differ according to whether the food/beverage is a take-out or eat-in order. Please be aware that if a shop displays pre-tax prices in such a way that customers are liable to be misled concerning the price to pay, that will result in a high risk of corresponding to “misleading representation displays”, so care must be taken. “Misleading representation displays” are a prohibited display method, as they can interfere with customers’ voluntary, rational choices, due to items being mistakenly seen as less expensive than they really are. It is desirable that of the above three prices, the tax-included amounts are displayed so that consumers notice that they are the final payment amounts. For instance, when a tax-included price is set uniformly at 1,100 yen, a shop can draw attention to that price by displaying it with larger numbers, etc.

The prices displayed when the base prices are maintained (different tax-included prices displayed) need to be written clearly distinguishing between take-out and eat-in.　For instance, you might display them in the following ways: “1,100 yen for dining (1,080 yen for take-out)”, or “1,100 yen (1,080 yen) *Price in brackets is for take-outs.”, etc. However, shops where most customers buy for take-out (such as bakery shops with small eating spaces) could display only the take-out prices subject to the reduced tax rate because there is little necessity to display prices for dining. Nevertheless, even in such cases, shop owners need to remain aware of the “misleading representation displays” issue. If a shop displays only tax-included prices for the take-out category, it might cause misunderstanding that the prices for dining there are lower than they actually are, because the tax-included prices for dining in are higher. Therefore, shops need to display prices clearly so customers are not misled. Specifically, in addition to making clear that the displayed prices are for take-out, it may be recommended that shops indicate clearly that the tax-included prices for dining are different by stating, “In cases of dining in, prices will differ due to the different tax rates”, or some such statement.