E-Tax Filing via Smartphones Utilizing Individual Numbers to Become Possible

Introduction

An e-Tax filing system for income tax returns using smartphones has been possible since January 2019.  In addition, a system utilizing individual number (‘My Number’) cards is scheduled to begin this month.  It may be advisable to use the e-Tax system with your smartphone for relatively simple returns involving medical expense deductions and the ‘Hometown Tax Donation Program’ (furusato nozei).

“Individual card system” becomes available for use with smartphones

 Regarding income tax returns for 2019, an e-Tax service with the individual card system via smartphone is scheduled to start Jan. 31, 2020 on the income tax return preparation section of the National Tax Agency’s home page.

  The “individual card system” requires the taxpayer to have an individual card.  From the smartphone’s e-Tax login screen, the user taps the “individual card scan” button, and enters a digital certificate password (4-digit) for a user certificate which is displayed on the input screen.

  Then, on the smartphone-specific tax return preparation site, the user enters necessary information from their withholding tax statement(s), etc., in accordance with the site instructions. 

  If using a PC, the taxpayer needs an IC card reader/writer to scan their individual card, whereas when using a smartphone such a device is unnecessary. In the latter case, only the user’s My Number card and a smartphone that can read it are needed.

  There are two e-Tax methods - the “individual card system” (the input method) and the “ID & password system”(the registration method).*  So far the former has been available only via PC, but starting with tax returns for 2019, it will become possible via smartphone.

Targets expanded

  From tax year 2019, the number of filers eligible to file by smartphone, the scope of income deductions, etc. will expand.

  Until the tax year 2018, smartphone tax return users had been limited to those with employment income (a completed year-end adjustment from one employer). However, the use of the e-Tax system via smartphone will expand to include cases of employment income from two or more employers, as well as miscellaneous income such as pension income or a side business.  In addition, the scope of income deductions will be broadened to include every type of deduction.

  For those who have already applied for the “ID & password system”, it was possible to use the e-Tax system to apply for refunds, etc. for 2019 from as early as January 6, 2020.

Item	For tax year 2018	For tax year 2019
Income	employment income （one completed year-end adjustment）	employment income （one completed year-end adjustment, unfinished adjustment(s), or year-end adjustments from two or more employers）
Deductions	medical expense deduction, donation deduction	every type of deduction
Tax credits	special deduction applied to donations to political parties, etc.	special deduction applied to donations to political parties, etc. , disaster-related deduction
Others		estimated tax prepayments, loss carryovers subtracted this year

Number of Income Tax Audits of Wealthy Taxpayers Reaches an All-time High

Introduction

The National Tax Agency issued the results of its income tax and consumption
tax audits for fiscal year 2018. Seemingly its examinations of returns for high-income individuals, and regarding Internet transactions such as in the ‘sharing economy’(e.g., Uber, Airbnb) are becoming more strict. The number of audits of the wealthy, as well as those involved in business activities in new fields, reached an all-time high.

Undeclared income per case of capital gains from stocks, etc. was the highest amount ever

 Regarding capital gains, the number of audits in FY 2018 was 20,784 (that was 86.2% of the number for FY2017; the following figures will show each category’s percentage vs. the previous year in parentheses).  Of that, cases of illegality such as undeclared income numbered 16,091 (89.3%). Both categories decreased from the prior year.

  Out of 152.6 billion yen (103.0%) of total undeclared income, income from land and buildings, etc., decreased to 115.1 billion yen (95.9%); however, unreported income derived from stocks, etc., rose to 37.5 billion yen (132.9%).  The amount of undeclared income per case averaged 7.34 million yen (119.4%); of that, unreported income from transactions of land and buildings, etc. averaged 6.89 million yen (110.4%), while the average sum for stocks, etc. was 9.19 million yen (159.0%). Both amounts increased from the prior year, with the stocks-related sum being the highest figure since 2005.

  One possible factor behind the large increase in undeclared capital gains income from stocks was that people with large amounts of such income were subjected to audits after the Nikkei Stock Average rose significantly toward the end of 2017.

  In the case of transactions in special accounts from which tax is withheld, tax returns are not required, and basically all income is declared.  Therefore, it is probable that filers overlooked income from transactions in special accounts without withholding tax and/or general accounts.

  There are often cases where an accountholder mistakenly thinks their account is a special account with withholding tax, when in fact it is a general account; this can result in the filer failing to declare all their capital gains income. This may be a good opportunity for you to confirm what type(s) of securities trading account you have.

The number of audits of wealthy filers reaches 5,313 cases

The number of audits of “the wealthy class” - such as owners of large amounts of stock and/or real estate, as well as individuals receiving especially large recurring income - reached 5,313 cases (101.8%). Among those, the undeclared income for FY2018 was determined to be 76.3 billion yen (113.9% of the FY2017 figure), additional taxes (back taxes) due were 20.3 billion yen (114.7%), and the undeclared income per case averaged 14.36 million yen (111.9%). All the numbers increased from the previous year, and were the highest since official announcements began in 2009.

※ Note: Generally “year” means the period April 1 - March 31. On the other hand, “fiscal year” for the National Tax Agency refers to July 1 - June 30.

Among those audited, the average additional tax per rich individual who invested overseas was 9.14 million yen (110.5%), a very large amount equivalent to 5.1 times the 1.8 million yen (101.1%) overall average additional tax per income tax audit. It is conceivable that, in addition to the fact that investment amounts by the wealthy tend to be large, it is difficult to collect all the information about overseas investments which is necessary for a tax return in real time, resulting in undeclared income.

Amount of back taxes pertaining to Internet transactions such as those involving the ‘sharing economy’, etc. also is highest ever

  The number of audits of individuals conducting online transactions including economic activities in new fields like the sharing economy, was 2,127 cases (105.6%), and the tax deficiency was 5.8 billion yen (156.8%).  Both numbers were increases, and were also the highest since FY2009.

Impact of the Consumption Tax Increase on Withholding Tax

Introduction

  When fees for tax accountants or certified social insurance labor consultants are paid, withholding tax is deducted.  What impact will the consumption tax increase have on this?

In principle, totals including tax are subject to withholding tax

 Concerning withholding tax, in principle, remuneration/fees paid to professionals such as tax accountants or certified social insurance labor consultants include consumption tax.  So in principle, the amount subject to withholding would be the tax-inclusive amount.  In that case, the amount of withholding tax would differ before & after the consumption tax increase. (However, when the remuneration amount and consumption tax amount are clearly differentiated on paperwork such as invoices, the remuneration/fees without the consumption tax could be regarded to be the amount subject to withholding tax.)

  So, when is a consumption tax amount clearly differentiated on paperwork such as invoices?  “A case in which the consumption tax is clearly differentiated” refers to a situation where the appropriate, specific amount of consumption tax, etc. to be levied on the transaction is noted on an invoice.  Besides invoices, the term “invoice” can refer to a contract, a payment statement, a receipt, etc.

A specific example

  Before the consumption tax increase: If an invoice from a tax accountant in September 2019 says only that the tax accounting fee is 54,000 yen, the amount of the withholding tax would be 5,513 yen - i.e., 10.21% of ¥54,000 (fraction smaller than a yen omitted).

  After the tax increase: If the tax accountant’s invoice in December 2019 says only that the fee is 55,000 yen, the amount of the withholding tax would be 5,615 yen - that is, 10.21% of ¥55,000 (again, fraction smaller than a yen omitted).

In this way, the amount of withholding tax may change due to the impact of the consumption tax rise.

  On the other hand, after the tax increase, if the tax accountant’s fee and consumption tax are described separately in an invoice from the accountant in December 2019, because the amount of the withholding tax will not have been impacted by the tax increase, the withholding tax will be 5,105 yen (10.21% of 50,000 yen remuneration).

Pay particular attention to account transfers

 Fees for tax accounting, certified social insurance labor consulting, and other such services vary.  Usually the net amounts “excluding tax” are detailed on contract documents, and we understand that often precise consumption tax amounts may not be noted - with only a statement to the effect that, “Consumption tax will be levied separately”.  Concerning withholding income tax, such a statement alone does not clearly distinguish the fee/remuneration from the consumption tax.

  Also, when paying remuneration or fees, if the breakdown of the payment(s) is described in detail on the payment statement, it means that the amount of consumption tax is clearly differentiated, and it is therefore possible for the net amount excluding tax to be the amount subject to withholding tax.

  However, in practice, as payments are made by account transfer, invoices and payment statements are often not issued.  In such situations, in order that the net amount excluding tax becomes the amount subject to withholding tax, it is necessary that a document detailing the exact amount of consumption tax for the amount of the reimbursement be exchanged, and that the contract’s content be preserved.