Paying Attention to Undeclared Income Gained from Virtual Currency and Online Transactions

Introduction

Because the number of undeclared transactions has been increasing, the National Tax Agency (NTA) has been making efforts to gather information on virtual currency transactions, transactions via the Internet, etc.

Background Behind the NTA’s Authority-Strengthening

The spread of smartphones and tablet terminals has made it possible for not only business operators, but consumers as well, to have easy access to networks.  This, combined with the diversification of work styles, has led to the emergence of activities such as offering assets that can be used by individuals through matching platforms on the Internet (the so-called "sharing economy”), as well as virtual currency transactions.

Furthermore, there are some background factors. For example, content distribution such as videos and music, which are operated solely by advertising revenue and can be used free of charge by consumers, has become widespread, and for this reason there are more cases where taxpayers who do not file proper tax returns are overlooked. There have been many cases of taxpayers who have not filed tax returns even though they have earned large profits from Internet auctions, resale transactions using flea market applications, video distribution, virtual currency transactions, affiliate programs, etc.

From Voluntary Cooperation to Regulation With Penalties

In the past, when a person in charge of data collection at a tax office wanted to obtain information from a business (e.g., an operator of a virtual currency exchange), he or she could make a request for voluntary cooperation, and obtain the information only if the business complied with the request.

Based on the information obtained in this way, and information disclosed publicly, taxpayers were encouraged to voluntarily file proper tax returns by the NTA sending documents to confirm the existence of transactions, and the details of those transactions, to taxpayers who needed to do so.

However, from January 2020, even in cases where businesses, etc. do not respond to requests for cooperation, it is possible to obtain information about traders through a "Request for Report to Specified Business Operators, etc.," through which the party receiving the request will be subject to penalties if they refuse.

For taxpayers who appear to have large amounts of undeclared income or malicious non-declarations, it is expected that strict tax audits will be conducted by utilizing this system, third-party contact(s), and requests for information to be provided by foreign authorities.

Examples of Actual Audits

It is now possible to collect information on undeclared profits derived from the sale and purchase of virtual currencies by having virtual currency exchanges disclose such information.

Even in cases where an overseas exchange is used, it is highly likely that the taxpayer is remitting virtual currency from a domestic exchange, and so it would be best to assume that the information about the transfer of money to the overseas exchange is also transparent.

In addition, it has become clear that even in cases such as a trader selling tickets purchased from ticket resale sites on net auctions, and using a settlement account in a relative’s name to avoid having their own name revealed, the trader's actual name has been discovered.

There is no doubt that the NTA is putting a lot of effort into collecting information on transactions carried out via the Internet, and it is also clear that the NTA's investigative capabilities are improving dramatically.

Paper Storage of Invoices With PDF Attachments to be Abolished

Introduction

Due to the revision of the electronic transaction information storage system, when electronic transactions are conducted, the option of paper-based storage of related tax documents will be abolished, and electronic data storage will become mandatory.

PDF Attachments to Invoices Also Qualify as "Electronic Transactions”.

In the FY 2021 tax reform related to electronic bookkeeping systems, the revisions pertaining to the electronic transaction information storage system will affect virtually all businesses.

There is no approval required for this system, and it will be automatically applied when electronic transactions are conducted. However, due to the abolition of the possibility of paper-based storage (which has been an alternative method) being used for tax purposes, as a general rule, electronic data storage will be mandatory for transactions carried out from next January (2022).

‘Electronic transactions’ are defined as "transactions in which transaction information is exchanged by electromagnetic means," and ‘transaction information’ refers to information that is normally included in order forms, contracts, invoices, receipts, quotations, and other similar documents received or delivered in connection with transactions.

For instance, the following types of transactions are included in ‘electronic transactions’:

1. Transactions via the Internet, etc.;
2. Transactions in which transaction information is exchanged by email (including cases where the information is sent as an attachment);
3. Transactions in which transaction information is exchanged through a website set up on the Internet.

In the ‘new corona virus’ situation, more companies are changing their methods of sending and receiving invoices, etc.  Items which used to be mailed by post are now being sent and received via PDF file attachments to emails.

Such cases also fall under the category of 2. above.  Therefore, the number of businesspeople conducting “electronic transactions” would end up being very large. 

As it is currently permitted to preserve and store relevant output documents in hard copy form (as paper, etc.), instead of by electronic means, probably there are many businesspeople who are unaware of the existence of the system itself.

Retention in a Searchable Format is Necessary.

In the tax reform for fiscal year 2021, the alternative storage method (‘hard copy’ form) for output documents will be abolished as a possibility.  Because of this, as a general rule, transaction information about electronic transactions conducted on and after January 1, 2022 will have to be stored as electronic data.  When storing electronic data, either of the following measures must be taken:

1. Transfer after being time-stamped;
2. Time-stamped within approximately two months after transfer;
3. Use of a system that retains a record of corrections to, or deletions of, data, or a system that prevents any corrections/deletions; and/or,
4.  Provision of clerical rules regarding the prevention of corrections/deletions.

In addition to this, certain requirements must be met - an important one of which is to ensure a search function is available (‘search {ability} requirement’). Although the search ability requirement will be eased in the fiscal 2021 revision, it will need to be addressed in many cases.

In situations where transaction information is exchanged via email, simply storing the transaction information data in the email software as-is does not usually satisfy the search ability requirement, so it will be necessary to consider introducing a document management system with a search function.

Failure to meet the search ability requirement, etc., may result in the revocation of the approval for blue tax returns, as the documents would not be stored in accordance with the new legal requirements.

Corona-related FAQ’s Clarify When to Recognize Grant Revenue

Introduction

On February 26, the National Tax Agency (NTA) updated its “FAQ's Concerning Measures to Prevent the Spread of New Coronavirus Infections, in the Context of National Taxes and Immediate Tax Treatment of Tax Returns and Tax Payments”.

As featured before the previous issue, the FAQ's provide information on the timing of recording income from issued subsidies and interest subsidies.

For Some Subsidies, Recognize Them as Revenue on Dates Expenses Incurred

 The corporate tax treatment added in the February 26 update is as follows:

1. Treatment of the timing of revenue recognition for subsidies, etc. received by corporations;
2. Timing of recognition of income from interest subsidies related to the Special Interest Subsidy Program for COVID-19 Infections; and
3. Treatment of the timing of recognition of revenue for guarantee fee subsidies received from private financial institutions for essentially interest-free and unsecured loans.

Since the right to receive subsidies, etc. is determined on the dates of grant decisions, in principle, the subsidies, etc. are to be recorded as revenue in the fiscal year that includes the date of the grant decision.

However, if the subsidy, etc. is provided in accordance with the provisions of laws and regulations, etc., for the purpose of covering expenses, and the necessary procedures have been taken in advance to receive the subsidy, etc., the subsidy, etc. shall be recorded as revenue in the fiscal year that includes the date the expenses are incurred.

As a specific example, the treatment of the timing of recording income from employment adjustment subsidies is given. In the case of subsidies provided under the special measures for COVID-19 infections, there is no need to submit a plan for absences from work, etc. in advance, so the revenue will be recorded in the "fiscal year that includes the date of the decision to provide the subsidy”.

There was a theory that employment adjustment subsidies must be recorded as revenue in the fiscal year that includes the date(s) of the expenses, but it has been clarified that if the subsidy is provided under the special measures for the ‘new coronavirus’ infection, revenue should be recorded in the fiscal year that includes the date of the decision to provide the subsidy.

Interest Subsidies Should be Recognized as Revenue in Accordance with the Period

The report also indicates when “interest subsidies” under the New Corona Special Interest Subsidy Program should be recorded as revenue.

Under this program, the amount equivalent to the interest paid for up to three years on loan(s) is provided as a lump-sum payment in advance. Even if the interest subsidy is granted in a lump sum, it is not yet fixed as revenue as of the date of the decision to grant the subsidy, so revenue equivalent to the amount of interest generated will be recorded as the interest payment is incurred.

Credit Guarantee Fee Subsidies Need to Be Capitalized.

The tax treatment of credit guarantee fees for the use of the "Essentially Interest-Free and Unsecured Loan Program by Private Financial Institutions" of the ‘new corona virus’-related emergency economic measures was also presented.

Under this program, the national government subsidizes all or half of the guarantee fees normally paid by businesses to credit guarantee associations.

If a business receives full subsidies, no special treatment is required. However, if it receives half subsidies, the paid guarantee fee (equivalent to half the amount) should be capitalized as "prepaid guarantee fees", etc., then transferred to "guarantee fees paid" as the guarantee period passes, and included in deductible expenses.