Japan to Revise Taxation to Prevent Smuggling of Gold Bullion

The Yomiuri Shimbun

12:21 JST, December 7, 2020

The government and ruling parties plan to revise the system for businesses’ deductions of consumption taxes on purchases of gold bullion from foreign visitors as a means to disincentivize smuggling.

By disallowing consumption tax deductions on commercial purchases of gold bars from foreigners visiting Japan and revising ID requirements, authorities hope to halt the endless inbound flow of undeclared bullion.

As a practical measure, passports and foreign resident cards will be stricken from the list of identification documents that gold buying businesses are required to make copies of and retain, which will automatically prevent a vast majority of such transactions.

The government and ruling parties aim to include the proposal in their outlines of planned revisions of taxation systems to be made in fiscal 2021.

Under the current system, when business operators receive money for goods they sell, they can deduct the portion of consumption tax that they paid at the time of purchasing the goods. Then they pay their own consumption tax amounts, which are deducted.

The system aims to prevent duplicate taxation. To use this system, business operators have to record these transactions in trading books and retain other related documents for identification.

Gold bullion is regarded as a highly safe asset that can be traded all over the world. Retail prices of gold bullion have been surging due to concerns about the economic situation in the midst of the novel coronavirus outbreak.

Therefore, stronger measures are necessary to prevent the smuggling of gold bullion.

Most of the smugglers into Japan are foreigners. A common tactic used by smugglers is buying gold bullion overseas where taxes equivalent to Japan’s consumption tax are not imposed, then bring the gold into Japan and resell it to commercial buyers at higher market prices. The higher sales tax levied in Japan effectively becomes their profit margin.

According to the Finance Ministry, the number of uncovered smuggling attempts and confiscated amounts of gold bullion in 2013 were 12 cases and 133 kilograms, respectively. These cases rapidly increased after the consumption tax rate rose from 5% to 8% in 2014.

In 2017, the number of cases reached 1,347 and the amount surged to 6.2 tons, the highest levels on record.

The government revised the Customs Law in 2018 to raise the upper limit of fines on smuggling. Included in fiscal 2019’s taxation system revisions, the requirement to store copies of identification documents, such as driver’s licenses and foreign resident cards, of people visiting dealers to sell gold bullion was added to conditions for using the tax deduction system.

However, when taxation bureaus nationwide conducted probes en masse in 2019, it was found that there were a large number of gold buyers who had stored a large number of copies of foreign resident cards that were deemed to be counterfeited.

In the wake of that finding, the government and ruling parties took aim at excluding foreign resident cards and passports from the acceptable range of identification documents for the purpose in the fiscal 2021 taxation system revision.

While business purchases from visiting foreigners will be excluded from the allowable consumption tax deductions, bullion purchases by businesses operators from foreign visitors will continue to be possible. However, without the deduction loophole, their tax burden will be heavier.

Thus, the government and ruling parties expect that the gold buyers will be more reluctant to purchase bullion from foreigners.

On the other hand, if a foreign resident in Japan presents a Japanese driver’s license or other identification documents to sell gold bullion, the purchases will continue to be covered by the tax deduction system.

According to the Finance Ministry, 146 tons of gold bullion and processed gold products were legally exported from Japan in 2019, while the volume of legal imports was only 3 tons. Because this import-export imbalance has continued for years, the ministry assumes that smuggled gold bullion products are circulating in the nation via business operators who illegally purchased imported gold bullion.