Tokyo pushes back on 'bizarre' death tax that deters expats

[TOKYO] Considering a work stint in Japan? You'd better make it short, and you'd better stay alive.

That's because the government subjects long-term foreign residents to inheritance tax of up to 55 per cent on their worldwide assets - meaning heirs could be forced to give up their family homes or businesses, even if they've never set foot in Japan.

Now, Tokyo governor Yuriko Koike is trying to ease the impact of the rule as part of her bid to make the city a global financial hub. Her government released a report last Friday urging the rule to be reviewed, together with other measures aimed at attracting asset managers to the Japanese capital instead of rival centres such as Hong Kong and Singapore. 

Yet there's no guarantee that Prime Minister Shinzo Abe's government will heed Ms Koike's call on the tax, especially since it only just amended the law in April. 

"Japan doesn't seem to want long-term residents anymore," said Paul Hunter, secretary general of the Tokyo-based International Bankers Association, which represents about 50 overseas financial institutions and has been lobbying against the rule. 

"Why would you do that at a time when you're doing Tokyo as an international financial centre?"

When the inheritance tax was introduced in 2013 - mainly to target Japanese nationals who give up their citizenship to avoid paying taxes on their overseas assets - it potentially applied even to short-term foreign residents. In April, the rule was tweaked to restrict it to people who have lived in Japan for more than 10 years. At the same time, the government added a "tail" clause that allows tax authorities to claim a former resident's global assets even if he or she dies within five years of leaving Japan.

'CAN'T DIE'

Expatriates "can't die in this country," Shigesuke Kashiwagi, Japan head of UK investment company Schroders Plc, told Ms Koike in June at a meeting of a panel formed last year to advise the local government on luring financial firms to Tokyo.

Not only will the tax prompt talented people to hesitate about coming to Japan, it could also force financial-industry veterans already living there to leave, according to Mr Hunter.

Ten years is "not a long time out of a working career" and the tail provision is "really, really bizarre," he said.

Finance Ministry official Keiichiro Inui said the amendment eases the impact on short-term foreign residents.

"We will monitor the situation with the new framework and consider any revisions if necessary," said Mr Inui, a deputy director in the tax bureau.

Ms Koike is seeking to attract asset managers who are keen to handle more of Japanese households' US$16 trillion of wealth. Yet her goal faces challenges beyond just the estate levy. Japan's income taxes are higher than those in Hong Kong and Singapore, and its labour laws remain inflexible. Her panel also identified low English proficiency and cumbersome bureaucracy as weaknesses.

LABOUR STRAINS

In last week's report, the committee recommended lowering corporate tax rates for asset managers and financial-technology firms located in special economic zones. And it announced a 30 billion yen (S$354 million) fund to help fledgling asset managers that want to start handling money for investors and build a track record.

The inheritance tax issue may also create a strain on a labour market where skills are in short supply due to Japan's shrinking population, according to Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute Inc. Imposing the levy "runs counter to government policy" of trying to secure skilled workers through measures such as easing conditions for permanent residence, he said.

Matt Sweeny, a Bain & Co consultant who took up his post in Tokyo about two years ago, learned about the tax liability at a seminar soon after he arrived.

"It was a shock," he said.

"It limits my career options."

Mr Sweeny, who owns assets outside of Japan including real estate, has already consulted with his tax adviser.

"I'll keep working in Japan for now," he said.

"But I'll need to consider whether or not to stay here before I go over the limit."

BLOOMBERG