Japan gov’t eyes refund method to tackle abuse of duty-free system (Pt. 3)

TOKYO — Japan is enjoying a boom in visitor numbers and spending. Behind the scenes, however, tax evasion through abuse of consumption tax exemptions is rampant. The Mainichi Shimbun investigated the steps the government is taking to address the problem.

Introduction of a refund system

To tackle the issue of the illicit resale of duty-free goods without denting the country’s status as a tourism-oriented nation, the Japanese government is proposing a way of returning sales tax to visitors at a later time, referred to as the “refund method.”

Under the current system, visitors and others buying goods at stores offering duty-free purchases are eligible for tax-free prices on purchases of items used in daily life, such as electronics and consumables, when the value of the items exceeds 5,000 yen (approx. $35). They must present their passport or similar documentation at the time of purchase. Buyers are then expected to show their passport to customs when leaving the country, but in reality, a large number do not take this step.

The refund system, which is a basic format used in countries and regions such as Australia, the E.U. and South Korea, has buyers pay the full, tax-inclusive prices and keep their receipts until they leave the country. They are then refunded the tax amount upon showing proof to customs agents.

Japan’s Ministry of Finance is considering installing multiple self-service kiosks at international departure lobbies where tax-exempt purchasers leaving the country can have their passports scanned. If they are suspected of reselling high-value goods purchased duty-free, customs agents can carry out inspections. A ministry official expressed hopes this will curb the exploitation of the tax-free system, saying, “If customs cannot confirm that duty-free items are being taken out of the country, the duty-free portion will no longer be refunded. Visitors to Japan will have more incentive to present their passports.”

One of the reasons behind Japan’s longtime use of tax exemptions at the point of sale is its historically low sales tax compared with other countries. When consumption tax was introduced at 3% in 1989, there was little resale and other such illicit activity. However, the tax gradually increased to 10% by 2019, and awareness has since grown about expanding profit margins through the resale of duty-free goods.

In addition, it was only in 2014 that the base of tax-free goods expanded. The administration of the late former Prime Minister Shinzo Abe, which was eager to invite more inbound tourists, added perishable items such as food, alcohol and cosmetics to what used to be a limited list of duty-free products including household appliances and clothes. As a result, outlets such as drugstores could also begin to offer tax-exempt sales.

Even then, reselling was not seen as an issue. But officials started to take note in fiscal 2020 when the procedures for tax exemptions were digitized. With purchase history data available to National Tax Agency systems, it suddenly became clear that systematic resales and other abuses were taking place. A senior tax agency official stated, “We became aware of clearly unnatural activity, such as records of tax-free purchases made by the same person at multiple Tokyo stores almost simultaneously.”

The government and ruling parties are expected to narrow down on the particulars and decide on the introduction of the refund-based system in deliberations on the tax system this fall or later. While some are pointing out that duty-free sales at department stores and other shops could be impacted, a Finance Ministry official noted, “More than the loss of sales is the risk of damage to companies’ ‘brand image’ when they are hit with additional taxes (due to abuse of the system), and there has been no noticeable opposition from the duty-free stores.”

However, in addition to raising awareness at the stores, it will be necessary to prepare dedicated operators to handle the refunds to consumers, and for these reasons, the new system is not expected to be unfurled before next fall at the earliest, according to another Finance Ministry official. For the time being, it appears some will continue to get away with exploiting loopholes in the system.

(Japanese original by Yuhi Sugiyama, Business News Department)

(This is the final part of a 3-part series. Click/tap here for part 1 and here for part 2.)