Huge resale scheme suspected as visitors to Japan evade tax on duty-free deals

OSAKA -- An organized structure in which businesses are leading a resale scheme came to light after Japanese tax authorities investigated seven people including Chinese nationals who were suspected of being involved in the illicit resale of goods they purchased during their duty-free shopping frenzies in Japan.

According to those close to the matter, the Osaka Regional Taxation Bureau launched a tax investigation and decided to collect consumption tax of about 760 million yen (roughly $5 million) from the seven people. The individuals had entered Japan separately, and bought large volumes of duty-free luxury brand items worth a total of 7.7 billion yen ($55 million) mainly at department stores.

-- Businesses provide funds, repeat illicit resales

In the course of the investigation, a sophisticated resale scheme came to light, and it is highly likely that the seven were "buyers," who were employed by multiple businesses based in Japan to repeatedly make fraudulent duty-free purchases. The businesses provided large sums of money to the buyers and instructed them to purchase duty-free luxury brand items, then paid them a portion of the profit margin gained from evading taxes, and resold the goods. Buyers received a fee of several percent of the purchase price.

The seven reportedly told the taxation bureau that they sent the goods overseas as souvenirs and have discarded all documents. The bureau decided to collect a total of some 760 million yen based on the provisions of the Consumption Tax Act. However, the seven left Japan without paying the majority of the amount. The bureau has continued asking them to pay, but it is believed that none of them have complied yet.

-- Rampant fraud wavering confidence in Japan's tax system

The credibility of Japan's consumption tax system has been shaken due to the discovery of massive tax evasion involving duty-free items. With a sense of crisis, the tax authorities are taking steps to root out such fraud. But with the number of foreign visitors to Japan recovering rapidly, it is also essential to strengthen the system to stop suspicious tax-free purchases at storefronts.

According to estimates by the Japan National Tourism Organization, the number of visitors to Japan in 2021 was 245,862 -- a sharp decrease of 99.2% from the figure recorded in 2019 before the spread of the coronavirus.

However, when the government lifted the ban on group tours in June 2022, the number of visitors to Japan that month increased 1,200% from a year ago. As of September, 1,028,500 people have visited Japan this year, meaning that inbound tourists are returning, especially in downtown areas and sightseeing spots across the country.

While the recovery of visitors to Japan is expected to lead to an increase in tax-free sales, the Tokyo Regional Taxation Bureau is apparently moving toward issuing administrative guidance to the department store industry.

A tax investigation of major retailers Sogo & Seibu Co., Odakyu Department Store Co. and Matsuya Co. found transactions that didn't meet consumption tax exemption requirements, such as sales to foreigners who had been in Japan for six months or more -- who are not eligible for duty-free shopping.

Suspicious transactions involving repeated large purchases of cosmetic items by the same individuals were also found, and the three companies were assessed additional taxes totaling over 100 million yen (approx. $716,000). The Tokyo taxation bureau has asked that department stores in the capital to ensure that their tax-exempt sales are appropriate.

Kimiya Ito, a professor of tax law at Seikei University in Tokyo, said, "Retailers should use electronic tax exemption procedures and rigorously check suspicious transactions." He added, "Strengthening cooperation with the National Tax Agency and customs offices can help eliminate fraud even more effectively."

(Japanese original by Ryo Numata, Osaka City News Department)