1.1.1. The Board of Audit shall audit final accounts of State revenue and expenditure in accordance with article 90 of the Japanese Constitution and other accounts provided by laws.
1.1.2. The Board of Audit shall constantly audit and supervise Government accounting to secure its adequacy and to rectify its defects.
1.2.1. The following shall be subject to audit by the Board of Audit:
1.2.2. Based on these articles, the Board of Audit audits tax revenue collected by the State tax authorities. Since the Board is in charge of auditing State accounts only, the Board is entitled to audit State taxes only, and is not entitled to audit local taxes, which are collected by local governments i.e. Prefectures and Municipalities (Cities, Towns and Villages) which enjoy local autonomy. To examine correctness and adequacy of State tax collection, the Board is entitled to, and does audit tax files of individual taxpayers, either those of individuals or those of juridical persons.
Note: Japanese Constitution Article 90:
Final accounts of the expenditures and revenues of the State shall be audited annually by a Board of Audit and submitted by the Cabinet to the Diet, with the Statement of audit, during the fiscal year immediately following the period covered. (For organisation chart of the Board see Annexure 1 at Pg.205 (i)).
2.1.1. "Bodies subject to audit by the Board of Audit shall regularly submit to the Board, statements of accounts, with vouchers and evidences, in accordance with Accounts Verification Regulations enacted by the Board of Audit".
2.1.2. In case of State taxes, State Tax Officers (STOs: Officers who order State tax payment) should submit statements of accounts and vouchers/evidences every month to the Board. For collected tax exceeding the prescribed amount, STOs should submit to the Board tax return, tax collection orders etc. when STOs:
2.1.3. The Board prescribes the documents which are to be submitted by the tax offices to the Board for each category of tax. In case of collecting corporate income tax from juridical person whose capital exceeds the prescribed amount (the amount varies depending on taxes) these evidences, for example, include:
2.1.4. The Board auditors constantly examine these documents submitted to the Board by STOs.
2.1.5. They also frequently make field audit trips to tax offices, examine documents not obliged to be submitted to the Board, and interview tax officers. However, they are not entitled to directly examine taxpayers. The Board presently has three tax audit divisions, and each of these divisions covers tax offices throughout the country area-wise. Total number of staff members working for these tax audit divisions is approximately 80. In sampling out tax offices' tax files, the Board uses sampling criteria such as amount of income, amount of juridical person's capital etc. In selecting high priority taxes, the Board especially emphasises total amount collected, complexity of tax amount calculation, complexity of relevant tax laws and regulations and others. The Board sometimes specifically selects newly introduced taxes and taxes whose governing laws and regulations are recently amended.
3.1. The Board's audit planning is two-fold i.e. one is top-down planning and the other is bottom-up planning. The Board management establish overall audit policies and audit guidelines applicable to all the audit fields before the start of all the Audit Divisions(ADs)' field audit. Based on such policies and guidelines, the ADs establish the Division audit plans. Although emphatic points are mostly the same every year, in case of tax audit, they sometimes change especially when new tax is introduced, major amendment is made for particular taxes etc. (high risk areas). Like other ADs, tax ADs sometimes change initial audit plans and shift priority taxes for audit, emphatic points, view points of audit etc. when it becomes clear through initial field audit that major outcome is not expected by the initial plan. The Board of auditors conduct field audit in five to six member groups headed by AD assistant directors. The Board uses its main frame computer for sampling out tax files etc.
4.1. The Board prepares its annual Audit Report in December every year and sends it to the Cabinet. The Cabinet submits the Report to the Diet together with its statements of accounts for deliberation. In preparing the Report, the Board takes several steps and thus secures fairness and impartiality of the Report. Like other ADs, the tax ADs discuss with tax office officials audit findings through either in-office audit (statements of accounts examination: see 2 above) or field audit. Based on the results of the discussion, they send official inquiries to auditee agencies (tax offices) and receive answers. The tax ADs then prepare tax audit part of draft Audit Report and submit the drafts to the Bureau Audit Report Committee. Chaired by the Director General of the Bureau, the Bureau Committee discusses whether the drafts be carried on the Board annual Audit Report. If approved by the Committee, the draft is tabled in the Co-ordination Committee chaired by the Deputy Secretary General. In the Bureau Committees, the drafts are examined by tax AD staff members who work for tax ADs which are different from proposing tax AD (peer review system). Co-ordination Committee comprises non-audit staff members of the Board. In discussing tax audit findings, however, ex-tax-auditor/non-audit staff members with sufficient knowledge of taxation examine the proposals because tax audit requires high professional knowledge. The drafts are then sent to Secretary General for approval. If approved, the drafts are then tabled in the three-Commissioner Audit Commission who make the final decision on whether to report the findings in the Board annual Audit Report. The Board secure fairness and impartiality of the Report through such deliberate discussions (See Annexure 2 at Pg.205 (ii))
5.1. As stated above, the taxes in Japan comprise State taxes and local taxes. The State Government (Central government) National Tax Administration Agency (NTAA) collects State taxes in its Tax Offices spread throughout the country. Local governments (48 Prefectures plus numerous Cities, Towns and Villages), which enjoy local autonomy, collect local taxes.
The Board of Audit is entitled to audit State taxes only.
A. Direct Taxes
B. Indirect Taxes
The State taxes collected by Ministry of Finance totalled 58,328 billion Yen in FY 1995. Major taxes are:
A. Prefectural taxes:
B. Municipal taxes:
6.1. In Japan, the National Tax Procedure Law generally governs State tax collection. The Law specifically stipulates:
6.2. In Japan, while individual State tax laws, e.g. Income Tax Law, Corporate Tax Law, Consumption Tax Law etc. stipulate taxation methods and other matters for individual taxes, Special Taxation Measures Law, which supersedes these individual tax laws, stipulates various special taxation measures for promoting Government's socio-economic policies such as promotion of workers' house ownership (tax exemption for house purchase bank deposit) etc. National Tax Collection Law stipulates State tax collection procedures, tax delinquency disciplines etc.
6.3. Since there are numerous directives and announcements giving detailed interpretations of individual tax laws and regulations, Board auditors and tax officers so far have had very few cases in which their interpretation of tax laws and regulations differed. The Board however is entitled to present opinions if the Board finds points to improve in existing tax laws and regulations. Under the present system, the Board has no official authority to decide how to interpret particular article(s) of particular tax laws and/or regulations. Since local taxes are not covered by the Board audit, the Board has no authority to interpret laws/regulations regarding local taxes.
6.4. However, under the Board of Audit Law article 36 if the Board of Audit finds matters that should be improved regarding laws, ordinances, administrative system or administration, it may present its opinion to or demand remedial measures by the responsible authorities or officials.
7.1 The National Government Organisation Law (NGO Law) stipulates Japanese Government basic organisations i.e. Ministers, Agencies and Committees. The Law stipulates that the National Tax Administration Agency (NTAA) is attached to the Ministry of Finance. Based on the NGO Law, the Ministry of Finance Establishment Law (MOF Law) establishes organisation and functions of Ministry of Finance (MOF) and National Tax Administration Agency, a MOF external organ (see Annexure 3 at Pg.205 (iii)). The Tax Bureau (internal tax research and planning department) researches, plans, and drafts internal tax systems including tax conventions between Japan and other countries. Customs and Tariff Bureau (customs and tonnage duties planning and research department) researches, plans and drafts custom duties and tonnage duties. The NTAA, the internal tax imposition and collection agency, has total 11 Regional Taxation Bureaus plus Okinawa Regional Taxation Office. Each of these Regional Bureaus has its Tax Offices which are directly in charge of collecting State taxes. The number of Tax Offices totals approximately 500 throughout the country. Unlike internal taxes, customs and tonnage taxes are exclusively imposed and collected by total *9 Custom-Houses, which are MOF internal departments. The National Tax Tribunal, which is attached to the NTAA, functions as a quasi-judicial body and judges tax grievance filed by taxpayers. The Tribunal has total 12 branch offices throughout the country. Since the Tribunal is a quasi-judicial organisation, taxpayers can proceed to court if he/she is not satisfied with the Tribunal's decision.
8.1. The Japanese tax system has its basis in a recommendation which a U.S. mission headed by Columbia University Professor Carl. S. Shoup presented in 1949 and 1950 shortly after the World War Two to the U.S. General Headquarters at that time stationed in Japan. The recommendation stressed fair burden-sharing among taxpayers by placing major emphasis on direct tax (particularly Income Tax), and also stressed local governments' financial independence. The recommendation thus advised several measures for accurate grasping of taxpayers' incomes, particularly high income earners. For example, the recommendation advised systems for:
8.2. Although not totally implemented (for example, total taxation on capital gain), the Shoup Recommendation largely forms the basis of present Japanese Government taxation systems.
8.3. Examples of tax reforms undertaken by the Japanese Government
(a) Direct tax indirect tax proportion
Reflecting these recommendations, the present taxes in Japan have continuously inclined to direct taxes after the World War Two. Post-War direct tax indirect tax proportions show:
50% vs. 50% ~ immediately after the War
60% vs. 40% - in late 1960s.
70% vs. 30% - 1975 and thereafter
In this period, however, the Japanese tax system somewhat failed to grasp non-business-workers (farmers, self-reliant shop owners etc.) income due to technical difficulties while imposing stringent tax assessment on business workers under withholding tax system.
Responding to business workers' growing disgruntlement on tax inequality, the Government has undertaken tax reforms such as income tax reductions and introduction of Consumption Tax.
Notes:
(b) Capital gain taxation
Due to technical difficulties, and also to balance other taxes, the Japanese Government has not imposed capital gain tax. However, due to enormous capital gain produced by recent sharp rise of stock value, the Government in 1988 introduced 26% separate self-assessed capital gain taxation (20% State tax plus 6% local tax).
(c) Examples of tax exemption
To promote workers' house-ownership and after-retirement welfare, the Government since 1970 has exempted tax on interests earned by workers' bank deposits for:
(d) Abolition of tax exemption
Before 1988, the Japanese Government exempted income taxes on interests of less-than-Prescribed-Amounts (PAs) bank deposits, postal deposits, and State/local government bonds. Under these exemption systems, depositors and bond purchasers could enjoy tax exemption on maximum 14,000,000 Yen yearly income. The Government abolished these exemption systems except for deposit interests earned by pensioners, elderly and other low income earners and imposed 20% income tax on all the deposits and bonds' interests. The Government in turn reduced income tax on interests of deposits and government bonds exceeding the PAs. The reform was to prevent tax avoidance by way of deliberately dividing incomes into many below-PA deposits. The reform was also to expand domestic consumption by discouraging deposits so that the Government can alleviate trade friction with foreign countries, especially the United States.
(e) Land transfer tax
Amid "Bubble Economy" in mid-1980s, land prices in Japan incessantly soared making it highly difficult for ordinary workers to build their own residences. And this produced rampant speculative land dealings among people who sought windfall profits by such price hike. To counter these circumstances, the Japanese Government reformed land transfer taxation as follows:
The step at (i) was to increase land supply and the step at (ii) was to discourage speculative land purchasing/selling.
Note: "Bubble Economy" refers to mid-1980s Japanese economy in which value of stocks, lands and other marketing assets bloated more than real. "Bubble Economy" particularly refers to bloating "fundamentals (interest, profitability, productivity etc.)" of these assets.
9.1.1. While regularly reporting audit findings on tax offices' under/over tax collections in its annual Audit Report, the Board intermittently reports its audit findings on tax systems and other tax-relevant matters. The following shows one of the examples of Board audit findings on tax system:
9.2.1. In Japan, the central Government runs medical insurance and also subsidises municipalities for running medical insurances, the former mainly for company workers and the latter for self-reliant workers (farmers, shop owners etc.). Hospitals and medical practitioners claim medical remunerations to Medical Remuneration Payment Fund (MRPF) after treating patients. The MRPF examines submitted claims, pays hospitals and practitioners medical remunerations, and forwards the examined claims to insurers (central Government and municipalities) to get reimbursement. Since MRPF pays medical remunerations in "points" which represent 10 Yen each, the medical remunerations are claimed as:
MRPF-approved points x 10 Yen
9.2.2. The Government imposes income tax on paid medical remunerations as follows:
Paid yearly medical remuneration(a) - total MHW - prescribed medical costs (b)= amount taxable (c)
Amount taxable (c) x tax rate = tax payable
In calculating (b) above, medical practitioners (individuals) were exceptionally entitled to calculate (b) as (a) x 0.72 (cost-income ratio = CIR) even when (b) is less than 72%. The Government established this tax discount system in 1954. The whole system was to keep the claimable remuneration (points) as low as possible while keeping high level deductible cost and thus to maintain high quality medical service. However, after the establishment of the system, practitioners' earned medical income and incurred medical costs became highly varied giving rise to criticism of "tax favouritism" for practitioners.
Under these backgrounds, the Board examined practitioners' 1975 medical incomes, their variance and the gap between the MHW-prescribed ratio (72%) and real medical costs. The Board sampling examination (5,372 practitioners) showed that:
9.2.5. Since medical practitioner tax discount was Government policy, the Board went no further than analysing the facts on the discount.
Notes:
9.2.6. After lengthy discussion, the National Tax Council thereafter amended medical doctor income tax discount system as follows:
(1979 amendment)
divided the uniform 72% CIR into 5 grades:
annual medical income less than 25 Yen million (lowest income) - 72 deductible more than 50 Yen million (highest income - 52% deductible
(1988 amendment)
annual income more than 50 Yen million - no tax discount
Note: National Tax council: A public advisory committee (deliberative committee) on tax reform attached to the Prime Minister.
10.1.1. The Japanese Constitution in its article 84 stipulates:
10.1.2. No new taxes shall be imposed or existing one modified except by law or under such conditions as law may prescribe.
10.1.3. Based on this, the Customs Law stipulates basic principles of custom duties. "Customs Tariff Law" and "Temporary Tariff Measures Law" provide for rates, payees and other relevant matters for Autonomous Customs Duties and Beneficial Custom Duties. Custom duty rates in Japan divide into:
(a) ACD customs tariff rates
The Customs Tariff Law article 3 stipulates:
"Custom duties shall be levied on the basis of import commodity prices or quantity as shown in the Custom Duty Schedules (CDS) prescribed by this Law". The CDS classifies imported commodities into 21 major items, 97 quasi-major items, 1,240 items and 5,018 small items
and stipulates custom tariff rates for each of the classifications. Since the Law fixes these rates in long term except for the case of significant trade environment changes, these rates are called "Basic Rates".
While Customs Tariff Law stipulates "Basic Rates". Temporary Tariff Measures Law stipulates "Temporary Rates" which temporarily replace "Basic Rates" when Basic Rates need to be tentatively changed.
(An example of Temporary Rate)
After the Japanese Government permitted import of "Hong Kong Flowers (HKFs: plastic artificial flowers)" with 20% Basic Rate in 1961, cheap HKFs flooded Japanese domestic market and temporarily bankrupted many Japanese artificial flower manufacturers. To cope with this, the Japanese Government from 1963 levied 35% Temporary Rates on imported HKFs. After Japanese manufacturers gained sufficient international competitiveness, the Government decided to gradually lower the Temporary Rate to 25% and returned to the 20% Basic Rate in 1972.
While BRs and TRs are in principle levied on all the goods and commodities from all the countries, "Preferential Rates (PRs)" exceptionally offers preferential duty treatment to particular goods and commodities from particular countries who:
Finance Minister designates countries, goods and commodities which are to enjoy preferential duty rates.
The Customs Tariff Law enables the Government to offer benefits (including Beneficial Custom Duty Rates = BCR) to countries who do not benefit from international tariff treaties between Japan and foreign countries, to the extent the benefits do not exceed the benefits offered by such treaties. Based on this, the Government designates countries and goods/commodities which enjoy BCR. Since BCRs have no basis on international treaties, the Japanese Government unilaterally offers BCRs within the tariff rates already given by international tariff treaties. The Japanese Government in practice offers BCRs to all the goods and commodities covered by international tariff treaties.
(b) Conventional Tariff Rates
The Japanese Government concludes international tariff treaties with foreign countries, and levies "Conventional Tariff Rates (CRs)" to the treaty-covered goods and commodities. CRs in Japan comply with GATT. CRs supersede ACD rates which however supersede CRs when ACD rates are lower than CRs.
The Japanese Government Customs Tariff Schedule since 1988 has followed Harmonised Commodity Description and Coding System (HS).
11.1.1. The Custom-Houses and National Tax Administration Agency (NTAA) each has internal control mechanism as follows:
11.2.1. Each of the Custom-Houses has Custom Service Examiners who examine administrative service management in the Custom-House. Each of the major Custom-Houses has one Senior Custom-House Examiner who co-ordinates among Custom Service Examiners.
11.2.2. Each of the Custom-houses has total 10 Custom House Officer Service Inspectors who inspect Custom-House officers' conduct in service. Each of the major Custom-Houses has one Senior Custom-House Officer Service Inspector who co-ordinates among Custom-House Service Inspectors.
11.3.1. The National Tax Administration Agency (NTAA) headquarters has Supervisory Office which inspects NTAA administrative services. When inspecting Regional Taxation Bureaus administrative services at a Bureau Director General's request, the Office is not directed by the Bureau Director General.
11.3.1. The NTAA has Tax Administration Inspectors throughout the country who supervise/inspect NTAA officers' administrative activities and investigate their crimes committed in discharging their duties.
11.4.1. Since NTAA tax collection and other tax administrations are subject to the Board mandatory audit, the Board every year reports the results of its NTAA audit in its annual Audit Report. The audit results in most cases show State tax under-collection and over-collection tax item by tax item (regularity audit results), and sometimes shows results of audit on State tax system and other State-tax-related matters. The Board sends its annual Audit Report to the Cabinet, who thereafter submits its final statement of accounts together with the Report to the Diet. The House of Representatives and House of Councillors each holds Public Accounts Committee deliberations on final accounts for a fiscal year about twenty times a year. The Audit Report is indispensable for Public Accounts Committee deliberations. Board staff members also attend all the deliberations and are requested to address the Board's opinion. For deliberation of State tax audit results, the NTAA staff members are also requested to attend these deliberations and express their views on the Board audit results.
12.1. The NTAA presently has 12 large scale main frame computers in the EDP centres in its headquarters and two major Regional Tax Bureaus and computerises tax assessment, tax collection, tax credit control and other large volume routine tax-related business. Each of the remaining 9 Regional Tax Bureau's Office Automation Centre has mini computers and computerises large volume routine tax businesses such as bank-transfer tax collection, tax credit control and so on. Besides computer-processing these large volume routine data, all the 12 Regional Tax Bureaus have personal computers to process small amount non-routine tax businesses.
12.2. The Board's computerised tax audit:
12.3. In these processes, the Board borrows NTAA's magnetic tape tax files, and samples out tax data files which meet the Board-set conditions by the Board's own main frame computer.
Annexure-1
ORGANISATION OF THE BOARD AUDIT COMMISSION
Annexure - 2
PREPARATION OF THE AUDIT REPORT
In preparing the Audit Report, the Board takes a number of steps for deliberation on audit findings so that it would be accurate, fair and adequate.
Annexure - 3
ORGANISATION CHART OF MINISTRY OF
FINANCE
* Exchange rate for different currencies vis-a-vis the US $ as on 31st March, 1997 are indicated in Appendix 1 (Pg. 475)