Japan criminal law imposes criminal responsibility for cases of wilful/malicious tax evasion in an effort in order to serve as a deterrent to such behaviour and helping to maintain the self-assessment tax system by facilitating fair and accurate reporting. The procedural flow of the criminal tax fraud system is as follows:
- If there is suspicion of tax fraud, officials of the National Tax Agency (NTA), Regional Taxation Bureau, and Local Tax Office who are authorized to investigate tax crimes will conduct an investigation to clarify the matter. Criminal investigations include investigations conducted with the voluntary cooperation of criminal suspects or witnesses and compulsory investigations conducted using court-issued warrants.
- If, as a result of the investigation, it is found that there is a criminal offence, the NTA and other officials must file a complaint with a public prosecutor, with certain exceptions, such as the tax fraud with respect to liquor tax and tobacco tax.
- The public prosecutor who receives the accusation will then file an indictment with the court in the same manner as for ordinary criminal cases (Code of Criminal Procedure, Article 247).
In particular, the NTA designates cases that are expected to have a strong social impact, such as consumption tax cases, cases involving non-reporting, international cases, and cases involving currently trending issues, as priority cases and actively collects information for them. If suspected criminal cases are discovered through such information gathering activities, the NTA will initiate criminal investigations.
There are no specific rules in Japan which state that tax evasion amounting over a certain threshold should trigger the commencement of criminal proceedings. In practice, however, the amount of tax evasion may be a factor in determining whether to initiate a criminal proceeding.
Article 248 of the Code of Criminal Procedure provides that "prosecution may not be appropriate in cases where it is not necessary due to the character, age, and circumstances of the offender, gravity of the offence, circumstances, and circumstances after the offence."
The amount of tax evasion is a factor that affects the determination of whether a "serious offence" has occurred. Therefore, it affects whether or not an investigation is initiated and whether or not to commence prosecution. However, in addition to the total amount of tax evasion, the ratio of the amount of tax evasion to the amount paid also has an important impact on the judgment of whether it is a "serious offence".
No, there are no rules which would result in tax penalties automatically triggering criminal proceedings in Japan. In order to establish and develop the self-assessment system and the collection and payment system, if the filing obligation and the collection and payment obligation are not fulfilled, civil penalties ("additional taxes") such as accuracy-related penalties, penalties for failure to file, penalties for failure to pay, and penalties for fraud will be imposed.
On the other hand, criminal penalties for a taxable offence are levied for the purpose of preventing malicious tax evasion cases and are distinct in nature from civil penalties. Accordingly, although there may be cases in which both civil and criminal penalties are imposed, criminal penalties would not be imposed solely as a result of the imposition of civil penalties. However, the presence or absence of a previous conviction (e.g., having previously been punished for tax evasion) may be taken into account when making accusations, prosecutions, and judgment sentencing decisions.
Article 38(1) of the Criminal Code states that "acts in which there was no intention to commit a crime shall not result in prosecution, provided, however, that this shall not apply where special provisions in the law exist." There are no special provisions providing that tax offences apply in the case of negligence. Therefore, as a general rule, criminal intent is a requirement for the establishment of a tax offence.
Yes. Amended returns and tax payments may be taken into account in accusations, prosecutions, and judgment sentencing decisions. Such voluntary filing not under the threat of audit may be evidence to negate the criminal intent element required for tax offences (as explained in more detail in Question 4.
In theory the prosecutor could, of their own initiative, prosecute the offence.
Article 191(1) of the Code of Criminal Procedure provides that "a prosecutor may investigate a crime himself when deemed necessary," and the authority of the prosecutor to investigate is not legally limited based on whether or not an "accusation" (an act in which an NTA) official informs a public prosecutor of the existence of a criminal fact and urges a subsequent investigation and prosecution) has already occurred (Supreme Court decision on December 23, 1960 (Criminal Reporter (Keishu), Vol. 14, No. 14, at 2213)). As a result, a prosecutor can, of their own initiative, prosecute the tax fraud offence.
However, the Act on General Rules for National Taxes sets out detailed provisions concerning examinations by NTA officials in cases of tax offences, and Article 159 of the Act on General Rules for National Taxes provides for accusations to public prosecutors by the NTA based on the results of the examination. Thus, in practice, all or almost all cases involving tax offenses are prosecuted by prosecutors after investigation and accusation by NTA officials, and prosecutors rarely conduct investigations/prosecutions at their own discretion.
The statute of limitations for tax offences is seven years in Japan.
The statute of limitations for prosecution starts to run from the time when the criminal act has ended (Article 253(1) of the Code of Criminal Procedure). Criminal acts include all the facts that comprise their constituent requirements, i.e., acts committed and their consequences.
For example, if a taxpayer avoids tax via a fraudulent or wrongful act, if a fraudulent return is filed before the statutory due date for payment, the statute of limitations for prosecution will begin to run after the expiration of the statutory payment period. If a fraudulent declaration is made after the statutory due date for payment, the statute of limitations for prosecution shall start to run from the time of the declaration.
A conviction for tax fraud in Japan may result in i) imprisonment for up to 10 years, ii) fines of up to JPY 10 million, or iii) both i) and ii), in addition to civil tax reassessment / penalties.
As in ordinary criminal cases, the public prosecutor who receives the accusation has discretionary power to "not initiate prosecution, considering character, age, and circumstances of the offender, gravity of the offence, circumstances surrounding the offence, and circumstances arising after the offence (Article 248 of the Code of Criminal Procedure).
Having a compliance or risk mitigation program in place may be a factor when prosecutors decide whether prosecution is necessary or whether the prosecutor will request a reduced sentence from courts.
No, there is no such program in Japan.
Due to the prosecutor's authority as described above, voluntary misconduct allegations may be a factor in prosecutors deciding that no charges should be filed or lowering the sentence. In connection with that, there are provisions which allow a judge to reduce the sentence of a perpetrator that voluntarily reports the misconduct. For example, Article 42, Paragraph 1 of the Penal Code states that if a person that has committed a crime voluntarily turns themselves in before being discovered by an investigative authority, the punishment may be reduced, and Article 66 of the Penal Code states that if the circumstances of the crime so warrant, a judge may reduce the sentence.
No, there is no such exemption in Japan.
The statute of limitations period for audits of tax returns is generally five years (seven years for transfer pricing). However, in cases of tax evasion, the statute of limitations is seven years.
Yes, the tax audit system through which tax assessments and penalties are imposed is separate from the system that imposes criminal liability, and the fact that criminal charges have been brought on a taxpayer does not mean that the tax authorities cannot assess and collect unpaid taxes.
There is no such settlement system in Japan. Practically, however, there may room for negotiation, as it may be possible to advocate to the NTA or prosecutor during a tax audit to convince them that the crime is a minor offense and discourage "accusation" or "prosecution."
The flow of tax criminal procedure is summarized as follows:
- NTA officials start investigations in cases of suspicion of tax crime
- NTA official provides an "accusation" to a public prosecutor
- Investigation by prosecutor and subsequent "prosecution"
- Trial and judgment in court
According to annual statistical data released by the NTA, of the cases for which the NTA has initiated investigations, approximately 60% to 70% result in an accusation, but approximately 99% of cases result in conviction when prosecution is initiated.
Companies, as well as individuals/directors, can be prosecuted.
Companies, along with directors and employees, can be defendants in criminal proceedings. Article 27(1) of the Code of Criminal Procedure stipulates that "when the defendant is a corporation, its representative shall represent the litigation."
Further, Article 163(1) of the Corporation Tax Act provides that in cases where a representative or an employee of a corporation has committed a criminal offence with regard to the business of the corporation, in addition to the offender being punished, the corporation shall also be punished with a fine.
The provisions for tax offences apply to all persons who have committed crimes in Japan, whether they are Japanese nationals or foreign nationals (Article 1(1) and Article 8 of the Criminal Code). Foreign employees and directors can therefore be prosecuted.
No, liability for the employee / director is separate from liability for the company's unpaid taxes.
If a company commits fraud or other wrongful acts for the purpose of avoiding taxes, the employee / director charged with the crime would be subject to fines or imprisonment but is not required to pay the company's unpaid tax amount. The liability for such unpaid taxes would fall on the company. Similarly, the company would not be liable for any fines imposed on the individual employee / director related to the wrongful acts.
No, there has not been such an increasing trend in Japan over the last five years. Due to the impact of COVID, the number of investigations and complaints has decreased in recent years. However, such number is expected to return to normal, pre-COVID levels again in the near future.
Regarding the topics to which such cases relate, many investigations involve consumption tax matters, cases of non-reporting, and international matters.