‘Stolen tax’: As inbound tourism surges, abuse of Japan’s duty-free system emerges (Pt. 1)

The number of foreign visitors to Japan surged to a single-month high of 3.29 million in July, and the country is seeing a boom in visitor spending. Yet behind the scenes, the country is encountering widespread tax evasion through abuse of its consumption tax exemption system. The government is stepping up countermeasures at the border but the sheer volume of cases is proving difficult to manage.

The Mainichi Shimbun investigated such tax evasion at Narita International Airport in Chiba Prefecture, a gateway to Japan for many international visitors.

1 million yen in tax ‘stolen’

In mid-June, as people waited in a long line at a check-in counter at Narita International Airport’s Terminal 2, two customs officers spoke with a middle-aged man of Asian descent, who was wearing a white T-shirt. The man, appearing flustered, was restless, calling someone on his smartphone and opening multiple suitcases on the floor.

Officials said the man was recorded as having purchased over 10 million yen (about $71,000) worth of goods at duty-free stores in Japan. Foreign visitors can receive a tax exemption on goods only if they take them out of the country. They are not allowed to resell the items within Japan, and if it emerges that they are not carrying the goods when they leave the country, they are asked to pay the 10% consumption tax.

Under Japanese law, however, inspections by customs officials are voluntary. Customs officials cannot forcibly collect the duty from travelers by detaining them like Japanese police, and they can’t stop people from leaving the country for refusing to submit to an inspection.

The man being questioned over his purchases told officials, “I had a foreign friend living in Japan tell me, ‘I want you to lend me your passport because I want to buy duty-free goods,’ so I did. I guess that friend bought clothing and fashion goods duty-free.” The man also said that he had mailed goods he bought duty-free to his home country, but he stated that he didn’t keep any of the documents that could prove he actually sent them.

As the departure time of the man’s flight approached, the customs officials repeatedly asked him to pay the consumption tax. But after talking with him for about 30 minutes, he hurriedly left the scene. Once out of the country, there is a very low possibility that such people will pay the consumption tax. The man is essentially suspected of stealing over 1 million yen (about $7,100) in taxes.

Tip of the iceberg

According to customs officials, many visitors to Japan who abuse the duty-free system and leave Japan without paying the taxes make claims such as, “My friend took the goods with them on another flight,” or “I’ll take the duty-free goods out of the country the next time I leave Japan.” Some people turn up just before their flights, leaving little time for inspections. One customs official divulged, “We inspect departures from the first flight to the last, but these are voluntary checks, so there’s only so much we can do.”

According to the Ministry of Finance, 3.71 million visitors to Japan in fiscal 2022 bought 604.2 billion yen (around $4.30 billion) worth of duty free goods before leaving the country. Customs asked for about 2.2 billion yen (approx. $15.65 million) in unpaid consumption taxes in 367 cases where the travelers did not have the tax-free goods on them during inspections. But payment was made in only 214 of these cases, with the amount they paid limited to around 70 million yen (about $498,000), leaving some 2.1 billion yen (approx. $14.95 million) unpaid.

Of the unpaid taxes, some 1.85 billion yen (around $13.17 million) was owed by individuals who had made purchases of over 100 million yen (roughly $711,000) each. In 57 cases where customs inspected purchases topping 100 million yen, 55 individuals did not possess the goods and left Japan without paying the tax.

In fiscal 2022, there were 374 cases where travelers spent over 100 million yen or more on duty-free items, with the total amount reaching 170.4 billion yen (approximately $1.21 billion), accounting for nearly 30% of the total. While customs officials are focusing their inspections on these high-value buyers, a senior official from the National Tax Agency admitted, “We can’t cover everything. What we’re aware of is probably just the tip of the iceberg.”

(Japanese original by Yuhi Sugiyama, Business News Department)

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