Terrie's Take: Japan's Taxing eCommerce, the World's Buying Sake, Abenomics, and Hotel Prices
Terrie’s Take is a selection of Japanese-centric news collected and collated by long-time resident and media business professional Terrie Lloyd. AkihabaraNews is pleased to present Terrie’s learned perspective; we all could use another take on the news - here’s Terrie’s:
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Terrie’s Take on January 27, 2014
- Taxing Cross-border eCommerce
- Sake exports booming
- Metro real estate showing signs of recovery
- IPOs to hit JPY1trn in 2014?
- Stiglitz warns on Japan recovery
- Travel surge pushes up hotel room prices
Taxing Cross-border eCommerce
While the second increase in consumption tax in October 2015 will collectively add an extra 5% on to physical things and digital goods we buy in Japan today, related legislation which will kick in around the same time (2015) will add an extra 10% (up from zero) on digital contents/services that are purchased by consumers (versus businesses) from suppliers abroad. This new tax will probably become known as the "Rakuten Tax" because the loop hole came to public attention after Rakuten started selling tax-free Japanese titles through the Kobo ebooks/ereader company in Canada, so as to avoid local taxes.
Currently, consumption tax is only charged on goods bought in Japan, and for imported physical goods. Actually, on imported physical goods, the tax regime is surprisingly lenient and is usually waived on personal orders of less than roughly JPY14,000 and which are shipped via courier. Unfortunately, with the new rules, consumption tax will be charged for ALL international sales made to consumers in Japan, and so we presume the relaxed attitude on small orders will disappear as well... Darn! We have gotten used to the idea of tax-free groceries and bathroom consumables from iHerb.com and Amazon.com.
The framework on which the new taxes will work is not yet specified, but regular references to the EU system by the authorities make us think that Japan will try a similar approach. In that case, for B2C transactions there is likely to be an online tax declaration form to be completed by the foreign vendor when they sell to Japan-based consumers. The foreign vendor will deduct the required taxes when the transaction is done, and remit the cash to the Japanese Tax Office shortly after.
It's not surprising that the government wants to hit international eCommerce, the Daiwa Institute of Research calculated that in 2012, while the tax rate was still 5%, that Japan lost approximately JPY25bn in taxes on music downloads, advertising, reports, subscriptions, and other digital transactions. The remarkable thing about the EU system and therefore the incoming Japanese one, is that it is honesty based, and will depend both consumers and vendors doing the right thing in order for the government to get paid. Given that Japan is the second largest consumer (per capita spending) of online porn in the world, not a sector that lends itself to forthright actions, we see the enforcement of this new system to be a major challenge.
Firstly the vendors. The EU rules require the vendor to establish that the consumer is in the EU, and if so, then to charge the appropriate rate of tax. Actually, at the moment they have a system whereby the tax can be paid in any one of the member nations, and so apparently most vendors try to pay their taxes in Luxembourg where the VAT is 15%, versus Denmark, where it is 25%. Not surprisingly, this rather messy arrangement will change in the future and vendors will be required to pay the exact country tax rate for the consumer's location.
However, it doesn't take much to see that:
1. While there is only one tax form for the 28 members of the EU and so the system currently isn't that onerous, if Japan and other countries around the world start following suit and imposing their own rates and systems, then being a multinational online vendor will become an incredible headache. Companies will have to deduce/prove each place of consumption, track rule changes, and be prepared to be targetted by legal challenges from territories they have no presence in. We imagine that this will be an ideal opportunity for Visa and Mastercard to offer a value-added tax-tracking/reporting service based on purchases by their card users (who are verified residents of each destination), thus encouraging vendors to only take these major forms of payment.
2. Setting up an online shop front and running ads to get customers has never been easier. Now, with the incentive of charging customers for their taxes, shipping products so as to stay in business for a while, then skipping town before making the tax payments -- this seems a perfect opportunity for shady operators. Who is to know whether online Shopfront B was Company A last week? How will foreign tax offices enforce foreign court action against a defaulted and vanished supplier?
3. Then, if you factor in virtual market places, like www.oDesk.com, for example, the ability for someone to register and start delivering software development projects as an individual, then to deregister and disappear into anonymity, makes it highly likely that not paying taxes will become a kind of underground "sport". Indeed, tax avoiders are likely to take the moral stance that since the taxes are going to another country, why should the supplier be forced to collect them? They receive no benefit in return so the tax must be immoral.
4. According to OECD figures, the avoidance rate for taxes for online transactions is already 10% to 30%, and with these changes is likely to grow significantly. The only way to reduce avoidance will be for tax offices around the world to share data and for related law enforcement agencies to agree to support foreign tax office claims against local corporations. Given that the Japanese tax office is only just now signing cooperation agreements to get foreign information on its own citizens and companies in Japan, it seems that it will be decades before they can take action against foreign corporations in a foreign country.
5. Thus, the cross-border digital consumption tax will probably come down to being compulsory for those companies big enough to not want to get caught not paying it, and optional for anyone else with a smallish operation. Perhaps in a twisted sort of way, the tax will encourage people to buy from small operators, since they will be at least 10% cheaper.
Then there is fraud by the customers. The most obvious example is where the customer uses an IP proxy service and Bitcoin payments, to disguise their real location. An automated vendor, which is just about every eCommerce site on the web, is not going to challenge a customer who digitally appears to be in the next state over, or in a low-tax/no-tax foreign jurisdiction. They certainly won't try to prove that the customer is in a hard-to-deal-with location like Japan or Denmark or wherever.
Then you have to consider the nature of the digital contents business. You have porn sites, marketplaces for moonlighting programmers, underage teen artists, underemployed writers, indie rock groups, etc., and in practically every instance the customers are secretive about their actions and thus even more likely to try to bend the rules than to pay the extra. It will be difficult for the tax authorities to go after people at this level. Maybe they will try to make an example of a few, as we have seen similar examples of in the music downloads business. But, as we've also seen, none of these legal actions has slowed down music downloads particularly.
Lastly, if the tax charging and collection system is too difficult, then merchants may just decide that shipping to Japan is too hard to do -- basically killing the golden eCommerce goose that the Tax authorities want to milk. We have already seen this all-or-none reaction from foreign vendors in the securities sector. Ten years ago, you could as a non-US citizen hold a stock trading account in the USA without any major headaches, other than to fill out a tax form annually. However, with the introduction of FATCA, securities firms in the USA have largely decided to eliminate their non-resident, foreigner customers rather than be bothered with meeting the onerous reporting requirements. So now there is nothing left to tax and the customers have gone elsewhere.
Sake exports booming
Things are looking up for Japan's 1,700+ sake brewers. Data from the Ministry of Agriculture shows that exports of sake hit JPY8.5bn in the 10 months through to October 31st, which according to industry experts means that shipments will exceed the 14.1m liters shipped in 2012. Sake exports have almost doubled from the 7.5m liters back in 2002, and are a reflection in the boom in Japanese restaurants operating overseas. The Japanese Culinary Academy in Kyoto reckons that there are now about 55,000 Japanese cuisine restaurants outside of Japan. (Source: TT commentary from businessweek.com, Jan 23, 2014)
Metro real estate showing signs of recovery
Although overall land prices in Japan continue to fall, albeit less rapidly than in the past, data from the Nomura Research Institute (NRI) shows that prices are recovering in major urban centers, and that this may be the start of an overall recovery. From June 2012 through 2013, land prices in Tokyo grew 5.2%, while in Osaka prices were up 2.3%. Within Tokyo sales of new condos were up 31% between May and December last year, compared to the same period in 2012. Osaka condo prices also rose 8.8% in June 2013, compared with June 2012. ***Ed: Of course this pick up could be a natural buying wave prior to the consumption tax increase, so no one is forecasting an outright recovery yet.** (Source: ibtimes.com, Jan 23, 2014)
IPOs to hit JPY1trn in 2014?
While the case for Abenonmics is still being made, its impact on the Japanese stock market is undeniable, and more action is expected for at least the first 4-6 months of this year. Japan's largest securities firm, Nomura Holdings, thinks that 2014 will be a strong year for companies to go public, and says that IPO share sales will double to around JPY1trn this year. If they are right, it will be the first time since 2010 that the market has hit that number, sputtering as it did to just JPY571bn on the back of 58 IPOs in 2013. Nomura is bullish because two big listings are expected: restaurant company Skylark and property/transport company Seibu Holdings. Both companies have foreign funds as shareholders and thus are likely to want to cash-out as early as they can (i.e., while Abenomics is still doing OK). (Source: TT commentary from bloomberg.com, Jan 23, 2014)
Stiglitz warns on Japan recovery
PM Abe is doing a great job touting at Davos, Switzerland, the biggest financial experiment in recent history, however, he is also getting some warnings from financial heavyweights while he is there. Apparently Nobel economist Joseph Stiglitz has stated that Abe's government is implementing the rise in consumption tax too early and that there is a significant risk that the nation's nascent growth will "sputter". Stiglitz reckons that most of the core inflation that Abe has been trumpeting is actually just a reflection of rising import prices due to the 25% devaluation of the yen over the last year. ***Ed: We pointed this out in an earlier Take. Numbers indicate that almost all the inflation to date can be accounted for by the more expensive energy imports Japan is dealing with.** (Source: TT commentary from telegraph.co.uk, Jan 23, 2014)
Travel surge pushes up hotel room prices
Rising prices for hotel rooms due to increased inbound foreign tourists is providing a nice boost for web reservations companies that don't actually service the foreign market. Competition with foreigners means that Japanese tourists are paying more, and this has reflected in the earnings of Ikyu, one of Japan's largest domestic travel booking firms. Ikyu says its profits are running 20% over last year, at around JPY1.6bn in the 9 months through to December 2013. Sales were up by 10%. The average price per room is now JPY25,000, up 5% over last year. (Source: TT commentary from asia.nikkei.com, Jan 23, 2014)
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Images: Terrie's Take; AkihabaraNews