IAG takes a deeper look at how Japan’s tax system for IRs will work when it comes to taxing local residents, after the government recently revealed foreigners will be exempt from paying tax on winnings.
The general framework for taxation of Japan’s first IRs, now expected to open in the late 2020s, has been decided. As stipulated in the Outline of 2021 Tax Reform Proposals, the winnings of foreign casino guests will not be subject to income tax, shelving an earlier proposal by the Ministry of Finance and Ministry of Land, Infrastructure and Transport that would have certainly reduced Japan’s attractiveness as a high-end gambling destination.
It doesn’t look like local players will enjoy the same benefits, with the Outline of 2021 Tax Reform Proposals also stipulating that local gamblers will be “taxed in certain cases in the same way as public gambling”, in which case the income will count as “occasional income.”
However, the decision to exempt foreign guests shows that authorities are keeping a close eye on international standards. Notably, neither Macau nor Singapore levy a tax on winnings, and the Outline stipulates, “From the perspective of ensuring Japanese IRs the ability to compete internationally, non-residents will not be taxed on income generated in the casino.”
Tax on profits made at a casino are directly tied to a customer’s desire to play, and thus their desire to visit Japan, making such stipulations a vitally important cog. Needless to say, both operators and local governments have been anxiously awaiting this decision.
“Such a decision would be completely tone deaf to the market. There are plenty of rivals in other countries. I was sure it could never happen, so I’m relieved to hear there won’t be taxation on tourists.”
There were also firm opinions expressed by candidate IR operators opposing moves to tax Japanese residents on winnings. Both an experienced casino player and employee, Rocky agrees with their views on the issue.
“It’s impossible to keep track of every single individual transaction in a casino. One bet doesn’t even take a full minute. Unlike [public] gambling, that means many bets are placed in a short amount of time,” he said.
“I wish they would decide not to tax Japanese people either. The JPY6,000 entrance fee is also just another edge for the house. If they overtax in this way, the market won’t be appealing and Japanese people will just travel to overseas casinos. This is especially true for high-rollers. In the end it will lower the services provided to customers overall.”
TAXATION ON HIGH DIVIDENDS IS UNAVOIDABLE
“If there is to be taxation on the winnings of Japanese guests, it will probably only be on high dividends,” Rocky suggests. “For example, in Las Vegas, slot machine winnings exceeding US$1,200, and table game winnings exceeding US$5,000, are taxed (at a flat rate of 24%). It would be better if Japan adopted something similar.”
It’s not hard to find examples of similar systems. I recall getting quite lucky one day while attending the horse races run by the Korean Racing Association (KRA). According to KRA rules, as a foreigner I was subject to tax on these winnings so what I ended up taking home was less than I expected, but the hospitality and atmosphere were great so I didn’t mind too much. The KRA staff assured me that the taxes I paid would be used for welfare and education, which I found to be acceptable.
COULD THE IR TAX SYSTEM BE BASED ON JAPAN’S EXISTING PUBLIC GAMBLING SYSTEMS?
Japan has complicated rules around taxation of winnings on domestic public gambling such as horse racing, keirin, boat racing and auto racing. According to the local “Refund System” (i.e. winnings), whether or not refunds on horse racing tickets fall under occasional income or miscellaneous income has been shaped by a number of lawsuits regarding horse race bets.
As per the National Tax Administration Agency, the local “Refund System” is divided into miscellaneous income and occasional income, and this categorization is decided on considerations such as period of time, number of times, frequency and scale of profit.
For example, an instance in which a person uses software to develop a betting system while keeping track of their horse racing bets and making regular profit would be classified as miscellaneous income, with the possibility of claiming losing tickets as expenses.
Conversely, the refund for someone who loves to attend the races as a fan and is a lighter bettor counts as occasional income, and the purchase price of losing bets isn’t recognized as necessary expenses.
The National Tax Administration Agency recommends those who receive any refunds from bets they place keep detailed notes on all race dates, locations and individual races, on the amount spent on bets, and on any refunds claimed back.
The amount of tax to be paid on either miscellaneous income or occasional income winnings is based on Japan’s personal income tax rates, which work on a sliding scale. Residents pay a tax rate of 5% on taxable income below JPY1.95 million and 10% on taxable income of between JPY1.95 million and JPY3.3 million, scaling gradually upwards to a maximum tax rate of 45% for those with taxable income above JPY40 million.
Miscellaneous income is added to an individual’s taxable income, minus any deductions for losing tickets, while only half of a person’s occasional income is added to their taxable income although deductions for losing tickets are not allowed. Occasional income also benefits from a JPY500,000 deduction before any tax is applied.
As it stands now, the Tax System Outline stipulates that when it comes to IRs, “Japanese residents will be taxed in the same way as public gambling.”
In other words, once winnings exceed a certain amount, the winner is required to report it as occasional income on their tax return.
It can be complicated, but at the very least one hurdle has been cleared by the government in anticipation of Japanese IRs.