Qualification as Interest Income on Japanese Income Taxation : An introductory inquiry into Income Taxation on “Foreign” Interest

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Japanese taxation on Interest Income heavily relies on withholding system in the hands of payer. This operates only when that payment is done within Japan. Along with globalization people are heading for financial institutions which exist outside Japan. Here withholding will not work both for the current provision of Japanese Tax Act and for the principle of taxing jurisdiction. Instead self assessment is needed here. Main problem is how to characterize certain payments in connection with such foreign institutions. As one area of international taxation we will struggle with this issue. In other words the question is how to interpret Japanese Income Tax Act in connection with “foreign”situation, especially “interest on deposits and savings” and “banks and other financial institutions”, both of which really locate in Japanese Income Tax Act and relevant order for enforcement. By an introductory inquiry below legal approach cannot solve problem because of complexity of current financial transaction. Conversely certain mixture of legal and economical is appropriate. First step is to interpret Japanese Tax Law within Japanese legal system. Second is to understand relevant contracts in accordance with conflict of law. On economic one there should be some limitation in connection with Interest Income. That may be whether or not solicitation was in public, relevant transactions continued recurrently and whole pictures were drawn in accordance with formalized covenants. Concrete degree of each element should be considered by next jurisprudences.

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