It’s Your Loss If You Don’t Know About This Voluntary Tax System in Japan

  • CULTURE
  • At the mention of taxes, the typical impression is that it’s something which we are legally obligated to pay. However, do you know that there is a voluntary tax system in Japan which calls upon the people to pay taxes on their own initiative and that there have been a significant number of people who actually hop on this bandwagon? Read on to find out more about this unique system from Japan and understand the issues involved!

    A campaign banner to encourage people to take part in the Furusato Nouzei system

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    What is Furusato Nouzei?
    Campaign banner to encourage participation in Furusato Nouzei so as to help people who had been affected by natural disasters

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    The term “Furusato Nouzei” (ふるさと納税), which literally means tax payments to the hometown, is a voluntary tax system in Japan which started in 2008 that enables people to pay taxes to a local government. In most cases, the taxpayer chooses his or her hometown to receive the money. However, there is no restriction to prevent someone from donating to a city, town, or village based on their personal preferences so you can contribute to as many recipients as you wish. In return, the taxpayer gets to enjoy tax rebates and local products sent by the local government concerned.

    Furusato Nouzei was conceptualized as a way for people to contribute to their hometowns even if they have moved elsewhere to work and live. Many Japanese were born and raised in the suburban areas and received resident, educational, and medical services provided by the local governments. However, once they move away from their hometowns to the big cities for studies and work, the taxes derived from their income would then go to those city governments instead of giving back to where they came from. Coupled with the decreasing population in suburban areas, this disparity in the tax revenue has contributed to the widening development and financial gaps between the cities and rural areas. With the introduction of the Furusato Nouzei system, people are able to choose how much they want to give, when they want to do it, and to whom the funds should be going to. With the income derived from this system, the ideal situation is that the suburban and rural areas can then get a much-needed boost to its finances and development with the help of the people who were born and raised there.

    Giving to different recipients under the Furusato Nouzei system

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    Despite the use of the term “nouzei,” this system is somewhat closer to a donation to the local governments. Generally, in the case of giving donations to local governments, you would need to declare it on your annual income tax return where a portion of the donated amount is to be offset against your income and resident tax. However, the Furusato Nouzei allows the entire amount above the minimum of 2,000 yen to be offset against your payable tax but this is still subjected to the limits imposed by your income level and family structure.

    The Japanese government has introduced several measures to encourage people to contribute via this system. Since 1 April 2015, the amount of tax rebates they can get was doubled from 10 percent to 20 percent. In addition, if you are giving to less than 5 local governments in a single year, you would not need to file income tax returns for each time the donation is made.

    Although the Furusato Nouzei system is largely targeted at individuals, this does not mean that corporate entities are not allowed to do the same. However, in the case of such entities, the rules governing the tax payments and treatment in their accounting records as well as the gifts from the local governments will differ from that of the individual taxpayer.

    Gifts in exchange for paying taxes?
    A catalog of gifts from Chigasaki City, Kanagawa Prefecture under the Furusato Nouzei scheme

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    Depending on the amount of contribution, the items sent to the person who made the donation will differ. Using Yamanashi City in Yamanashi Prefecture as an example, if the amount of tax paid is more than 10,000 yen, you can get a box of 6 to 8 Yamanashi peaches since the prefecture is the no. 1 producer of peaches in the country. Besides the usual food items such as meat, vegetables, seafood, alcohol, noodles, desserts, and condiments, there are also certificates of appreciation, discount coupons to use at the local area’s hotels or tourists spots, beauty products, sundry goods, clothes, or traditional crafts. However, it is worth noting that the purpose of such gifts is more for the local governments to show their appreciation to the donors rather than as a means of exchange for the taxes received. As such, you may notice that there may be some smaller towns and villages which are not providing extravagant or high-value gifts as compared to bigger cities but that’s perfectly understandable given their circumstances.

    Diagram showing how the Furusato Nouzei system works

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    Some people may feel odd about getting something in return for paying taxes. However, if you look at it from another perspective, this practice of sending the local produce to the donors actually allows the manufacturers and businesses in the city or town which received the donation to promote themselves especially if the donors themselves have not heard of or used the product they receive. In fact, it’s been said that many of these taxpayers actually become repeat consumers of these local products, so in a way, this helps the area to benefit from the Furusato Nouzei system in an indirect manner.

    In recent years, there has been a worrying trend that some of those who received gifts under the Furusato Nouzei system have been selling them online. Although there is no law saying that they can’t do so, the authorities are urging the public to refrain from making this a commercial activity since the gifts are meant as tokens of appreciation from the local government and not as goods to be resold for profits.

    Government Cloud Funding – Choosing how your money is to be used

    Besides being able to choose where you want to give the money to, you can also select specific projects to contribute to even though they may not be managed directly by your hometown or a place of your preference. The Furusato Choice website has a page listing all the government cloud funding projects (*Japanese only) which are seeking donations via the Furusato Nouzei system so potential donors can find out which causes appeal to them and direct their funds accordingly. Here are three examples of the wide variety of projects featured:

    Izumisano City’s project for a new ice-skating rink

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    1. Izumisano City in Osaka Prefecture wants to build an ice-skating rink (*Japanese only) near the Kansai International Airport so that ice skaters, speed skaters, and ice hockey players can have a place to train at in the Kansai region. At present, the number of ice-skating rinks in the area has been decreasing and many of the existing ones are either packed to the brim or do not meet international standards. Besides allowing the region to nurture future athletes, the city also hopes to host major events at this venue such as the NHK Trophy. The call for funding has only begun recently so it has just achieved 1 percent of its target amount as of the end of August 2016. The city has also hired professional ice skater Takahashi Daisuke as the adviser for this project.

    Kibichuo’s project to take care of retired racing horses

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    2. Kibichuo in Okayama Prefecture wants to create a place for horses retiring (*Japanese only) from professional racing. On average, horses live for 25 to 30 years but their professional racing career is usually over by the time they reach the ages of four to eight so the town wants to build a place for these horses to stay at. In addition, the town is planning to open Japan’s first horse therapy resort so these retired horses can be used for leisure riding, horse therapy, and as training partners for Japan’s equestrian team.

    Jinsekikogen’s project to reduce the number of stray and abandoned dogs being put to sleep to zero

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    3. Jinsekikogen in Hiroshima Prefecture has launched a project to raise funds so as to reduce the number of dogs being put to sleep (*Japanese only) to zero. In order to do so, it needs to build new shelters, open an adoption center for these dogs to find new owners, boost their operations, and hire staff to take care of these dogs. Response to this project seems to be quite good as it has hit more than 100 percent of its target.

    Donations vs. Furusato Nouzei
    Damage to the Kumamoto Castle during the earthquake in 2016

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    In the event of natural disasters, it is often that you will come across appeals for donations to the affected area’s government for restoration and relief efforts. However, it is usually not specified how the money will be used and that the donors tend not to have a say in this regard. With the introduction of the Furusato Nouzei system, taxpayers can choose which area they wish to contribute to and at times, can even choose how the funds will be used and to what type of project. Using the recent Kumamoto earthquake as an example, the Furusato Choice website has a list of local governments receiving Furusato Nouzei (*Japanese only) on behalf of the entire Kumamoto Prefecture or parts of the prefecture which had been hit by the disaster. The funds are passed on to the recipients by the local governments which take up the burden of issuing the tax receipts to the taxpayers rather than leaving it to their counterparts in Kumamoto to deal with the paperwork.

    This way of giving donations in the form of tax payments under the Furusato Nouzei system has caused some problems in unexpected ways. The number of people who paid the Furusato tax between 2008 and 2010 was relatively stable at around 33,000 people. However, in the aftermath of the March 11 earthquake and tsunami crisis in 2011, the number of taxpayers surged to a high of 741,667 people that year, while the amount paid i.e. 64.91 billion yen jumped nearly 10 times higher from the previous year’s total. As such, it was obvious that many people were using this tax system to give donations to the three prefectures i.e. Iwate, Miyagi, and Fukushima which were most badly hit by the disaster. However, the huge amount of tax refunds to be made i.e. 21.01 billion yen had to be borne by the local governments where the taxpayers were staying at.

    Happenings Surrounding the Furusato Nouzei System
    Gifts for taxpayers under the Furusato Nouzei system

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    Since its inception, the Furusato Nouzei had its fair share of highlights and controversies so here is a list of some of these happenings:

    • Hirado City in Nagasaki Prefecture was the first local government to pass the 1 billion yen mark under this tax system for the fiscal year 2014.
    • Tochigi City in Tochigi Prefecture saw a 7-fold increase in its Furusato tax for 2014 thanks to its locally produced strawberries Tochiotome which was being offered as a gift for taxpayers.
    • DMM.com launched a campaign on 12 February 2015 for taxpayers who contributed to Kaga City in Ishikawa Prefecture by offering them DMM money up to half of their payment amount which could then be used on their online portal. Due to the overwhelming response of 1,700 taxpayers who contributed more than 53 million yen by the end of February that year, the campaign had to be canceled ahead of schedule (4 March) even though the original end date was 31 March.
    • In Gunma Prefecture, the problem of taxpayers putting their coupons received as gifts for the Furusato tax payment up for Internet auctions was so prevalent that the Ministry of Internal Affairs and Communications asked the prefectural government to come up with measures to stop this trend and prevent the reselling of the gifts.
    • Nabari City in Mie Prefecture had underestimated the appeal of the Hercules beetles when it offered that as a gift under the Furusato Nouzei scheme this April 2016. In just 6 days, the farmers which were rearing the beetles ran out of stock for the insect lovers who flooded the city with donations just to get this beetle.
    Pros & Cons of the System
    Various types of vouchers as gifts to the taxpayers

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    Despite the initial aim of rejuvenating the suburban and rural areas by allowing people to contribute to their hometowns, the Furusato Nouzei system also has its fair share of supporters and critics. People who are in favor of this system feel that it allows the local governments to “get back a portion of their investment” on the people who had stayed there until they became adults but moved to the big cities before they could contribute part of their employment income as taxes. With the Furusato Nouzei, these governments can use the much-needed funds to take care of the current and future residents in their areas. In addition, the taxpayers can have a say in how their funds are used and get local produce from their hometowns or the areas they support.

    On the other hand, there are concerns over the system such as the increased administrative work needed to process the payments and smaller towns not enjoying the same level of support as the bigger cities which already have a larger population to begin with. Last but not least, the increasingly expensive and high-worth gifts given to the taxpayers seems to deviate from the intended purpose of the gifts being tokens of appreciation and boosting awareness of the city or town which receives the tax payment. For example, there are websites like this (*Japanese only) which compare the gifts offered by the local governments and comes up with a ranking of the most “value for money” deal under this system. As such, there are many people who neither have links to the city or town concerned, nor have a genuine preference or liking for the place, but still pay the Furusato tax just to get the gifts. Perhaps it’s no wonder that the top 10 local governments which got the most tax payments in 2015 (*Japanese only) offered high-worth items such as meat products, shochu (Japanese liquor), fruits, electrical appliances, seafood, and even iPads! It makes me wonder how an iPad could be considered as a local produce from Shizuoka, though.

    Having read so much about the Furusato Nouzei, how do you feel about this system? Do you think that this might work in your country as well?

    Furusato Nouzei Website (*Japanese only)

    *Featured Image: furusato-nouzei.com/

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