Japan mulls crackdown on tax-free shopping & stricter residency rules for foreigners

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Japan contemplates tax hike & tighter rules for foreigners

Amid concerns about overtourism and growing unease surrounding foreign residents, Japan is considering a range of policy changes, including tax increases and tighter regulations for foreigners.

Source: Mlenny on Canva, for illustration purposes only

According to The Japan Times, the ruling Liberal Democratic Party (LDP) set up a panel on 21 May to address these concerns.

Addressing leniency for foreign residents

The government is examining several areas involving foreign residents, including the ease of converting foreign driving licences, a legal gap between naturalisation and permanent residency, and issues within the national health care system.

Critics say that current regulations for converting foreign licences to Japanese ones are too lax, arguing that this has contributed to a rise in traffic accidents involving foreigners.

In one example from October 2024, an intoxicated foreign teenager drove the wrong way on a one-way street and crashed into another vehicle at an intersection, resulting in a fatality.

18-year-old boy kills 51-year-old man in car crash after drunk driving in Japan

At present, foreign licence holders only need to pass a written test consisting of 10 questions to convert their licence.

Observers have called the test insufficient in evaluating a driver’s understanding of local traffic laws.

Authorities have also highlighted a loophole where applicants use hotels or other temporary lodgings as their registered address.

Pathway to Japanese citizenship under scrutiny

Meanwhile, under Japanese law, foreigners staying more than three months must enrol in the national health insurance scheme.

However, from April to December 2024, only 63% of foreign residents paid their premiums — well below the 93% compliance rate among citizens.

Another area under scrutiny is the process of becoming a Japanese citizen.

Currently, naturalisation requires five years of residency and only one year’s worth of tax and insurance records.

In contrast, applying for permanent residency involves 10 years of residency, five years of tax history, and two years of insurance payments.

Lawmakers have questioned why the pathway to citizenship, which grants voting rights and one of the world’s most powerful passports, is less stringent than that for permanent residency.

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Proposed policies target tourists, too

The panel is also weighing measures that primarily affect tourists, including a possible overhaul — or even full abolition — of Japan’s longstanding tax-free shopping system.

Source: Nikkei

Originally introduced to encourage foreign spending, the scheme allows tourists to buy goods without paying the standard 10% consumption tax, provided the items are taken out of the country.

However, there is growing evidence of abuse.

In 2022, at least nine travellers who made tax-free purchases were found to have left Japan without the goods in question, resulting in 340 million yen (approximately S$3 million) in unpaid taxes.

While the precise extent of the issue is unclear, officials suspect that Japan’s recent tourism boom has made the problem more widespread.

Retailers have raised concerns that changes to the system could hurt sales and burden airport staff with additional customs checks.

In a related move, the government is also considering raising the 1,000 yen (S$9) departure tax, which currently applies equally to Japanese and foreign nationals.

The proposed revision would see the increase apply only to foreign travellers.

While proponents argue this would help fund tourism infrastructure and manage overtourism, critics warn that targeting only foreign tourists may violate international agreements.

Also read: Japan considers raising tourism tax from S$9 to S$45 in bid to address overtourism