Value of Receipts from 10 Years Ago in Violations of Political Funds Control Act and Income Tax Act

“I think it is completely ineffective.”

“The government calls it a revision, but in reality, it’s a deterioration.”

This statement comes from Hiroaki Urano, 84, a tax accountant and special researcher (tax law) at Rissho University Law Institute, regarding the revised Political Funds Control Law enacted on the 19th of last month in response to the LDP faction’s secret funds scandal.

Despite the scandal involving political fund parties’ secret funds, none of the “secret funds lawmakers” were charged with tax evasion. Only 39 members from the Abe and Nikai factions received party sanctions. The full investigation into substantial fund flows and undisclosed entries in financial reports remains insufficient, with no scrutiny of the incident itself.

The law revision, intended to plug loopholes in what has been dubbed a sieve-like law, passed after just under 27 hours of deliberation in both houses combined, further cementing it as a Political Funds Control Law riddled with even more loopholes.

“I believe the newly enacted revised Political Funds Control Act, which seems to encourage further acceptance of slush funds through legislation, is completely ineffective. It fails to investigate or verify the root causes of the slush fund issue and ultimately just covers up the problem. It’s merely a revision in name, a law that further glosses over bad governance.”

In the slush fund scandal, most legislators repeatedly evaded prosecution by claiming they had delegated political fund management entirely to their secretaries.

As a measure to prevent recurrence, the revised Political Funds Control Act strengthens penalties for legislators. It mandates legislators to create confirmation documents for financial statements. If legislators neglect to verify them and the accounting officer is punished for omissions or false statements, the legislator faces suspension of civil rights.

“They probably mandated the creation of confirmation documents to impose joint responsibility, but originally, the accounting officers were merely nominal figures. The organizers of political fund parties and gatherings are the legislators running political organizations, and the recipients of slush funds are individual legislators.

The slush fund scandal goes beyond violations of the Political Funds Control Act and can be considered an organized tax evasion case within the Liberal Democratic Party. Naturally, legislators should be held accountable if they evade taxes.

Since political organizations are legal entities, they are subject to corporate tax. Furthermore, slush funds constitute miscellaneous income, subject to income tax and consumption tax. In the case of tax evasion in slush fund scandals, legislators could have been prosecuted for violations of the Income Tax Act, Corporate Tax Act, and Consumption Tax Act, potentially facing imprisonment of up to 10 years or fines of up to 10 million yen.”

Regarding the political fund parties that have become breeding grounds for slush funds, the revised law lowered the threshold for public disclosure from the current over 200,000 yen to over 50,000 yen for ticket purchasers. However, donations from individuals or companies to political organizations are subject to an annual total exceeding 50,000 yen for disclosure, whereas for parties, each purchase amount per event is considered. There are no restrictions on the number of parties held or the number of participants.

“Lowering the disclosure threshold amount won’t change much; parties can still gather money privately by holding multiple events or dividing purchases among multiple people.”

 

They publicly disclose 10 years later when they can escape through the statute of limitations. “They’re really mocking the people, aren’t they?”

Meanwhile, the “policy activity funds” transferred from political parties to individual lawmakers, which have been dubbed as a “black box” due to the lack of obligation to disclose their use, have become a focal point.

In the case of the Liberal Democratic Party (LDP), the policy activity funds are received by the secretary-general and distributed to lawmakers. It is reported that Toshihiro Nikai, the former secretary-general, received approximately 5 billion yen during his five-year tenure.

Under the recent revision, concerning policy activity funds, lawmakers who receive payments are required to report to their party the specific amounts and dates spent for each item, which the party must then include in financial statements. Receipts and other documentation are slated for public release ten years later.

“The statute of limitations for violations of the Political Funds Control Act is 5 years. Even if discrepancies or false entries are uncovered 10 years later, no charges can be brought. Regarding taxes, in cases of egregious tax evasion such as slush funds, taxes can be collected retroactively for up to 7 years. However, due to the 7-year statute of limitations, after 10 years, no penalties can be imposed.

Receipts from 10 years ago hold no value whatsoever. Moreover, there’s a possibility they could be publicly disclosed with blacked-out details.

In essence, this means lawmakers can escape prosecution due to the statute of limitations, facing no consequences during the entire public disclosure period. It’s an unfortunate situation where, amid the uproar over slush funds, the system has been further deteriorated.”

Without any basis, the revised law included the public disclosure of receipts after 10 years, sparking anger on social media with comments like ‘Don’t joke around.’

“They inserted the word public disclosure to create an illusion among the public that things hidden until now would become transparent. They’re really mocking us, aren’t they?”

“I think the public needs to escalate their anger even more.”

The revised law includes the establishment of a third-party organization to audit political funds, such as policy activity expenses, in order to ensure transparency. However, the specifics of how audits will be conducted have not been determined.

“There is a political fund audit system in place where lawyers, tax accountants, and certified public accountants can be responsible for audits. However, there are cases where tax accountants from support groups or relatives serve as auditors.

The role of auditors is to verify whether income and expenses are appropriate, carrying a certain level of responsibility. However, political fund auditors often just check if the transactions are documented correctly and stamp their approval, failing to fulfill their auditing role.

Therefore, even if they talk about establishing a third-party organization, the actual effectiveness remains highly questionable.”

If irregularities are uncovered, naturally, it will be the National Tax Agency’s responsibility to intervene.

“Normally, it’s the duty of the National Tax Agency to thoroughly investigate and, in cases of tax evasion, file charges. The prosecution then waits for these charges to conduct their interrogations. However, both the National Tax Agency and the prosecution must respond adequately, but there’s a customary tendency not to take strong action against politics.

They aren’t doing what they should be doing. This is illegal inaction. They’re still keeping their own positions safe, so they won’t easily move without strong anger from the people.”

In a nationwide telephone opinion poll conducted by Kyodo News on June 22 and 23, responses showed that 78.9% of respondents felt the revised Political Funds Control Act would not resolve the issue of politics and money. Regarding reforms to policy activity funds that included considering disclosing receipts after 10 years, 90.4% of respondents found these reforms not sufficient.

 

“Most of the public doesn’t approve, and rightly so. There isn’t a single aspect worthy of approval.”

According to the same Kyodo News survey, the Cabinet approval rating stood at 22.2%. It has remained in the 20% range for the past six months, dropping below 20% in surveys conducted by other agencies.

Public discontent with politics continues unabated. Yet, despite passing a revised Political Funds Control Act riddled with loopholes through sheer numerical strength, Prime Minister Fumio Kishida proudly asserted, “It has become an effective system, a significant step forward.” Are they underestimating the people?

” I think the public needs to escalate their anger even more. If we don’t express our opinions and concerns about the way politics are conducted every day of the year, lawmakers will think they can go back to things like creating slush funds once the heat dies down.

In Japan today, many people don’t vote because of distrust in politics, thinking voting won’t change anything anyway, which ultimately benefits the Liberal Democratic Party. As stated in the preamble of the Constitution, ‘The state derives its authority from the people.’ If lawmakers aren’t fulfilling the trust placed in them by the people, then the voters must choose again in the elections. If the public doesn’t show a tough stance, politics won’t change.”

Hiroaki Urano, a tax accountant and special researcher at Rissho University Law Institute, was born in Hokkaido in 1940. He served as a professor at Rissho University’s Faculty of Law and Graduate School of Law from 2002 to 2011, and as a guest professor from 2011 to 2021. He is the author of several books including “Facing Tax Audits with Dignity” (Nihon Hyoronsha), “Inequality and Poverty Expanded by Taxes” (Akebi Shobo), and “Challenges of Fiscal Democracy” (Gakushu no Tomosha).