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Ernst & Young Tax Co.
Hibiya Mitsui Tower
Tokyo Midtown Hibiya 1-1-2 Yurakucho Chiyoda-ku Tokyo 100-0006
Japan
Indirect tax contacts
Yoichi Ohira +81 (3) 3506-2678 yoichi.ohira@jp.ey.com
Chikara Okada +81 (3) 3506-2110 chikara.okada@jp.ey.com
Nami Okuyama +81 (3) 3506-1273 nami.okuyama@jp.ey.com
A. At a glance
Name of the tax Consumption tax (CT)
Local name Shouhizei
Date introduced 1 April 1989
Trading bloc membership None Administered by National Tax Agency Japan (NTA) (http://www.nta.go.jp)
CT rates
Standard 10% Reduced 8% Other Exempt-with-credit and exempt
CT number format Not required. (However, a registration number system is expected to be introduced from 1 October 2023, together with new invoicing rules.)
CT return periods
Monthly, quarterly, biannually and annually Thresholds
Registration JPY10 million of taxable transactions, subject to exceptions
Recovery of CT by non-established businesses No
B. Scope of the tax
CT applies to the following transactions:
• The supply of goods or services made in Japan by a “taxable person”
• The importation of goods into Japan
• The purchase of services subject to reverse charge
C. Who is liable
A “taxable person” is any business entity or individual that makes taxable supplies of goods or services in the course of doing business in Japan.
However, the CT legislation provides for a small business exemption, the application of which depends on the first-time taxable turnover is realized in previous fiscal years.
An entity qualifies for this exemption and is therefore not considered as a taxable person if it meets both following conditions:
• The taxable supplies (sales) in the “base period” (i.e., the fiscal year two years prior to the current fiscal year) did not exceed JPY10 million.
• The taxable supplies (sales) in the “specified period” (i.e., the first six months of the previous fiscal year, subject to exceptions) did not exceed JPY10 million. As an alternative condition, the enterprise may instead refer to the salaries paid in Japan during that period.
Other criteria apply to newly established corporations. Moreover, if a newly formed corporation purchases certain assets during its first two fiscal years, the corporation may not be eligible for exemption for the subsequent two fiscal years.
Exemption from registration. Aside from the small business exemption (see detail above), the CT law in Japan does not contain any provision for exemption from registration.
Voluntary registration and small businesses. A business falling under the small-business exemp tion may elect for taxable person status (see detail above).
Group registration. Group CT registration is not allowed in Japan.
Non-established businesses. Non-established businesses that become or elect to become a taxable person should appoint a tax representative (see below). When a non-established business elects or becomes a taxable person, they must register for CT in Japan, under the normal registration rules (see above).
Tax representatives. A foreign business qualifying as a taxable person must appoint a resident tax representative to deal with its CT obligations, by submitting the appropriate form to the tax office.
Reverse charge. Under the reverse-charge mechanism, the purchase of certain services consti tutes a taxable transaction, with the consequence that the recipient may be required to declare and pay the CT due thereon. The reverse charge applies to the following services:
• B2B digital services provided by a foreign business
• Services by a foreign business to another business, which mainly consist in the provision of services by film or theater actors, musicians, other entertainers and professional athletes
However, the recipient is not required to self-assess the CT in the following cases:
• If its taxable sales ratio is 95% or more
• The recipient applies the simplified system for calculating input tax deduction
• The recipient is not a CT taxable person
Domestic reverse charge. There are no domestic reverse charges in Japan.
Digital economy. Cross-border digital services are subject to specific rules. The notion of digital services covers most content and services provided through an electronic network, e.g., e-books, online newspapers, music, videos, game applications and software provided via the internet, online advertising, online language lessons.
The place of supply of digital services is where the recipient belongs, having regard to its address. For services to businesses, the place of supply is where the recipient has its head office, main office, or in certain circumstances, an establishment situated in another country that purchases the services for the purpose of its activities in that country.
A distinction is made between business-to-business (B2B) and business-to-consumer (B2C) sup plies, based on the nature of the service, as well as the terms and conditions of the contract. The
classification of the supply as B2B or B2C impacts on the treatment applicable to cross-border digital services to customers in Japan:
• B2B digital services: a reverse-charge mechanism applies, whereby the recipient is required to declare and pay the CT due on the purchase, depending on the CT status (see the Reversecharge subsection above). The nonresident providing B2B digital services must inform the customer beforehand that the reverse-charge mechanism is applicable.
• B2C digital services: the nonresident supplier is required to register for CT; charge CT; file CT returns and pay the CT to the tax office unless the supplier can benefit from the exemption for small businesses. Currently, Japanese resident businesses cannot credit input tax accounted for by overseas businesses on B2C digital services, unless the supplier is a “registered foreign business” (which is an optional registration system specific to foreign suppliers of digital ser vices).
There are no other specific e-commerce rules for imported goods in Japan.
Online marketplaces and platforms. No special rules exist for online marketplaces and platforms in Japan. Even if digital content is listed on the platform, the supply of digital services should take place between the content provider and the customer if the contractual relationship indicates so.
On the other hand, the services provided by the platform to the content provider (listing the digi tal content) would fall under B2B digital services. If such service is provided by nonresident platforms to resident content providers, the reverse-charge mechanism would be applicable.
Registration procedures. A taxable person is required to submit a taxable person notification form to the tax office promptly. A business qualifying for the small-business exemption can elect to become a voluntary taxable person by filing a certain application to the tax office. The election becomes effective from the tax period following the tax period in which the application was made. These forms can be submitted to the jurisdictional tax office in paper or online.
Deregistration. A voluntary taxable person can cancel its registration by filing a certain application to the tax office. However, the cancellation is not allowed for two years after the election was made.
When a taxable person who is not a voluntary taxable person becomes qualified for the smallbusiness exemption, it is required to submit a notification form that it is no longer a taxable person to the tax office promptly.
When a taxable person ceases its business, a certain form needs to be filed promptly with the tax office.
Changes to CT registration details. A notification form should be promptly submitted (by paper or online) when any of the following details have changed: registered address, name of the busi ness, name of the tax representative, address of the tax representative, fiscal year or the amount of share capital.
The CT law in Japan does not stipulate a specific deadline to notify such changes to the tax authorities.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of consumption tax.
The CT rates are:
• Standard: 10% (7.8% national tax and 2.2% local tax)
• Reduced: 8% (6.24% national tax and 1.76% local tax)
Examples of goods and services taxable at 8%
• Supplies of food and drinks, excluding alcoholic beverages and dining out
• Subscriptions to newspapers (limited to newspapers that are issued at least twice a week and feature information on general topics such as politics, economics, society and culture)
The previous standard rate of 8% continues to apply to certain supplies, such as construction contracts and property leases, based on engagements that were enacted before the tax rate change.
The term “exempt-with-credit supplies” refers to supplies of goods and services that are not taxed but do give rise to a right of input tax deduction.
Examples of exempt-with-credit supplies of goods and services
• Exports of goods
• Exports of services
• International transportation of passengers and cargo
• Sales in export shops
• Supplies to foreign embassies and legations situated in Japan
The term “exempt supplies” refers to supplies of goods and services that are not taxed and that do not give rise to a right of input tax deduction.
Examples of exempt supplies of goods and services
• Bank interest
• Insurance
• Educational services
• Sales and leases of land
• Social welfare services
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Japan.
E. Time of supply
The time when CT becomes due is called the “time of supply” or “tax point.” CT is generally chargeable when ownership of goods is transferred, when a service is performed or when foreign cargo is removed from bonded areas.
Deposits and prepayments. The payment of deposits and prepayments is not subject to CT in Japan, but the payment of the original price is subject to CT depending on the type of the original transaction.
Continuous supplies of services. The time of supply rules for continuous supplies is when all the supplies have been delivered or completed.
Goods sent on approval for sale or return. The time of supply rule for supplies of goods sent on approval for sale or return is when ownership of the goods is transferred.
Reverse-charge services. There are no special time of supply rules in Japan for supplies of reverse-charge services. As such, the general time of supply rules apply (as outlined above).
Leased assets. For finance lease transactions that are deemed as a transfer of leased assets under the provision of Japanese income tax law or corporate tax law, in principle, the time of supply is when the lessor delivered the leased assets to the lessee. For operating lease transactions, the time of supply is when the lessor should receive the lease fee.
Imported goods. For import CT, the time of supply for imported goods is the time when the goods are removed from bonded areas. For the domestic CT, there are no special time of supply rules in Japan for supplies of imported goods. As such, the general time of supply rules apply.
F. Recovery of CT by taxable persons
A taxable person has the right to recover input tax on imports and taxable supplies of goods and services made to it. Input tax is recovered by way of deduction from output tax.
The time limit for a taxable person to reclaim input tax in Japan is five years. This time limit runs from the filing deadline.
To be able to deduct input tax, the goods and services must be used for business purposes. In addition, it is required to keep books, invoices and customs documents. There have also been recent changes to the categorized-entry invoice retention system. See the Records subsection below, under Section H. Invoicing).
Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepre neur).
Examples of items for which input tax is nondeductible
• Purchase of B2C digital services from a foreign supplier not registered as foreign business
Examples of items for which input tax is deductible (if related to a taxable business use)
• Purchase, lease, hire, maintenance and fuel for cars, vans and trucks
• Conferences and seminars
• Advertising
• Accommodation
• Mobile phones
• Business gifts
• Travel expenses
• Business entertainment
Partial exemption. A taxable person carrying out nontaxable activities is subject to a limitation of the amount to deduct CT if:
• Its taxable sales ratio is below 95% Or
• Its taxable turnover exceeds JPY500 million
The JCT legislation allows different methods to calculate the input tax credit:
• Proportional method (general pro rata method): the tax deductible is calculated by multiplying the total input tax by the “taxable sales ratio,” i.e., the ratio between the turnover of taxable/ exempt sales and the total turnover.
• Itemized method (direct allocation method): input tax attributable to taxable transactions can be fully deducted, while input tax attributable to nontaxable transactions is not deductible. Input tax relating to both categories of transactions can be credited according to the taxable sales ratio. Taxable persons can apply an alternative ratio based on reasonable factors, subject to prior authorization from the tax authorities.
Approval from the tax authorities is not required to use the proportional method or itemized method in Japan. Special methods are not allowed in Japan (aside from the Simplified credit –see the subsection below). To use either the proportional or itemized methods, a taxable person simply checks a box on the CT return for which method they choose (proportional or itemized).
Simplified credit. A taxable person with annual sales not exceeding JPY50 million may use a simplified formula to calculate the deductible CT by filing an application form of simplified credit system in advance to the jurisdictional tax office. Under this system, the deductible tax is calculated by multiplying the output tax by a deemed purchase ratio. This ratio ranges from 40%
to 90%, depending on the type of sales. A taxable person that elects to use the simplified for mula must use it for a minimum period of two years.
Capital goods. There is no definition or special treatment for “capital goods” in Japan. As such input tax recovery on capital goods (i.e., the sale and lease of property, large equipment and computers) are computed in accordance with the normal input tax recovery rules (as outlined above). Certain types of capital goods (e.g., the sale and lease of land) is exempt and no CT is charged.
Refunds. If the amount of input tax creditable in a taxable period exceeds the amount of output tax, the excess is refundable. In this case, an additional form that indicates certain transactions should be filed together with the tax return. The tax refund is made to the bank account stated on the tax return.
Pre-registration costs. Input tax incurred on pre-registration costs in Japan is not recoverable.
Bad debts. In the case of write-offs of bad debts due to the Confirmation of Rehabilitation Plans (which is an agreement on write-offs of bad debts under plans for reorganization bankruptcy, etc., in accordance with certain regulations/laws) and other certain reasons, CT on such bad debts are deductible in the taxable period in which such event occurs. Documentary evidence should be maintained.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not deductible in Japan.
G. Recovery of CT by non-established businesses
Input tax incurred by non-established businesses in Japan is not recoverable.
H. Invoicing
CT invoices. CT law does not explicitly require a taxable person to issue a tax invoice for taxable supplies made to other taxable persons (or a credit note for adjustments). However, in order to deduct input tax, the recipient must hold an invoice containing certain mandatory information. The CT amount must not be mentioned separately. In addition, purchase statements and purchase calculation statements that were prepared by a business making taxable purchases and include certain information (applicable to documents confirmed by suppliers of the taxable purchases) can be used as a record required for input tax credit purposes.
Because of the introduction of multiple rates from 1 October 2019, new invoicing requirements were implemented. This covers where the transaction includes items being subject to the reduced tax rate (8%), the invoice should indicate which item is subject to the reduced rate and should have tax inclusive subtotal amounts for the standard 10% rate and the reduced 8% rate.
From 1 October 2023, holding a qualified invoice will, in principle, be required to deduct CT. Qualified invoices will include the supplier’s registration number, applicable rates, breakdown of the price by rate and the total amount of CT. The new JCT qualified invoice system requires JCT taxpayers to register as a qualified invoice issuer to be able to provide a qualified invoice, enabling buyers to claim a credit for input JCT. Only registered businesses will be allowed to issue qualified invoices. To be a registered business, taxable persons will have to file an applica tion with the competent tax office. Information on registered businesses (name and registration number) will be published on NTA’s website. Registered businesses will be obliged to issue qualified invoices (with some exceptions, such as sales through vending machines) and keep a copy of invoices. Subject to conditions, certain suppliers will be allowed to issue simplified qualified invoices.
After the introduction of the qualified invoice method, the possibility to deduct CT on purchases from enterprises benefiting from the small business exemption will be limited and eventually removed.
The 2022 tax reform will amend, among others, the registration process as provided below:
• Currently, an exception allows an exempt taxpayer to register as a qualified invoice issuer in the middle of a taxable period and become a qualified invoice issuer from the registration date, but only for the taxable period that includes 1 October 2023. The 2022 tax reform will expand the applicability of this exception to taxable periods that include any day between 1 October 2023 and 30 September 2029.
• If the expanded exception applies, the qualified invoice issuer cannot revert to an exempt taxpayer for the following taxable periods until the taxable period that includes the day two years after the registration date.
• The tax authority will be entitled to reject the registration application by foreign businesses or revoke the registration of foreign businesses, which are required to assign a tax representative in Japan in accordance with General Law of National Taxes but are not compliant with such requirement.
From 1 October 2019 until the implementation of the qualified invoice system, transitional mea sures will be applicable, including accounting and invoicing requirements so as to distinguish sales and purchases according to the rate. Simplified methods of calculating input and output tax will be allowed for businesses facing difficulties in making the distinction.
Credit notes. CT law does not explicitly require a taxable person to issue a credit note for adjustments. However, retention of books that cover name of the supplier and description of transac tion, etc., is necessary.
Electronic invoicing. Electronic invoicing is allowed in Japan, but not mandatory. Only foreign businesses providing B2C digital services can issue electronic invoices. In other cases, elec tronic invoices are not permitted in Japan.
Simplified CT invoices. The name of the recipient does not need to be included on invoices issued by businesses that transfer taxable assets to an unspecified person, such as retail business, res taurant business and taxi business, etc.
Self-billing. Self-billing is not allowed in Japan.
Proof of exports. CT is not chargeable on supplies of exported goods. To qualify as exempt from CT, an export supply must be accompanied by official customs evidence stating that the goods have left Japan.
Foreign currency invoices. For CT purposes, if an invoice is issued in a foreign currency, the values must be converted to the domestic currency, which is the Japanese yen (JPY). The conver sion must be based on an official bank rate on the date of the transaction.
Supplies to nontaxable persons. There are no special invoicing rules for supplies to nontaxable persons in Japan. The CT law does not explicitly require a taxable person to issue a tax invoice for taxable supplies made to other taxable persons (or a credit note for adjustments). However, to deduct input tax, the recipient must hold an invoice containing certain mandatory information. Records. Taxable persons must record transaction details (date, description, name of counter party, consideration) in its books.
In principle, the records must be held at offices of the taxable person. However, practically, the records can be stored at a third party’s storage, etc., if the taxable person may reach the records any time upon necessity from the tax authorities.
There was an amendment to the categorized-entry invoice retention system, which is effect from 1 October 2019 to 30 September 2023 (the qualified invoice system will be introduced on 1 October 2023). To be-come a registered invoice issuer before the qualified invoice system is introduced, a taxable person can submit an application to the appropriate tax office between 1 October 2021 and 31 March 2023. There are exceptions to this due date if the application cannot be submitted by 31 March 2023.
Record retention period. Records (i.e., books and invoices) must be kept for seven years in prin ciple. This means that if the business retains one of them for seven years, the retention period of the other one will be shortened to five years.
Electronic archiving. Invoices received from foreign businesses can be kept in electronic form rather than in paper form. However, generally, invoices need to be kept in paper form in principle. Keeping them in electronic form or in scanned copies is acceptable if the taxable person obtained an approval from the relevant tax office regarding electronic book/record retention.
I. Returns and payment
Periodic returns. Taxable persons must file CT returns annually. An individual entrepreneur must file its CT return by 31 March of the year following the end of the calendar year. A corporation must file its annual CT return within two months after its fiscal year-end. A taxable person may opt to file tax returns monthly or quarterly instead of annually. Tax authorities do not grant an extension of the filing/payment deadline. Effective from the fiscal year that ends on or after 31 March 2021, corporations that are granted extension of the filing of the corporate tax return are allowed to extend their CT return filing deadline for one month (i.e., three months after its fiscal year-end), if it submitted the CT Filing Deadline Extension form by the end of the fiscal year. The CT Filing Deadline Extension application form must be submitted by the end of the fiscal year in which the taxable person intends to apply the extension.
Periodic payments. An individual entrepreneur must pay the CT due by the same date as the CT return submission deadline, i.e., by 31 March of the year following the end of the calendar year. A corporation must pay the CT due by the same date as the annual CT return, i.e., within two months after its fiscal year-end.
A corporate taxpayer must submit a final CT return for each taxable period within two months from the end date of the taxable period. However, if a corporate taxpayer subject to the “special provision for extension of corporate tax filing deadline” submits a “consumption tax filing dead line extension notification form” to the tax office, the final CT return filing deadline will be extended by one month. This is applicable from the taxable period to which the last day of each business year ending after 31 March 2021.
CT due in Japan can be paid by the following methods:
• Direct payment (the tax can be paid online via “direct payment” using the e-Tax system, which is a direct deduction from the taxable person’s bank account)
• Internet banking
• Credit card (accessed by the “National Tax Credit Card Payment Site”)
• Convenience stores (only for tax payments of up to JPY300,000 in total amount per slip)
• Account transfer
• Over-the-counter payment
Electronic filing. Electronic filing is available under certain conditions, such as obtaining an ID number. From the fiscal year that starts on or after 1 April 2020, Japanese corporations whose amount of capital exceeds JPY100 million, insurance companies or other certain corporations are required to file the tax return electronically.
Payments on account. Depending on the previous year’s tax liability, a taxable person may be required to make interim CT returns and payments:
• If the national tax due exceeds JPY480,000: semiannually
• If the national tax due exceeds JPY4 million: quarterly
• If the national tax due exceeds JPY48 million: monthly
A taxable person who is not subject to this obligation may voluntarily make interim tax returns and payments.
Special schemes. No special schemes are available in Japan.
Annual returns. Annual returns are not required in Japan.
Supplementary filings. No supplementary filings are required in Japan.
Correcting errors in previous returns. Taxable persons should submit an amended tax return to correct any errors filed in previous returns. The amended tax return can be submitted in paper or online. See Section J. Penalties below for further details on what penalties may apply for such errors.
Digital tax administration. There are no transactional reporting requirements in Japan.
J. Penalties
Penalties for late registration. There are no penalties applicable for late registration of CT in Japan.
Penalties for late payment and filings. In cases of late payment of CT, late-payment interest is imposed, calculated at the following rates:
• First two months: 7.3% or special standard rate + 1% per annum, whichever is lower
• After two months: 14.6% or special standard rate + 7.3% per annum, whichever is lower
The special standard rate applicable in a given year (Y) is announced by the Minister of Finance by 15 December of the previous year (Y-1). It corresponds to the annual average contractual interest rate on bank short-term loans of each month from October of the second preceding year (Y-2) and September of the previous year (Y-1), plus 1% per annum. The special standard rate for 2021 is 1.5%. At the time of preparing this chapter, the rate for 2022 has not yet been announced.
In case of late filing of the CT return, the following penalties are imposed:
• 5% if the CT return is filed voluntarily (i.e., before receiving an audit notice) after the due date
• 10% (or 15% for the portion exceeding JPY500,000) if the CT return is filed after receiving an audit notice but before the audit
• 15% (or 20% for the portion exceeding JPY500,000) if an error is found as a result of a tax audit
• Furthermore, 10% will be added to non-reporting (late filing) penalties, if the taxable person that has been subject to penalties for non-reporting or fraud within the last five years due to a correction initiated by tax audit
Penalties for errors. Where the tax declared in the CT return is understated, the following penal ties are imposed:
• 0% in case of voluntary disclosure (i.e., before receiving an audit notice)
• 5% (or 10% of the excess portion of additional tax over JPY500,000 or the original amount, whichever is greater) if the taxable person makes a voluntary disclosure during the period from receiving an audit notice to anticipation of correction
• 10% (or 15% of the excess portion of additional tax over JPY500,000 or the original amount, whichever is greater) after anticipation of correction
No penalties apply for the late notification or failure to notify changes to a taxable person’s CT registration details. For further information, see the subsection Changes to CT registration details above.
Penalties for fraud. In addition to the penalties outlined above, if any such errors are related to fraudulent activity, a further 10% will be added if the taxable person has been subject to penalties for non-reporting or fraud within the last five years due to a correction initiated by tax audit.
Personal liability for company officers. In case a company evaded CT due or received a CT refund by deception or other wrongful acts, and an officer of the company has committed such decep tion or other wrongful act, the company officer shall be punished by imprisonment with work for not more than 10 years and/or a fine of not more than JPY10 million.
In case a company evaded CT due by intentionally neglecting to file a tax return by the due date, and an officer of the company has committed such neglect, the company officer shall be pun ished by imprisonment with work for not more than five years and/or a fine of not more than JPY5 million.
Statute of limitations. The statute of limitations in Japan is five years. The statute of limitations for both the tax authorities (to go back to review returns) and for taxable persons (to correct errors in previous CT returns) is five years from the filing due date. In case of fraud, the statute of limitation could be extended to seven years.