VAT, GST and Sales Tax in Japan

Summary

Name of the tax Consumption tax
Local name Shouhizei
Date introduced 1-Apr-89
Trading bloc membership None
Administered by National Tax Agency Japan (http://www.nta.go.jp)
Consumption tax rates
Standard 8% (expected to increase to 10% effective from 1 October 2019)
Other Exempt (with input tax credit) and nontaxable (without input tax credit)
Consumption tax return periods Monthly, quarterly, biannually and annually
Consumption tax number format Not applicable
Thresholds Registration JPY10 million of taxable transactions
Recovery of consumption tax by non-established businesses Yes

Scope of the tax

Consumption tax applies to the following transactions:

  • The supply of goods or services made in Japan by a taxable person
  • The importation of goods into Japan

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.

Under the “small business” exception, enterprises with taxable supplies not exceeding JPY10 million in a “base period” are exempt from consumption tax for business years beginning on or before 31 December 2012. The base period for each consumption tax reporting year is the individual enterprise’s business year that was two years prior to the current business year.

For business years beginning on or after 1 January 2013, a busi­ness entity or individual whose taxable supplies in the calculation period are over JPY10 million is a taxable person even if the taxable supplies in the “base period” are JPY10 million or less. For business enterprises, if the preceding business year was lon­ger than seven months, the calculation period is the first six months of the preceding business year. If the preceding business year was seven months or less, the calculation period is the first six months of the year before the preceding business year.

Instead of the amount of taxable supplies, the amount of salary payments can be used in determining whether the enterprise is taxable. For individuals, the calculation period is from 1 January to 30 June of the preceding year.

A newly formed corporation with stated capital of JPY10 million or more is not eligible for the small business exemption from consumption tax for its first two fiscal years. However, a newly formed corporation established on or after 1 April 2014 will be subject to consumption tax for the first two fiscal years, regard­less of its stated capital, to the extent that a controlling person (e.g., a company holding more than 50% of equity interest in the newly established corporation) or a related corporation has tax­able supplies in Japan exceeding JPY500 million.

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.

A Japanese business receiving B2B digital services provided by a foreign business on or after 1 October 2015 is liable to file and pay tax (see Digital economy).

Voluntary registration. A small business with taxable turnover of JPY10 million or less in its base period may voluntarily apply to become a taxable person.

Group registration. The consumption tax law does not allow closely related companies to register as a group.

Tax representatives. If a foreign business is required to become a taxable person, it must appoint a resident tax representative to deal with its consumption tax obligations. This is accomplished by submitting a form to the tax office. A taxpayer that discharges a tax representative must submit a report of the discharge to the tax office.

Reverse charge. See Digital economy.

Digital economy. From 1 October 2015, new consumption tax rules apply to cross-border digital services (e.g., cloud services, distribution of digital contents, downloading of software) pro­vided by foreign businesses to the Japanese market.

The place of supply of these services is generally determined based on whether the address of the recipient of the digital ser­vices is in or outside of Japan. However, from 1 January 2017, the place-of-supply rule for B2B digital services will be changed as follows:

  • B2B digital service received by the foreign office of a Japanese business solely for foreign sales purpose: Foreign transaction (not subject to consumption tax)
  • B2B digital service received by a Japanese permanent estab­lishment of a foreign business solely for domestic sales pur­pose: Domestic transaction (taxable purchase subject to the reverse-charge mechanism)

The digital services provided to a Japanese business constitute a domestic transaction subject to consumption tax. A taxation scheme is determined based on whether the services provided are B2B or B2C digital services. Digital services are classified as B2B if provided by a foreign business where the recipients of the services are normally limited to businesses considering the nature of the services or the terms and conditions of relevant agreements. All digital services provided by a foreign business other than B2B digital services are classified as B2C digital ser­vices.

With respect to the provision of B2B digital services, a reverse-charge mechanism is applied, which shifts the obligation of pay­ing consumption tax to a Japanese business receiving the B2B digital services. Therefore, a Japanese business receiving the B2B digital services is liable to file and pay consumption tax. However, in the case where the taxable supplies ratio of a Japanese business receiving digital services is 95% or greater for the taxable period under regular consumption taxation, or where a Japanese business adopts the simplified formula for the taxable period, there is no requirement to report reverse-charge consump­tion tax on its tax returns for the time being. On the other hand, a foreign business providing B2B digital services is required to notify the service recipient beforehand that the transaction is subject to a reverse-charge mechanism (i.e., that the business receiving services is liable to pay consumption tax) when provid­ing B2B digital services.

With respect to the provision of B2C digital services, a foreign business is liable to file and pay consumption tax when it is a taxable person (after considering tax exemption for small busi­nesses). The Japanese business receiving B2C services from a foreign business will not, for the time being, be eligible for input tax credit. However, input tax credit can be available if the ser­vices are provided by a “registered overseas business.”

A foreign business that fulfills certain requirements can become a registered overseas business by submitting an application to the Commissioner of the National Tax Agency via the District Director of the Tax Office with jurisdiction.

 

Consumption tax rates

The term “taxable supplies” refers to supplies of goods and ser­vices that are liable to consumption tax. Consumption tax is charged at a flat rate of 8% (6.3% national tax and 1.7% local tax). No reduced rates apply.

A rate increase to 10% is expected to take effect from 1 October 2019.

To alleviate the burden for low income earners, when the con­sumption tax rate is raised to 10% on 1 October 2019, the current rate of 8% (6.24% national tax and 1.76% local tax) will be retained for certain goods. The lower rate will be applied to pur­chases of food and drinks (fresh and processed), excluding alco­holic beverages and dining out, as well as to subscriptions of newspapers. Followed by the multiple tax rate circumstance, a new invoicing system will be introduced on 1 October 2023. Until then, a simpler method, categorized-entry invoice will be used instead (see Section H).

Taxable sales subject to the lower rate are as follows:

  • Sales of food and drinks (excluding restaurant business as defined in the Food Sanitation Act, café business and other provision of meals in places that have certain eating or drinking facilities by an operator that runs a business for the provision of meals, i.e., dining out)
  • Sales of newspapers for which a subscription agreement has been concluded (limited to certain titles of newspapers that feature information on general society such as politics, economics, soci­ety and culture that are issued at least twice a week)

The 5% tax rate that applied generally until 1 April 2014 con­tinues to apply to certain situations related to construction contracts and property leases.

The term “exempt supplies” refers to supplies of goods and services that are not taxed, but the taxpayer may deduct any related input tax. Exempt supplies include exports of goods or services and international travel, transportation and communica­tion services.

Nontaxable supplies (with no right to input tax credit) include interest, insurance, real estate, foreign-exchange transactions and education (see Section F).

Option to tax for exempt supplies. Not applicable.

Time of supply

The time when consumption tax becomes due is called the “time of supply” or “tax point.” Consumption tax is generally charge­able when ownership of goods is transferred, when a service is performed or when foreign cargo is removed from bonded areas.

  1. Recovery of consumption tax by taxable persons

A taxable person may recover input tax, which is consumption tax charged on goods and services supplied to it for business purposes. A taxable person generally recovers input tax by deducting it from output tax, which is consumption tax charged on supplies made.

Input tax includes consumption tax charged on goods and services supplied in Japan and consumption tax paid on imports of goods.

Keeping of books, invoices and customs documents is required for input tax credit.

For tax periods beginning on or before 31 March 2012, a taxable person may deduct input tax in full unless its nontaxable supplies exceed 5% of total supplies made. This is the “95% rule.” However, for tax periods beginning on or after 1 April 2012, the 95% rule applies only to a business with taxable supplies for the period of JPY500 million or less (annualized for a business with a taxable period of less than one year). Consequently, the partial exemption (see Partial exemption) applies to a business if it has over JPY500 million of taxable supplies regardless of its taxable supplies ratio.

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 entrepreneur). These private, nonbusiness expenditures are the only category of expenditure for which input tax is nondeductible.

Input tax is deductible if the expenditure is related to a taxable business use.

Input tax credit will not be available for businesses receiving B2C digital services for the time being (see Digital economy).

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
  • Attending conferences and seminars
  • Advertising
  • Accommodation
  • Mobile phones
  • Business gifts
  • Travel expenses
  • Business entertainment

Partial exemption. For tax periods beginning on or before 31 March 2012, if a taxable person’s turnover from taxable sup­plies (including exports) is less than 95% of its total turnover, it may not recover input tax in full. This situation is referred to as partial exemption. For tax periods beginning on or after 1 April 2012, the partial exemption applies to a business if it has over JPY500 million of taxable supplies regardless of its taxable sup­plies ratio. The amount of input tax that the taxable person may deduct may be calculated using either of the following methods:

  • General pro rata method: the taxable person’s taxable supplies ratio (which is based on the ratio of the value of taxable supplies made compared to total supplies made) is applied to the total amount of input tax incurred.
  • Direct attribution method: the taxable person’s input tax is allo­cated to taxable and nontaxable supplies made. Input tax directly related to taxable supplies is deductible in full, while input tax directly related to nontaxable supplies is not deductible. The general pro rata method is used with respect to the remain­ing input tax that is not directly related to taxable or nontaxable supplies.

A business with annual sales of JPY50 million or less may use a simplified formula to calculate consumption tax payable. Under this system, the taxpayer calculates the credit for consumption tax paid by multiplying the consumption tax on sales by a deemed purchase ratio. This ratio ranges from 50% to 90%, depending on the type of sales made. A taxpayer that elects to use the simplified formula must use this formula for a minimum period of two years.

Refunds. If the amount of input consumption tax recoverable in a taxable period exceeds the amount of output consumption tax payable, such an excess should be refundable.

Preregistration costs. Not applicable.

Recovery of consumption tax by non-established businesses

Japan refunds consumption tax incurred by businesses that are not established in Japan. To obtain a refund, a non-established business must appoint a resident tax representative and elect to be treated as a taxable business.

Invoicing

Tax invoices and credit notes. The Japanese consumption tax law does not explicitly require that a taxable person provide a tax invoice for taxable supplies made to other taxable persons (or a credit note for adjustments). (There is no tax invoice system in Japan.) However, keeping of invoices (and books) is required for input tax credit (see Section F).

Following the increase in consumption tax rate to 10% from 1 October 2019, the current 8% rate will be retained for certain goods, and, in response to the multiple tax rates, an invoice sys­tem will be introduced from 1 October 2023. Until then, a sim­pler method, categorized-entry invoice system will be used as a transitional measure.

Categorized-entry invoice method. For the four years until the new invoice method is introduced, the current invoice method will continue to be used for input tax credits, and to enable accounting categorization, the categorized-entry invoice mea­sures will be provided.

Introduction of new invoice method. To replace the current invoice method, retention of qualified invoices or simplified qualified invoices issued by registered businesses will be a requirement for taking input tax credits, applied from 1 October 2023.

Business registration system. Businesses that are not tax-exempt­ed enterprises have to submit an application to the Tax Office Director with jurisdiction to be registered as a business that can issue qualified invoices (“registered businesses”). The name and registration number of registered businesses will be published on the internet.

Qualified invoices and simplified qualified invoices. Registered businesses are permitted to issue qualified invoices indicating the entries such as name and registration number of the registration business. Those conducting certain types of taxable sales to a large number of unspecified people may issue simplified quali­fied invoices omitting certain entries instead. Registered busi­nesses are required to issue qualified or simplified qualified invoices (excluding certain transactions, such as taxable sales using vending machines) and keep copies of the documents.

Revision of the input tax credit requirements. For taxable pur­chases that are subject to the reduced tax rate, the accounting book must contain information of the reduced-rate transaction. Except for purchases from vending machines and certain other cases, certain documents such as qualified invoices or simplified qualified invoices must be kept as a requirement for taking input tax credits.

Transitional measure for taxable purchases from tax-exempted enterprises. After the introduction of the qualified invoice meth­od, input tax credits will no longer be possible for purchases from tax-exempted enterprises. However, for the first six years, an input tax credit equivalent to 80% or 50% of the consumption tax on the taxable purchases can be taken for domestic taxable pur­chases from tax-exempted enterprises, provided that certain books and invoices are kept.

Proof of exports. Japanese consumption tax is not chargeable on supplies of exported goods. To qualify as exempt from consump­tion tax, an export supply must be accompanied by official cus­toms evidence stating that the goods have left Japan.

Foreign-currency invoices. If an invoice is issued in a foreign cur­rency, the values for consumption tax purposes may be converted to Japanese yen (JPY) based on an official bank rate on the date of the transaction.

B2C digital services. A foreign business providing B2C digital services is allowed to issue electronic invoices. As for input tax credit of the recipients of the services, invoices received from the foreign business can be kept in electronic form rather than in paper form.

Consumption tax returns and payment

Annual consumption tax returns. Taxable persons must file con­sumption tax returns annually. An individual entrepreneur must file his or her consumption tax return and pay the tax due by 31 March in the year following the end of the calendar year. A corporation must file its annual consumption tax return and pay the tax due within two months after its fiscal year-end.

Interim consumption tax returns. Depending on the previous year’s tax liability, a taxable person may be required to file interim consumption tax returns and pay tax during the year.

An interim tax return is required for the first six months of the tax year if the estimated tax due exceeds JPY609,600, based on the preceding year’s tax payments. Interim payments are required in May, August and November (for a fiscal year ending in December) if the estimated tax due for the year exceeds JPY5 million. In addition, if the estimated tax due for the year exceeds JPY60 million, interim payments are required monthly.

For tax periods beginning on or after 1 April 2014 for a corpora­tion and 1 January 2015 for an individual, a taxable person who is not required to file and pay interim tax will be able to volun­tarily file an interim tax return and pay tax.

Special schemes. Not applicable.

Electronic filing. Electronic filing is available after certain proce­dures, such as obtaining an ID number.

Penalties

Interest is applied to late payments of consumption tax. Effective 1 January 2014, the interest rate is the “standard rate” plus 1% for interest during the first two months after the due date. The standard rate is 1% plus the rate announced by the Minister of Finance every year on 15 December as the average interest rate on short-term bank loans that applied in the period between October of two previous years and September of the previous year. For 2015, the interest rate is 2.8%.

A penalty is charged in the following amounts if the annual con­sumption tax return is not filed by the due date:

  • 5% if the taxable person makes a voluntary disclosure before receiving an audit notice
  • 10% or 15% (of the excess portion of additional tax over JPY500,000 for tax returns) if the taxable person makes a vol­untary disclosure during the period from receiving an audit notice to anticipation of correction
  • 15% or 20% (of the excess portion of additional tax over JPY500,000 for tax returns) if an error is found as a result of a tax audit
  • 40% if fraud or tax evasion is involved
  • Further 10% will be added to both non-reporting penalties and fraud penalties if the taxable person that has been subject to penalties for non-reporting or fraud due to anticipation of a cor­rection in the last five years and files an amended tax return once again based on not filing the tax return, falsification or concealment

A penalty is charged in the following amounts if the amount of tax declared in the annual consumption tax return is understated:

  • 0% if the taxable person makes a voluntary disclosure 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
  • 35% if fraud or tax evasion is involved
  • Further 10% will be added to fraud penalties if the taxable person that has been subject to penalties for non-reporting or fraud due to anticipation of a correction in the last five years and files an amended tax return once again based on not filing the tax return, falsification or concealment