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A Brief Introduction to the Japanese Consumption Tax System

October 24, 2022

In Japan, the value-added tax (VAT/GST) was established in January 1989 under the name Consumption Tax ('CT'). It's quite similar to the value-added tax (VAT) system used in the European Union, in that each sale triggers recalculation and payment of tax to the government.

What is the Consumption Tax in Japan?

When a company moves inventory, renders a service, or imports items into Japan, they must pay consumption tax, often known as value-added tax or VAT. The rate was 8%, but it was raised to 10% as of October 1, 2019. There is no tax on exports and certain services provided to foreigners. Certain exchanges are exempt from taxes, including real estate purchases and leases, securities sales, and the delivery of public services.

Is the 8% Still Applicable?

Is the 8% Still Applicable?

The consumption tax rate of 8% is still applicable to food, except if such food is bought in restaurants. It is also applicable to newspaper subscriptions for publications that publish at least twice a week.

Up to the time that the invoicing system is implemented, the credit for CT or VAT paid will continue to follow the present approach for tracking, which requires that the invoice identifies the lower tax rate that applies to products. 

As a result of the additional administrative costs associated with keeping track of the various rates, the more straightforward approach to calculating the amount of consumption taxes paid will be permitted.

A New Invoicing System by 2023

Starting in 2023, an invoicing system will be implemented in light of the 10% rise in the consumption tax rate. Several measures will be implemented over the course of four years as the industry adjusts to the arrival of an invoicing system.

Unless they are exempted, businesses will need to submit an application with the local tax office in order to become eligible to issue qualified invoices which would include details such as applicable tax rate, registration number, and more.

When to Register for Japanese Consumption Tax

Consumption Tax may be required by law to be charged by international enterprises offering products or services in Japan. Regular tax filings and payment of any remaining CT to the Japanese tax office are part of this ongoing compliance. The use of CT in Japan is often required in the following situations:

  • If the foreign merchant is delivering products inside Japan

  • Importing items into Japan

  • Providing services (such as consultancy, athletic, or artistic performances), etc.

If a foreign merchant is storing or delivering products in Japan but does not have a physical location there, they may be considered a PE (permanent establishment). As a result, their business can be liable to both direct and indirect forms of taxation.

Annual Consumption Tax Compliance Limit

Annual Consumption Tax Compliance Limit

The CT compliance level is YEN 10 million each year, calculated using the prior-base year as the basis. If your company's initial capital is more than 10 million yen, either as a resident company or as a PE of a foreign entity, you must comply with CT immediately.

To simplify the recovery of an input CT, exporters with a taxable supply below this threshold may choose to become taxable enterprises.

Consumption Tax Registration Requirements

Consumption Tax Registration Requirements

The Japanese tax authorities do not require businesses to explicitly register for CT. The first tax return serves as the registration application, and a tax office will be assigned to the firm based on it.

To comply with Japanese tax law, a foreign trader who is not a resident of Japan must designate a tax representative who is a resident of Japan. All interactions between the firm and Japanese tax authorities must be handled by the agent.

Get the Help of the Experts

Setting up a business in Japan can be overwhelming especially if you have to deal with tax concerns. This is why you need the help of a tax manager with experience and knowledge of Japan's tax laws. They can offer guidance on how you should file your taxes, which forms should be used, what information needs to be included, and how to manage accounting for your business. Consulting a specialist will also save you time and headaches in the long run.

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