Japanese Consumption Tax (JCT): A Complete Guide to Japan’s VAT System
December 19, 2022
From October 1st, 2015 onward, the Amendment of the Income Tax Act and Other Acts (Act No. 9 of 2015) has been put into effect. Any foreign businesses operating in Japan that own warehouses or distribute products may be subject to consumption tax accordingly.
Japan is currently transforming its consumption tax system to guarantee correct tax calculation. As this system has been in place for a long time, it cannot be easily altered; therefore, multiple transitional measures have already taken effect or will soon do so. These steps will give businesses enough time to adjust and adopt the changes smoothly.
It all began on October 1st, 2019 with the hike in Japan's consumption tax rate and the adoption of several tax rates. From that point forward, corporations can request a Registered Supplier ID Number (akin to Europe's VAT or America's Sales Tax) from their government. As such, this policy will lead to an overhaul of invoicing systems across the country.
What is the Qualified Invoice System (QIS) in Japan?
A qualified invoice system, or QIS, is an invoicing system designed to simplify and streamline the way businesses collect payments and record financial transactions in Japan. It was first introduced in April 2020 as part of the Japanese government’s efforts to modernize the economy and make it more efficient.
The Japanese government set up the system so that businesses could issue qualified invoices, which are a form of digital receipts used to track payments made through mobile payment platforms such as PayPay, LINE Pay, and d Payment. These qualified invoices can be utilized for corporate tax returns, cashless payments, and other financial purposes.
The system is designed to reduce the administrative burden associated with invoicing and make it easier for businesses to keep track of their payments more efficiently. It also provides enhanced security measures such as digital signatures and encryption, which help protect confidential information within the invoice system.
In Japan, the Japanese Consumption Tax (JCT) is similar to Europe's Value-Added Tax (VAT) and America's Sales Tax. Beginning in October 2023, the Japanese government will introduce a revolutionary and innovative Qualified Invoice System (JCT).
When Do You Register for VAT?
If a foreign company's sales in Japan surpass JPY 10 million (roughly EUR 81,000) during the "base period," which is the fiscal year two years prior to the current one, they must register and pay consumption tax (CT) for that timeframe. For instance, if you had CT taxable sales of more than JPY 10 million in 2018, your entity would be legally obligated to pay CT starting from January 1st, 2020.
Specified Period Threshold
If you don't exceed the threshold of JPY 10 million in CT taxable sales during 2018, but your Japan Amazon store from January to June 2019 was over that amount, then you will be deemed a mandatory consumption taxpayer for 2020.
Deductible Consumption Tax
When figuring out the amount of consumption tax to be paid, it is possible to deduct the CT on taxable purchases made from Japanese suppliers when computing the consumption tax payable on taxable sales.
What Products Are Subjected to VAT or Consumption Tax?
If you're looking to purchase or lease a service in Japan, are supplying services (other than digital services) from within the country, or are providing digital services to Japanese individuals and companies for commercial gain, then you’re subjected to Consumption Tax.
Who is Required to Register?
Companies that generate more than 10 million Japanese Yen (JPY) in taxable sales within the base period or specified period are automatically considered to be taxpayers. Furthermore, a newly-established business is classified as a taxpayer if its paid-in capital at the commencement of the fiscal year surpasses JPY 10 million or if it is operated by an individual or company whose amount of taxable transactions during their theoretical base period exceeds JPY 500 million.
Is There Voluntary Registration?
Upon submission of a request to become a VAT taxpayer, an individual is eligible for the benefits associated with being one.
Can Foreign Businesses or Fiscal Representatives Apply for Voluntary VAT Registration?
Absolutely! An overseas company is eligible to apply for this service and must appoint a fiscal representative when selected.
Who Can Apply for a Registered Supplier Identification Number in Japan?
Japanese Consumption Tax (JCT) changes not only impact businesses that have a physical presence in Japan, but also those who provide digital services to consumers residing there. In specific scenarios, even if the service provider is located overseas, they may still be subject to JCT on these particular digital offerings.
It's also important to remember that not everyone is eligible for qualified invoicing. To issue these sorts of invoices, you have to be formally registered as a qualified invoice issuer and possess an RSN (Registered Supplier ID Number). Put simply, only taxable businesses in compliance with consumption tax laws may register as a qualified invoice issuing enterprise.
Can a JCT-exempt Business Apply for a Registered Supplier ID Number in Japan?
Japanese businesses with taxable sales of 10 million or less in the base period are not required to pay consumption tax and, thus, cannot generate qualified invoices under the Qualified Invoice System.
Despite this, some JCT-exempt businesses do become liable to pay JCT taxes. This can be a viable route if their customers ask for qualified invoices. But it's important to make sure that your company will benefit financially from the new system; you should consider any associated costs carefully before committing to anything long term.
What are Japan's VAT Rates?
Starting in 2022, Japan's value-added tax (VAT) rate is set at a fixed 10%. A reduced consumption tax rate of 8% is applicable to food (except for alcoholic drinks) and publications issued twice a week or more.
Are there any reduced rates, zero rates, or exemptions?
Goods sent overseas, including the transfer or lease of goods from Japan, as well as transportation-related tasks associated with international shipping, are all considered zero-rated supplies.
Tax-exempt services and products include: purchases or leases of land; sales of securities and investment instruments; financial transactions such as loans, guarantees, distributions from trusts or investment funds; insurance premiums; medical treatments under public health plans; social welfare activities; school tuition and assessments for exams passed by students. Furthermore, rent payments for residential housing are exempt from taxation too. Additionally, you can add to the list services related to childbirth (delivery), burials (funerals) done at home, as well as help centers specifically designed for elderly people or those with disabilities who need assistance in their daily lives.
A lower tax rate of 8 percent will be in effect as of October 1st, 2019. This applies to sales of food and non-alcoholic beverages, as well as subscriptions to certain newspapers. Now is the perfect time to take advantage of this special taxation opportunity!
When to File for VAT Returns
All applicable taxpayers must submit their final or annual tax return within two months of the end of either an organization's fiscal period or an individual's calendar year. If tax payable exceeds certain thresholds, interim returns and payments may be required. Tax liability for the current period can be determined from either prior-year amounts or actual transactions. Any residual net balance resulting from up-to-date sales needs to be fully paid when submitting the annual return.
How to Register for JCT
If you think you need to register for Japanese consumption tax or are not sure, please contact us for a free consultation.
How long is it before the application is processed?
In determining the length of time necessary for assessing applications, the NTA states that it varies based on how many documents are being reviewed and for how long. It is difficult to provide an exact answer; however, paper-based submissions usually take a month, while electronic ones should be processed within two weeks or less.
To register your company, you must complete and submit a CT registration form along with the following valid documents:
Certificate of Incorporation (translated into Japanese)
Trade Register Extract (also in Japanese)
Articles of Association's main provisions in English and translated to Japanese director/shareholder passports and a power of attorney for a tax agent
Directors passport copy
Company Bank statement or letter
Overseas taxable companies are required to name a tax representative who can manage all the necessary steps needed for VAT registration and filing.
Reach out to us for a complimentary consultation if you need help signing up for Japanese VAT or are uncertain whether you're required to register.