Japan Consumption Tax – The Basics for Foreign Companies Doing Business in Japan
[This article was originally prepared for inclusion in the newsletter of the Japan Foreign Lawyers Association (RBA).]
Introduction
Japanese consumption tax is a VAT (i.e., value added tax) style tax applied to the supply of certain goods and services within Japan. It is similar in nature to European VAT and Australian GST. Note that Japanese consumption tax / VAT is different to a sales tax (which tends to be more familiar to clients from the United States.)
Currently the rate of Japan consumption tax applied to taxable transactions is 10%.
Japan’s consumption tax system is reasonably straightforward when compared to systems in countries such as Europe and Australia. However, the application of Japan’s consumption tax rules in specific circumstances can be extremely complex.
Learn More about the Japan Consumption Tax Services offered by Japan Visa’s qualified Japanese professionals.
JAPAN CONSUMPTION TAX – KEY CONCEPTS
The following is an overview of some key concepts associated with consumption tax in Japan.
Input Tax and Output Tax
Two important terms that may not be familiar to clients from non-VAT jurisdictions are Input Tax and Output Tax.
Output Tax: This is the consumption tax charged and collected by a Seller of a good or service when a taxable transaction occurs (see below regarding taxable transactions.)
Input Tax: This is the consumption tax paid out by a Purchaser / Service recipient when a taxable transaction occurs (see below regarding taxable transactions.)
Taxable Transactions
Not all transactions are subject to Japanese consumption tax.
Taxable transaction means a transaction to which Japanese consumption tax applies.
Japan consumption tax generally applies to the following:
- The sale of goods or the provision of services within Japan, and
- The import of goods into Japan. Consumption tax payable upon the import of goods into Japan is commonly referred to as Import Consumption Tax. In the case of import transactions, the taxable base is the value of the imported goods for customs duty purposes (usually this means the CIF price) plus the amount of any customs duties and other excise taxes.
Non-taxable / Exempt Transactions
These are transactions specified by the Japanese authorities (mainly for policy reasons) as NOT subject to consumption tax.
Exempt transactions include:
- Sale or lease of land.
- Sale of securities and similar instruments.
- Financial transactions including loans, guarantees, distributions from investment trusts and insurance premiums.
- Sale of postage stamps, revenue stamps, etc. by the central and local governments.
- Medical treatment provided under the public medical insurance law.
- Social welfare activities.
- School tuition and examination services.
- Housing rent.
- Services related to childbirth, burial, home-help, and welfare centers for aged and handicapped persons.
Zero Rated Transactions
Zero Rated refers to a transaction that IS subject to Japanese Consumption Tax but the applicable rate is zero percent.
The most important item in this category is export transactions – note that term export refers to the export of both goods and services.
WHO MUST FILE A JAPAN CONSUMPTION TAX RETURN?
Anyone purchasing goods or services in Japan will PAY Japanese consumption tax. However, not everyone is required to file a Japan consumption tax return.
Basic Rule
The basic rule is that where sales in a business’s Base Year (defined as the fiscal year two years prior to the current fiscal year) are greater than JPY10 million, then the business must file a Japan consumption tax return with respect to the current fiscal year.
The Rule for Newly Established Companies
A newly established company will by definition not have a Base Year for Japanese Consumption Tax purposes (since the Base Year is the company fiscal year two years prior to the current fiscal year).
The rule for newly established companies (i.e., companies that were established in the last two years) is as follows:
- Where the Paid in Capital on establishment is JPY10 million or more, then the new company will automatically be a consumption tax filer in it’s first two fiscal years. From the third fiscal year onwards, the Basic Rule described above will apply.
- Correspondingly, a company that is established with less than JPY10 million of Paid in Capital will not be required to file a Japan consumption tax return in its first two fiscal years. From the third fiscal year onwards, the Basic Rule described above will apply.
Electing to File a Japan Consumption Tax Return
A company that is not required to file a Japan consumption tax return may nonetheless ELECT to do so. A company would generally make such an election if it determined that it was likely to be in a refund position.
An election could be relevant in two situations:
- Where a company’s Base Year taxable sales (i.e., the company’s sales in the fiscal year two years prior to the current company fiscal year) are less than JPY10 million. Note that taxable sales include zero rated transactions.
- In the case of a newly established company with paid in capital of less than JPY10 million.
Timing of Election
An election for voluntary consumption taxpayer status must usually be filed prior to the start of the taxable year for which the election will apply.
However, in the company’s first taxable year, the election can apply from the commencement of business provided the election is made prior to the end of that first taxable year.
It should be noted that where an election is made, it must remain in place for at least two years.
Contact JAPAN VISA™ to learn how our Japanese professionals can assist your firm regarding Japan Consumption Tax issues.
The above is provided for general information purposes only and does not constitute advice to undertake or refrain from undertaking any action. Only qualified Japanese professionals are able to advise on Japan immigration, legal, and tax matters.