Complete Guide to Japanese Consumption Tax

What is Consumption tax?

Consumption Tax (CT) is a tax levied on the volume of business (aka “taxable sales”) and is paid based on a self-assessment method. Both domestic and import transactions (except for certain transactions deemed non-taxable) are subject to the Consumption Tax. It is also added to the price of goods and is ultimately borne by consumers.

Domestic transactions
Transfer and/or lease of assets or the provision of services by individual business owners or corporations in Japan.

Import transactions
Foreign goods received from banded areas.

Note import transactions are not calculated by a tax accountant. It is the duty of Japan Customs.

Non-taxable Transactions

If your clients are in Japan, charging Consumption Tax is a must. But what if some of your clients are not in Japan should you charge this tax?

The answer is no because it is export transactions.

Export and export-like transactions (e.g. international communications and international transport ) are not subject to the Japanese Consumption Tax. Besides, financial and capital transactions as well as transactions in certain areas of medical care, welfare, and education are also deemed non-taxable.

Purchase Tax Credit

When doing business in Japan, there is a possibility you’ll someday need services from foreign enterprises. If that is the case, you may wonder how it will influence the amount of your taxable sales. The truth is that it will depend on whether or not your company is registered officially in the National Tax Agency as a Japan located business.

If yes, you can receive the so-called purchase tax credit. In other words, the Consumption Tax on taxable purchases may be deducted from Consumption Tax on taxable sales when calculating the amount of tax to be paid.

In case the amount of Consumption Tax on purchases is bigger than the amount of Consumption Tax on taxable sales, you can get a refund for the difference by filing a tax return. Note, however, that foreign companies cannot obtain a refund for CT paid in Japan if they don’t have taxable sales in the country.

To be entitled to a purchase tax credit, you need to preserve both account ledgers and invoices that describe certain matters. The amount of deduction varies and depends on different factors.

Consumption Tax Rate

On October 1st, 2019, the Japanese government introduced a long-delayed Consumption Tax hike despite the concerns it may hit the economy. The rate was increased from 8% to 10% (inclusive of a 2.2% local Consumption Tax rate) to help cover the ever-growing cost of supporting the aging population in the country. It applies to nearly all goods and services; most of the food and beverages are subject to the reduced tax rate introduced at the same time, though.

Note: the definition of Local and National Consumption Tax is not important for an average business owner. If you, however, plan on creating a Consumption Tax Return on your own, knowing the difference between those is a must.

The reduced tax rate is applied to the following items :

sales of food and beverages (except alcoholic drinks and dining out);
newspapers published twice a week or more (under subscription contracts).

Simplified Method for Consumption Tax Calculator

With a view to reducing compliance costs, Simplified Method for Consumption Tax computing was provided as an option for sole proprietors and small-sized businesses whose taxable sales during the base period did not exceed ¥50 million. This way, they do not need to calculate the amount of business purchases or the amount of input tax.

To become eligible, you need to submit a Report on the Selection of the Simplified Tax System for the Consumption Tax to the tax office in advance. Note, however, that you should check your sales and investment plans for the next two years before submitting the report. The reason behind this is that once you submit it, you’ll have to stick to this method for two years. Therefore, any sudden change in investment plan may cost you more than using the services of a professional tax accountant for two years.

The formula for calculating the tax based on the simplified method looks like this:

Tax Payable = Consumption Tax on Taxable Sales * ( 100% – Fixed Purchase Rate).

Japanese Consumption Tax Liability & Exemptions

Liability

Businesses that fall under the following categories are subject to JCT:

1. Businesses with more than ¥10 million of taxable sales amount during the base period.

2. Businesses which do not have more than ¥10 million of taxable sales amount but submitted “Report on the Selection of Taxable Proprietor Status for Consumption Tax”;

3. Businesses that fall under neither of the categories above and whose taxable amount of sales and payrolls for the specified period exceeds ¥10 million.

Exemptions

Small enterprises or sole proprietors with taxable sales of ¥10 million or less in the base period are exempt from filing the Japanese Consumption Tax Return

Tax Avoidance Technique (Certified by National Tax Agency)

As mentioned above, sole proprietors and small companies are exempt from paying the tax if their taxable sales during the base period are ¥10 million or less. Therefore, self-employed and small companies will generally be exempt from paying CT for the first 2 years (providing that the ¥10 million or less condition is satisfied).

However, if you start increasing your sales from the third year, it may be wiser to switch to a corporation status.

The reason is simple: the tax liability of a self-employed (before becoming a corporation) and a corporation (once that individual business owner switched to a corporation status) is determined separately. It means that even if your taxable sales as a sole proprietor exceeded ¥10 million last year, once you’ve become a corporation, there won’t be any reference to your history sales. You will get treated as a newly-established corporation and, therefore, will be exempted from paying the Consumption Tax for 2 more years (providing that the ¥10 million or less condition is satisfied).

Due Date & Tax Payment Procedures

The due date varies depending on the type of transaction and business.

Domestic Transactions

Individual Business Owners: Tax is imposed on activities for the period from January 1st to December 31st and is to be paid to the tax office by March 31st of the following year.

Corporations: Before April 2020, the Japanese Consumption Tax had to be paid within 2 months after the end of a company’s fiscal year. Starting from April 1st, 2020, however, the deadline for filing a Consumption Tax Return can be extended by one month. This brings JCT treatment in line with Corporate Tax Filing Extension and eliminates the necessity to amend the JCT returns after finalizing financials.

Specification of the amendment introduced on March 27, 2020 by the Diet:

Eligibility
Only companies that have applied for the Corporate Income Tax Filing Extension are eligible for the Consumption Tax Filling Extension. The extension is not available for a company’s monthly or quarterly JCT related filings.
Applications’ Effective Date: the year 2021
It applies to the companies whose tax year starts on or after March 31, 2021, that do annual Consumption Tax Filing.
Application Requirements
The application for the Japanese Consumption Tax Extension must be submitted before the end of a company’s fiscal year.

Import Transactions

Consumption Tax levied on import transactions is to be paid before foreign goods are removed from the bonded area.

Important: if the due date falls on weekends or holidays, the CT should be paid on the day prior to the weekends/holidays. Also note, the Japanese Consumption Tax Regulation does not provide any payment extension. The due date is always fixed.

The upshot? The Japanese market provides enough opportunities for developing your business. The long-delayed policy introduced by the Japanese government will most likely increase the annual national income and foster a positive change in the long run.

Make the hay while the sun shines – hire a tax accountant to ensure proper and timely reporting.