YAY! You can now acquire a Registered Supplier ID Number in Japan (similar to VAT Number in Europe or Sales Tax Number in America)!
It’s no longer big news that Japan is in the middle of updating its Consumption Tax System. This way the government wants to ensure they calculate creditable tax accurately. Of course, such an old system with a long history cannot be changed at a click of a button. That’s why several transitional measures will be taken (or have been, indeed!). Hopefully, it will give businesses some time to implement the changes.
It all started with the increase in the Japanese Consumption Tax rate along with the introduction of the multiple tax rates on October 1st, 2019. After that, they have started accepting applications that will help you acquire a Registered Supplier ID Number in Japan (similar to VAT Number in Europe or Sales Tax Number in America). Consequently, these measures will lead to the implementation of the new invoicing system.
That’s why we’ve created a simple guide for those who would like to know the application steps and requirements. So make sure you read it through!
Those who need some basic information on Japanese Consumption Tax can check our past article.
Table of Contents
What is a Qualified Invoice System in Japan?
Japanese Consumption Tax (JCT) is the Japanese version of the Value-Added tax (VAT) in Europe and the Sales Tax in the USA.
From October 2023 the Japanese government will implement a new JCT system – Qualified Invoice System.
The main difference between the current invoicing system and the new invoicing system lies in the content of the invoice.
New invoices must include a breakdown of applicable tax rates for the given transaction and the Registered Supplier ID Number of a taxable business.
Let’s compare the current invoice content with the qualified invoice:
So, in practice, it seems that many businesses already issue invoices that satisfy the requirements of the Qualified Invoice System. The only thing they need to add is the “Registered Supplier ID Number”.
Who can acquire Registered Supplier ID Number in Japan?
First and foremost, the changes to the Japanese Consumption Tax system will affect not only businesses that have a physical presence in Japan but also those that provide certain digital services to Japanese customers. That’s because in certain situations, digital services provided to Japanese customers may be subject to JCT even if the service provider is located overseas.
Read here for more information on Taxation on Digital Services in Japan.
Also, not all who issue invoices can issue qualified invoices. In order to issue qualified invoices, you need to be registered as a qualified invoice issuer (meaning you should have a Registered Supplier ID Number). In other words, only a taxable enterprise for Consumption Tax purposes can register as a qualified invoice issuing enterprise.
Can JCT-exempt businesses get Registered Supplier ID Number in Japan?
taxable sales of ¥10 million or less in the base period are exempt from paying the Japanese Consumption Tax and therefore do not fall under the Qualified Invoice System and cannot issue qualified invoices.
However, sometimes, JCT- exempt businesses can become JCT taxpayers. This way they will be able to issue qualified invoices (if their clients require so). But be careful, whether or not it’s advantageous for your business can only be judged on the calculations of your company’s financials.
We would recommend JCT- exempt businesses not register as qualified invoice issuers just yet. It’s better to oversee the situation for 1 more year as the deadline for application is March 31st, 2023. So, when the time comes, you can either submit or not submit it depending on the company’s situation.
How do businesses liable for JCT prepare for the changes?
Only registered JCT payers can issue invoices under the new invoicing system. So, you need to submit the JCT registered supplier application to the tax office. Consequently, they will issue the Registered Supplier ID Number for your business if there’s no issue with the application.
Please be careful, there are 2 application forms – one for domestic businesses and another one for overseas businesses .
So, what you need to do is:
01: Submit the Japanese Consumption Tax Registered Supplier Application
02: Receive Registered Supplier ID Number
Another thing is that under the new invoice system a JCT taxpayer will need to retain copies of the issued qualified invoices (that have the Registered Supplier ID Number and other required information) to be able to claim a Purchase Tax Credit.
More information on Purchase Tax Credit can be found here.
What will happen to freelancers and sole traders that do not have Registered Supplier ID Number ?
Literally, it will have a direct impact on freelancers and sole traders with taxable sales ¥10 million or less in the base period. Because they are exempted from JCT meaning they cannot issue qualified invoices even if their clients ask them to do so.
Therefore, if a JCT-exempt business wants to continue its operation or has a client who considers the benefits of Purchase Tax Credit (please read further why it matters) it must notify a tax office of its choice to become a JCT taxpayer (aka taxable enterprise).
Purchase Tax Credit and how it will affect businesses
In the past, even if a business didn’t have an invoice, it could still claim a purchase tax credit by recording the name of the payer and the reason for not having an invoice in its accounting books.
However, with the introduction of the new invoice system, the requirement for qualifying for the purchase tax credit will get stricter and only businesses that can issue qualified invoices can claim a purchase tax credit.
It means that buyers cannot claim Purchase Tax Credit for purchases made from businesses that cannot issue qualified invoices and will need to select a different seller to do business with (the one that can issue qualified invoices).
Steps sole traders and freelancers must make to prepare for the changes
Step 1: Consider the way you operate
Some businesses work mainly with individuals or general consumers who do not require “qualified invoices”. In such situations, it is absolutely fine to remain a tax-exempt business.
However, if you mainly work with businesses that require “qualified invoices” you should definitely consider becoming a taxable business for JCT purposes. Well, maybe not just yet, as it can be disadvantageous for you at the moment.
Step 2: Make sure you are informed about the introduction of the new invoice system and the way it can affect your business
The new invoice system will come into effect on October 1st, 2023. If upon careful consideration you conclude (or your tax accountant) that it’s more advantageous for you to become a JCT taxpayer, then there are a couple of things you need to do before it becomes effective.
- If you submit the JCT registered supplier application before March 31, 2023 (the registration itself will take place on October 1st, 2023, though), you can obtain a Registered Supplier ID Number without submitting “Notification of Taxable Enterprise Status for Consumption Tax”
2. You file the JCT registered supplier application on or after March 31st, 2023 you will also be required to submit “Notification of Taxable Enterprise Status for Consumption Tax”.
Regarding the deadline, usually, you should submit notifications a day before the taxable period starts.
With this notification, the timeline is different, though. You need to submit it at least one month before your taxable period starts to avoid complications. The reason for this is that the JCT Registered Supplier Application is subject to review and sometimes may be rejected by the tax office.
For individuals, the taxable period is fixed from January to December. But for corporations, it depends since every company has its own fiscal year period.
Step 3: Make sure you correctly prepare your qualified invoice format and optimize your new system’s accounting.
Suppose you register as a “qualified invoice issuer.” In that case, you must adjust your invoice format to the requirements of the new invoice system.
Also, if you’re switching from a tax-exempt business to a taxpayer for JCT purposes, your accounting process will change significantly. This is because the new rules will introduce additional bookkeeping and record-keeping requirements.
Besides, you’ll need to consider reviewing the accounting software used and other relevant software to optimize the process.
If you’re using the service of a professional accounting office, then it shouldn’t be your concern.
All you need to do is conclude with your accountant whether or not it’s beneficial for your business to become a JCT taxpayer. The rest, as they say, is history.
How can I apply to get a Registered Supplier ID Number in Japan?
Either electronic or paper-based filing method is available.
If you choose to submit electronically, you will need to use “e-Tax software (WEB version)”,”e-Tax software (SP version)” or “e-Tax software”. All these are available from October 1, 2021.
Outline of the online application process (e-Tax software (WEB version))
Key spaces to watch out for in case of paper-based applications
How long does it take to get the application approved?
All in all, all businesses (be they JCT payers or not) should take advantage of the remaining time prior to the introduction of the new invoice system. They need to make the relevant changes to ensure they’re 100% ready for the new system.
Do not underestimate the scale of work involved. You may need to adapt or upgrade the IT systems you use to meet the new invoice requirements. Or else, you may need to renew your business contracts or renegotiate for other contract terms.
In short, it’s not just a tax issue, but a complete transformation of your business that requires time.
Otani Accounting Office experts can help you prepare for the new system and ensure your business transitions to the Qualified Invoicing System smoothly. So make sure to drop us a line, and we’ll advise you on how to do best in your particular situation.