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  • Service: Tax, Global Indirect Tax
  • Type: Regulatory update
  • Date: 11/1/2012

Japan: CT essentials 

Essential information regarding CT as it applies in Japan.


Scope and Rates

What supplies are liable to CT?


Taxable supplies for Consumption Tax (“CT”) purposes are the following transactions when carried out for consideration as part of a business carried on by an individual or a company:

  • sale or lease of an asset in Japan
  • supply of services in Japan.

From the perspective of the vendor/service supplier in a domestic taxable supply, the supply is a ‘domestic taxable sales transaction’ whilst from the perspective of the purchaser/service recipient, the supply is a ‘domestic taxable purchase transaction’. Consumption Tax imposed on a taxable supply is called ‘output tax’ for the vendor/service supplier and ‘input tax’ for the purchaser/service recipient.


In addition to the taxable supplies identified above (domestic taxable supplies), the removal of foreign goods from a bonded area (i.e. import of goods) also represents a taxable transaction for Consumption Tax purposes (import taxable supply). Consumption Tax imposed on importation is called ‘import input tax’ for the importer.


What is the standard rate of CT?


The current rate is 5 percent, effectively comprised of 4 percent national Consumption Tax and 1 percent local Consumption Tax. (A two-stage increase in the 5 percent consumption levy, first to 8 percent in April 2014, and then to 10 percent in October 2015 was enacted in August 2012.)


Are there any reduced rates, zero rates, or exemptions?


Non-taxable Supplies


There are a number of transactions which are specifically excluded from being taxable supplies. The main non-taxable supplies are as follows:

  • sales or leases of land
  • sales of securities and similar instruments (not including golf-club membership rights and other similar items, but including foreign securities)
  • monetary transactions including loans, guarantees, distributions from joint operation trusts or other investment trusts and insurance premiums
  • transfers of postage stamps, revenue stamps, etc. by the central and local governments (including foreign postage stamps, etc.)
  • specified activities carried out by the central and local governments, such as registration and certification activities, as well as handling charges for foreign-exchange transactions
  • medical treatment under public medical insurance law
  • social welfare activities
  • school tuition and examination services
  • rental of housing
  • services related to childbirth, burial, home help and welfare centers for aged and handicapped persons

Export Supplies (zero –Rated)


Export supplies, including the transfer or lease of goods representing an export from Japan as well as other export-related activities such as international transportation are treated as export exempt supplies, to which an effective zero percent Consumption Tax rate is applied. It is not necessary to collect or account to the government for Consumption Tax on such transactions.


Services provided to a non-resident will also be treated as export supplies, except in the case of transport or storage of assets in Japan, provision of accommodation and food in Japan, or provision of services of a similar nature in Japan.

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Registration

Who is required to register for Japanese CT?


Japan's Consumption Tax Law has not adopted the “invoice system” (which is common in European CT systems) and a registration number for Consumption Tax is not required. Therefore, there is no “registration” per se for Japanese Consumption Tax purposes. Although the invoice system will likely be introduced in Japan in the near future, the schedule of the introduction has not been decided.


Japan has a unique system to judge whether a company/individual is required to file a Consumption Tax return or not. A company/individual is either a “taxpayer” for Consumption Tax purposes or it is not. The word “taxpayer” for this purpose means a taxpayer that has a Consumption Tax return filing responsibility. The rules for determining taxpayer status are detailed below. Please note while there is no “registration,” companies/individuals which meet the taxpayer requirements as detailed below are required to notify the tax authority that they are a taxpayer for Consumption Tax purposes.


Taxpayers



Broadly anyone, whether a consumer or a business enterprise, acquiring goods and services in Japan will suffer consumption on those transactions; the concept of a “taxpayer” for Consumption Tax purposes specifically relates only to those companies or individuals which are required to file a Consumption Tax return to the Japanese government.


  • (1) Principle Rule for Taxpayer Status

    For a taxable year in which the annualized value of a business operator’s domestic taxable supplies and export exempt supplies in the taxable year prior to the preceding year did not amount to more than JPY 10 million (and having taxable sales of no more than JPY10 million for the specified period*), the operator will not be treated as a Consumption Taxpayer.

    *This requirement only applies to fiscal years starting on or after 1 January 2013. The “specified period” is the first 6 months of the preceding fiscal year (if the preceding fiscal year is short [less than 7 months], basically, the first 6 months of the fiscal year prior to the preceding fiscal year).

  • (2) Election for Taxpayer Status

    A Consumption Tax-exempt business operator (i.e. a business operator without “taxpayer” status under the rule explained in (1) above) which wishes to file a claim for a Consumption Tax refund can elect to be a taxpayer by submitting a notification of election to the tax authority.

    If a business operator is “Consumption Tax-exempt” and is therefore not required to file a Consumption Tax return, the business operator does not need to file and pay the net Consumption Tax payable but also loses the chance to claim for a refund. Taking the total amount of output Consumption Tax and the total amount of input Consumption Tax into account, it is necessary to carefully consider whether or not a voluntary election of Consumption Taxpayer status should be made.

    A notification for the election for Consumption Tax status must ordinarily be submitted prior to the commencement of the first taxable year for which it will apply. However, in the first taxable year of a business enterprise, the election can apply from the commencement of business where the election is made prior to the end of that taxable year. An election is generally irrevocable for a period of 2 years.

    Under the 2010 tax reform, if a taxpayer who made an election for taxpayer status acquires certain fixed assets (the acquisition cost of which is JPY 1 million or more) within this two year period (excluding taxable years in which the simplified tax credit system has been applied), the taxpayer status may continue until the third year beginning from the year in which the fixed assets are acquired. This amendment applies to those that make an election to become a taxpayer on or after 1 April 2010 for taxable years beginning on or after the same day.

  • (3) Newly Established Companies

    Regardless of the rule described in (1), a newly established company having share capital of at least JPY 10 million, or equivalent, will have mandatory taxpayer status for the first two taxable years.

    Under the 2010 tax reform, if such company acquires certain fixed assets (the acquisition cost of which is JPY 1 million or more) within this two year period (excluding taxable years in which the simplified tax credit system has been applied), the company may continue to be taxpayer until 3 years beginning from the year in which the fixed assets are acquired. This amendment will apply to companies established on or after 1 April 2010.

Are there penalties for not registering or late registration?


No.


Is voluntary CT registration possible for an overseas company?


Please see the section "Who is required to register for Japanese CT?" above. There is no special provision for an overseas company.


Are there any simplifications that could avoid the need for an overseas company to register for CT?


No. Notification must be made to the tax authority as soon as taxpayer status is met.


Further, there is no "reverse charge system" in Japan.


As explained above, if the service is rendered in Japan, the service supply is treated as a taxable supply for Consumption Tax purposes. Services rendered outside Japan are out-of-scope for Japanese Consumption Tax purposes.


Does an overseas company need to appoint a fiscal representative?


The overseas company would need to appoint a local agent to act as a substitute to the overseas company to be responsible for any Consumption Tax filings and payments of the overseas company.

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CT grouping

Is CT grouping possible?


No.


Can an overseas company be included in a CT group?


N/A

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Returns

How frequently are CT returns submitted?


The taxable period is the calendar year in the case of individuals and the respective accounting period in the case of companies. However, upon selection, the taxable period may be on a quarterly basis rather than on an annual basis (i.e. the periods from January to March, April to June, July to September, and October to December in the case of individuals and every 3 months starting from the commencement date of the respective accounting period in the case of companies). A monthly period is also available upon selection.


Consumption Tax is payable within 2 months after the end of the taxable period together with submission of the final tax return. Provisional payment of Consumption Tax is also required for the first 6 months of an annual taxable period either on a pro-rata basis (i.e. one-half of the tax paid for the preceding taxable year), or on an interim basis (i.e. tax calculated based on actual operating results for the first 6 months of the annual taxable year concerned). However, a provisional payment of Consumption Tax is not required if the Consumption Tax payable for the prior taxable period was not more than JPY 600,000.


Also, quarterly filing is mandatory if Consumption Tax payable for the previous taxable period exceeded JPY 5 million; in such a case, Consumption Tax for the first three quarterly filings is one-quarter of the Consumption Tax paid for the previous taxable year or, by selection, the actual results for the current quarter. Taxpayers who paid Consumption Tax in excess of JPY 60 million for the prior taxable period will be required to make a monthly interim payment of taxes during the current taxable period.


In the case of import taxable supplies, Consumption Tax is generally payable at the time the goods leave the bonded area.


Are there any other returns that need to be submitted?


No.


If a business receives a purchase invoice in foreign currency, which exchange rate should be used for CT reporting purposes? (e.g. central bank’s exchange rate applicable on the date of the invoice)


For Consumption Tax applicable on imports, the Customs Authority publishes statutory exchange rates which should be applied in converting any balances from a foreign currency. For other conversions, the exchange rate at the time such transactions were created should be applied. In principle, the TTM (telegraphic transfer middle rate) of the taxpayer’s main bank should generally by used.

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CT recovery

Can a business recover CT if it is not registered


No. Consumption Tax can only be recovered for periods in which the payer is considered a “taxpayer” for Consumption Tax purposes (See “Who is required to register for Japanese CT?” above).


Does your country apply reciprocity rules for reclaims submitted by non-established businesses?


N/A


Are there any items that businesses cannot recover CT on?


There are no “items” for which Consumption Tax is not recoverable. However, there are limitations on the amount of creditable input Consumption Tax as discussed at “Can expenses related to only partially taxable business be deducted?” below.

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International Supplies of Goods and Services

How are exports of goods and services treated?


Export supplies, including the transfer or lease of goods representing an export from Japan as well as other export-related activities such as international transportation are treated as export exempt supplies, to which an effective zero percent Consumption Tax rate is applied. It is not necessary to collect or account to the government for Consumption Tax on such supplies.


Services provided to a non-resident will also be treated as export supplies, except in the case of transport or storage of assets in Japan, provision of accommodation and food in Japan, or provision of services of a similar nature in Japan.


How are goods dealt with on importation?


The removal of foreign goods from a bonded area (i.e. import of goods) represents a taxable transaction for Consumption Tax purposes (import taxable supplies). Consumption Tax imposed on importation is called ‘import input tax’ for the importer.


For the purposes of import taxable transactions, an importer (any individual or company importing goods into Japan) must pay Consumption Tax to the government (Customs Office) unless the importation is tax-exempt under the threshold rule.


Consumption Tax on importation is imposed on any importer regardless of whether the importation is carried out for business purposes. Thus, individuals importing goods as consumers can be an import input taxpayer. Where an individual or company pays Consumption Tax on its importation, that individual or company does not automatically become a Consumption Taxpayer required to file a Consumption Tax return.


In the case of import taxable transactions, the taxable base is the value of the imported goods for customs duty purposes (i.e. normally, the CIF price) plus the amount of any customs duties and other excise taxes.


How are services which are brought in from abroad treated for CT purposes?


Services rendered in Japan are subject to Consumption Tax. Services rendered outside Japan are out-of-scope for Japanese Consumption Tax purposes.

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Invoices

Is a business required to issue tax invoices?


No, as Japan does not have CT invoice system.


What do businesses have to show on a tax invoice?


An invoice system requires taxpayers to maintain copies of tax invoices for all purchased inputs in order to claim an input Consumption Tax credit. Although Japan's Consumption Tax works like a credit method CT, it has not adopted the invoice system. Instead Japan requires taxpayers to either maintain books and records to support amounts claimed for the credit or to use a simplified system for estimating the credit.


All valid tax invoices must contain the following particulars:

  • the full name of the supplier
  • the date of the taxable transaction
  • the description of the taxable transaction
  • the total amount charged on the taxable transaction
  • the full name of the person to whom the goods or services are supplied.

Can businesses issue invoices electronically?


No.


Is it possible to operate self-billing?


No.


Can a business issue CT invoices denominated in a foreign currency?


Yes.

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Transfer of Business

Is there a relief from CT for the sale of a business as a going concern?


No. The sale of a business as a going concern is treated as a supply of all the underlying assets for Consumption Tax purposes. As such the assets transferred must be analyzed/grouped into those subject to Consumption Tax and those which are not.


In general, Consumption Tax may be recouped by filing a Consumption Tax return. In other words, if the taxable revenue ratio (taxable sales/total sales) of the corporation selling assets is 95percent or more, the company should be able to offset the input Consumption Tax against its output Consumption Tax in full in principle, therefore there should be no real tax burden and it is merely a cash flow timing difference. On the other hand, however, if the taxable revenue ratio (taxable sales/total sales) of the corporation selling assets become less than 95percent due to the transfer of deposit with banks (non-taxable transaction), Consumption Tax may not be recouped by filing in full. Please see “Can expenses related to only partially taxable business be deducted?” above.

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Option to Tax

Are there any options to tax transactions?


N/A

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Head Office and Branch transactions

How are transactions between head office and branch treated?


Transactions between head office and its branch(es) are non-supplies as they are regarded as one entity for Japanese Consumption Tax purposes.

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Bad Debt relief

Are businesses able to claim relief for bad debts?


Yes. When, due to circumstances in accounts receivable and other claims on the buyers (purchasers), all or part of the compensation for the transfers of taxable assets including tax have become unrecoverable, the amount of Consumption Tax included in the unrecoverable amounts of sales are deductible from the amount of Consumption Tax during the tax period in which the bad debt takes place. The application of this deduction is conditional on the maintaining of supporting documents.

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Anti-Avoidance

Is there a general anti-avoidance provision under CT law?


No.

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Penalty Regime

What is the penalty and interest regime like?


The penalty regime consists of additional penalty and interest taxes based on the amounts of unpaid taxes.

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Tax Authorities

Tax audits


How often do tax audits take place?


National tax office usually conducts it every three years.


The statute of limitation is 3 years* (5 years in the case of non-filing and 7 years in the case of fraud), during which the tax authorities are authorized under the law to examine returns filed by taxpayers.


* Under the 2011 tax reform, this period was extended to 5 years. This amendment is applicable for periods for which the statutory filing deadline is on or after 2 December 2011.


Are there audits done electronically in your country (e-audit)? If so, what system is in use?


No.


Advance rulings and decisions from the tax authority



Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?


Yes. However, a formal advance ruling system which provides comments in writing is not generally convenient for taxpayer because of certain practical aspects of this system. Therefore, the taxpayer usually seeks informal verbal comments from the tax authority.


Are rulings and decisions issued by the tax authorities publicly available in your country?


Yes. However, such rulings and decisions are not necessarily considered to be binding on the tax authorities for application to other taxpayers/scenarios.

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Miscellaneous

In your country, are there unique specific indirect tax rules (regimes) that differ from standard indirect tax rules in other jurisdictions?


Imports are always subject to import Consumption Tax upon entry, regardless of whether it is imported by a taxpayer or not.


Are there indirect tax incentives available in your country (e.g. reduced rates, tax holidays)?


Exception in the case of a newly established company with greater than JPY 10 million or equivalent in share capital, a company which starts making domestic taxable supplies in a given year can generally enjoy a tax holiday for that first year. In addition, the “tax holiday” may be extended after the initial year as long as taxpayer status is not attained as discussed at “Who is required to register for Japan CT? ” above.


What are the other local indirect taxes beside CT?


N/A

 

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