JAPAN - Revision of Japanese consumption tax system
The consumption tax is a sales based tax. It is levied on the supply of goods and services in Japan. Electronic services provided by foreign-based companies to Japanese consumers are also subject to the consumption tax.
From 1 October 2019 the consumption tax will be raised to 10%. At the same time, multiple tax rates and an invoicing system are also being introduced. As a result, enterprises doing business in Japan will have to adapt to these changes in the consumption tax system.
Increase of standard tax rate to 10%
The consumption tax rate was originally scheduled to increase from 5% to 8% on 1 April 2014 and from 8% to 10% on 1 October 2015. Though the increase from 5% to 8% was adopted as planned, the increase from 8% to 10% has been twice pushed back. It will finally apply beginning 1 October 2019.
Introduction of varied rates
Though the standard consumption tax rate will increase, beginning 1 October 2019, multiple tax rates are being introduced that will allow application of a reduced tax rate of 8% on certain transactions.
The reduced rate of 8% will apply to:
- The sale of food/beverages excluding alcoholic drinks and meals provided in restaurants or through catering services, and
- The sale of newspapers under subscription contracts.
Introduction of the Japanese invoicing method
Furthermore, with respect to the consumption tax system, Japan has announced that beginning in 2023 it will use an invoicing method that’s similar to that used in various European countries.
Under the invoicing method adopted broadly in European countries for sales based taxes, a taxpayer registers and bills using invoices that include the tax ID on the customer invoice. This format of invoicing is mandated to ensure the supplier receives sales tax from customers and so that purchasers account for the paid amount as deductions.
Japan currently uses a different method to ensure proper consumption tax calculation. The current system (called the ledger method) is based on transaction evidence and the company’s books. Under the current system there is no requirement that tax rates/amounts be set out on issued invoices.
Under the new method (called the qualified invoicing method), taxpayers in Japan will be required to register and specify on the invoice the applicable tax rate and amount. They must also retain all customer invoices. It should be noted that the qualified invoicing method will not be exactly same as the European invoicing method.
To allow businesses sufficient time to prepare, the new invoicing system will begin 1 October 2023, (in other words, four years after the introduction of the multiple tax rates in 2019). From 1 October 2019 to 30 September 2023 taxpayers who sell goods/services that are subject to the reduced consumption tax rate of 8% must adopt a ‘simplified’qualified invoicing (Kubun-Kisai Seikyusho) method. Under the simplified qualified invoicing method tax registration numbers are not required on tax invoices.
The invoicing changes that will come into effect in 2023 will greatly impact enterprises doing business in Japan, particularly taxable persons filing consumption tax returns.