Consumption tax calculation under new tax-qualified invoicing system
Japan is currently in the midst of a series of major reforms of its consumption tax system, beginning with the introduction of the multiple tax rate system on 1 October 2019, and now moving toward implementation of the tax-qualified invoicing system on 1 October 2023.
The consumption tax system historically has relied on taxpayers’ accounting books to calculate their tax liability since it was first implemented in 1989. However, this traditional system has been said to suffer systemic problems that may cause tax leakage. The traditional system allows companies/solo proprietors that do not have consumption tax filing and payment obligations to collect consumption tax from their customers. The tax-qualified invoicing system is expected not only to ensure the creditability of consumption tax under the multiple tax rate system but also to eliminate situations that may result in tax leakage. The tax-qualified invoicing system will also require taxpayers to meet the new requirements for calculating tax liability based on the qualified invoices.
Retention of qualified invoices
Under the tax-qualified invoicing system, qualified invoices containing certain information may be issued only by registered invoice issuers. As a precondition to claiming input (consumption) tax credits, taxpayers will be required to retain the qualified invoices.
Method of calculating output/input tax amount
Under the tax-qualified invoicing system, as under the consumption tax system, tax liability is calculated by crediting the total input consumption tax amount against the total output consumption tax amount during the taxable period. Currently, under the traditional system, both output/input taxes are generally calculated based on taxpayers’ accounting books (method A below). Moving forward, under the tax-qualified invoicing system the calculation method based on qualified invoices (method B below) will be adopted.
A) Total amount-based method:
The tax amount is calculated based on total taxable sales/purchases amount, by multiplying each tax rate by taxable sales/purchases amount separately totalled for each applicable tax rate
B) Cumulative method:
The tax amount is calculated based on output/input tax amount, by aggregating the output/input tax amount stated on each qualified invoice that was issued/received during the taxable period.
Applicable combination of the calculation method
Taxpayers can select either method to calculate the output/input tax amounts. However, when the output tax amount is calculated under the cumulative method (Method B), then the input tax amount may not be calculated under the total amount-based method (Method A). The reasoning behind this rule is that a tax amount calculated under the cumulative method may be smaller than that amount if calculated under the total amount-based method because of fraction rounding; thus, this combination could result in an unequitably smaller tax liability.
Taxpayers will be able to select the applicable calculation method from the following three combinations.
(*1) The cumulative method for output tax may be used only by taxpayers who are the registered invoice issuer and who retain copies of the qualified invoices issued for their counterparties.
(*2) There is another applicable method called the book-based cumulative method. If a taxpayer continues to calculate and book its input tax amount based on the taxable purchase amount stated on each qualified invoice using its own rounding rule for every qualified invoice during the taxable period, the total booked amount is thought to be an appropriate input tax amount, even if that amount differs from the exact tax amount stated on the qualified invoice due to the difference in fraction rounding.
Rounding of fractions
When output/input tax on the qualified invoice includes a fraction that is less than JPY1.0, a rounding calculation should be performed only for the total taxable sales/purchases amount stated in each invoice separately by the tax rate. Taxpayers can select the rounding rule-- rounding up, rounding down, or normal rounding--at their discretion, as long as they use the same rounding rule consistently.
Due to the series of consumption tax reforms, the consumption tax calculation in Japan has become increasingly complex. The adoption of the cumulative method may be useful for taxpayers who are familiar with the invoicing system in other countries, although the Japanese invoicing system will not be exactly the same as European-style systems. To ensure proper tax compliance, taxpayers should make sure they understand the requirements thoroughly in advance of implementation of the new tax-qualified invoicing system in 2023.