Investing in Japan
How to Set Up Business in Japan Laws & Regulations on Setting Up Business in Japan
Section 3. Taxes in Japan
3.6 Overview of consumption tax
The following domestic and import transactions, except for certain transactions deemed non-taxable, are subject to consumption tax. The consumption tax rate is 8% (inclusive of local consumption tax rate of 1.7%). Although the consumption tax rate is scheduled to increase to 10% (inclusive of local consumption tax rate of 2.2%) from April 1, 2017*1, a reduced consumption tax rate will also be introduced at the same time. The reduced tax rate of 8% (inclusive of local consumption tax rate of 1.76%) will be applied to food and beverages, except for alcoholic drinks and dining out, and newspapers published more than twice a week (based on a subscription contract).
- Domestic transactions: the transfer or rental/lease of assets or the provision of services as a business in Japan by an enterprise for consideration.
- Import transactions: cargo retrieved from a bonded zone
Financial transactions, capital transactions and certain transactions in the areas of medical care, welfare and education are deemed non-taxable. Export transactions and export-like transactions such as international communications and international transport are exempt from consumption tax.
*1 On June 1, 2016, Prime Minister Shinzo Abe announced that the rise in the consumption tax to 10% and the introduction of the reduced tax rate would be postponed until October 2019.
3.6.1 Self-assessment and payment
Enterprises engaged in domestic transactions (excluding enterprises that are exempt from consumption tax) and parties engaged in import transactions must file and pay consumption tax on their taxable bases by the methods and procedures respectively provided for them. (If the amount of consumption tax on the taxable base of an enterprise (unless a tax-exempt enterprise) is less than the amount of consumption tax on purchases calculated as being deductible by the prescribed method, the shortfall is refunded by filing.) In the case of the prescribed cross-border supplies of electronic commerce by foreign enterprises, the Japanese enterprises who receive the provision of services or foreign enterprises who provide the services are responsible for tax filing.
To ensure that double taxation does not occur at the production and distribution stages, a scheme has been adopted allowing the deduction of consumption tax on purchasing from consumption tax on sales.
3.6.2 Deduction of purchase tax
Consumption tax on purchasing (receipt of the transfer or rental/lease of assets or the provision of services from another party) may be deducted from consumption tax on the taxable base when calculating the amount of consumption tax to be paid. The amount of this deduction is limited, however, depending on the percentage of taxable sales. In order for the consumption tax on the purchase to be deducted, both account ledgers and invoices that describe certain matters have to be retained. For the prescribed cross-border supplies of electronic commerce by foreign enterprises, only the consumption tax on the purchases that are subject to the reverse charge system and the purchases that are received from the registered foreign enterprises can be deducted. If taxable sales*1 during the base period*2 amounted to 50 million yen or less, the product of consumption tax on the taxable base multiplied by a given percentage determined by industry, may be considered the consumption tax on purchasing for the current taxable year and allowed as a deduction if the prescribed notification is submitted to the director of the tax office.
It should be noted that documents to be retained in order for the consumption tax on purchases to be deducted will change with the introduction of the reduced consumption tax rate on April 1, 2017. Between April 1, 2017 and March 31, 2021, in addition to the account ledgers and invoices that describe certain matters as before, account ledgers and invoices indicating tax rate categories for separate accounting and the items of which are subject to the reduced consumption tax rate have to be retained. After the introduction of a so-called ‘invoice system’ on April 1, 2021, qualified invoices issued by registered taxable enterprises need to be retained.
3.6.3 Tax exempt enterprises
Enterprises whose taxable sales *1 are 10 million yen or less for the base period *2 (excepting enterprises that have opted to be taxable)and that meet certain conditions are exempt from consumption tax filing/liability for the current year. However, enterprises can elect to be taxable enterprises if the prescribed notification is submitted to the director of the tax office. A company that has no base period, such as a newly established company, whose capital at the start of the taxable year is 10 million yen or more and in certain other cases cannot be a tax-exempt enterprise in that taxable year.
*1 In case where a corporation' s base period is not one year, the taxable sales during the base period are the amount obtained by prorating the balance during the below-mentioned base period in the prescribed manner.
*2 Base period: The base period is the full accounting period two years prior to current accounting year. A corporation may not have a full base period if it was a) newly established or b) changed its accounting period during the two-year prior period. The base period for such corporation is found by combining all accounting periods that commenced during this two-year prior period.