Investing in Japan
How to Set Up Business in JapanSection 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%).
- 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: foreign 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.
Note: The consumption tax rate will increase to 10% (inclusive of local consumption tax rate of 2.2%) from October 1, 2019. A reduced consumption tax rate, however, 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 sales of food and beverages, except for alcoholic drinks and dining out, and sales of newspapers published more than twice a week (under subscription contracts).
3.6.1 Tax exemption for enterprises
Enterprises whose taxable sales*1 are 10 million yen or less for the base period*2 are exempt from consumption tax filing/liability (such enterprises are referred to as "tax exempt enterprises"). However, tax exempt enterprises can opt to be taxable by submitting an advance notification.
Tax filing/liability will not be exempt for certain corporations and enterprises, such as a newly established corporation with capital of 10 million yen or more, a newly established corporation whose capital is less than 10 million yen but is established by a group of enterprises whose taxable sales are more than 500 million yen with the group having more than a 50% stake (only for two years after the establishment, for either case), and an enterprise whose taxable sales*3 during the first half of last year or the previous fiscal year are more than 10 million yen.
- In the 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.
- Base Period: The base period is the full accounting period two years prior to the 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.
- Amount of salary paid can be used instead of taxable sales.
3.6.2 Deduction of purchase tax
Consumption tax on taxable purchases may be deducted from consumption tax on taxable sales when calculating the amount of consumption tax to be paid. In order for the consumption tax on purchase to be deducted, both account ledgers and invoices that describe certain matters have to be retained. The amount of the deduction, however, varies depending on factors such as the proportion of taxable sales to total sales. For certain cross-border supplies of electronic commerce by foreign enterprises, only the consumption tax on purchases that are subject to the reverse charge system (see 3.6.3) and on purchases that are received from registered foreign enterprises can be deducted.
If taxable sales during the base period amounted to 50 million yen or less, the amount calculated by multiplying the consumption tax on taxable sales by a specific percentage given to each industry may be considered the consumption tax on purchases to be deducted and allowed as a deduction if advance notification is submitted (such system is called the "simplified tax system").
Note: For the first four years from the introduction of the reduced consumption tax rate, i.e. between October 1, 2019 and September 30, 2023, account ledgers indicating matters necessary for separate accounting and invoices that describe tax rate categories for separate accounting have to be retained ("categorized invoice retaining system"). From October 1, 2023 onward, instead of the above-mentioned invoices, qualified invoices issued by taxable enterprises authorized by directors of tax offices need to be retained ("qualified invoice retaining system", also commonly known as "invoice system").
3.6.3 Self-assessment and payment
Enterprises engaged in domestic and/or import transactions are obliged to file and pay consumption tax. (If the amount of consumption tax on purchases to be deducted is more than the amount of consumption tax on taxable sales, the difference can be refunded by filing in a tax return.) In the case of certain cross-border supplies of electronic commerce by foreign enterprises, Japanese enterprises who have received the provision of services are responsible for filing and payment (reverse charge system)
Section3: Table of Contents
- 3.1 Overview of Japanese corporate tax system for investment in Japan
- 3.2 Domestic-sourced income
- 3.3 Overview of corporate income taxes (corporate tax, corporate inhabitant tax, enterprise tax)
- 3.4 Overview of withholding income tax
- 3.5 Tax treaties
- 3.6 Overview of consumption tax
- 3.7 Overview of individual tax system