Japan's consumption tax rate will increase from 8% to 10% in October 2019, after a move confirmed by Prime Minister Shinzo Abe.
Prime Minister Abe revealed the news in an extraordinary Japanese government cabinet meeting on October 15. The move will affect the many non-resident digital service companies supplying Japanese consumers given new rules that came into effect in October 2015.
Japanese e-commerce was revamped when the government required foreign businesses supplying digital services to Japanese consumers to account for the then 8% consumption tax. From October 2019 these businesses will have to amend their systems to account for the new 10% consumption tax, a move which has a significant knock-on impact to daily business operations.
Background to digital tax in Japan
The bill amending Japanese Consumption Tax (JCT) received Diet approval on March 31, 2015. Registrations for the new digital consumption tax opened on July 1 that year. Japan’s National Tax Agency (NTA) regularly updates a list of foreign digital service businesses that have registered.
The key drivers behind Japan’s decision to produce this legislation were the concerns from Japanese e-commerce businesses of an unbalanced marketplace as they compete with foreign e-commerce businesses.
A September 30, 2015, piece on the new Japanese eCommerce consumption tax, in The Japan Times, outlined the extent of this marketplace – and the potential revenues for the Japanese government:
“According to Daiwa Institute of Research Holdings, market sales pertaining to e-books and music purchased from overseas providers totaled ¥35.2 billion ($292.9 million) and ¥23.1 billion, respectively, in 2012.”
Affected digital services include the purchase of digital books, music and game downloads, as well as advertising via the internet or telecommunications.
A registration system for foreign businesses was established. This registration requires that the foreign business appoint a qualified agent, or to have its offices in Japan.
Taxamo support for Japan consumption tax
The Taxamo Advantage service supports compliance with Japanese Consumption Tax (JCT) via one simple integration.
Taxamo can also reveal the threshold for foreign businesses supplying these digital services. Only businesses with a taxable turnover of ¥10 million in Japan will be affected. This threshold of ¥10 million is the equivalent of USD$89,500, EUR€77,000, or GBP£68,000.
A business whose taxable turnover in Japan (2013 FY) is more than ¥10 million shall be a “taxable person” (2015 FY) under Japanese Consumption Tax Law and shall in turn account for Japanese Consumption Tax. With regard to B2C transactions, the foreign business will declare and pay Japanese Consumption Tax.
Learn more about Taxamo Advantage here.
Definition of Japanese e-commerce
So what comes under the scope of this legislation, what type of Japanese e-commerce will be affected? Well, there is a clear definition of e-commerce as services supplied via electric and telecommunication networks, excluding those ancillary to other transactions.
Affected services, therefore, are the cross-border supply of digital books, music downloads, and advertising via the internet or telecommunications to Japanese-based consumers.
Definition of B2B and B2C transactions
Japanese “B2B transactions” are services that are clearly for businesses, concerning the nature, terms, etc., of the services provided (e.g. the provision of advertisement). Other transactions are “B2C transactions” (e.g. the provision of digital books and music), where a ‘non-taxable’ person i.e. not a business is the end consumer.
Japanese Consumption Tax (JCT) explained
Since October 1, 2015, a foreign business providing B2C digital services to Japanese residents will have to account for JCT.
Here are some of the precise details included in this legislation:
- A foreign business wishing to allow its customers to deduct their input tax for its B2C supplies of services will need to register with Japan’s National Tax Agency here.
- A foreign business will be able to account for JCT without the above registration. However, in this case, their Japanese customers will not be able to deduct input tax for its B2C transactions.
- ‘Reverse charge mechanism’ (where service recipients are required to pay tax rather than service providers) to be introduced for B2B transactions.
- With regard to B2C transactions, the foreign business will declare and pay JCT.
- A registration system for foreign businesses will be established (this registration requires that the foreign business appoint a qualified agent to represent its interests in Japan, or to have its offices in Japan). Input tax deduction will be permitted only if the foreign service provider is registered, in order to prevent input tax deduction without tax payment.
- Registration procedures for foreign businesses are planned to start on July 1.
Japanese government contact details
The Japanese government also plans to publish more English-language materials relating to the new JCT on their METI website in the near future.