An Easy Explanation of Consumption Tax for Doing Business in Japan

“Life is not complex. We are complex. Life is simple, and the simple thing is the right thing.” ― Oscar Wilde

Hello, my name is Taisei Koshida, and I am a certified public accountant and tax accountant.

I aim to assist non-Japanese business owners who need help with reading or writing in Japanese. If you find the Japanese tax return system challenging, I can help you with your tax filings.

If you are unsure about whether you need to file a tax return or not, this blog can be helpful for you.

The System of Consumption Tax in Japan 

You need to pay the remaining amount to the tax office after deducting the consumption tax you paid to suppliers and other expenses from the consumption tax you collected from your customers.

Which Transactions are Subject to Consumption Tax? 

1. Transactions conducted within Japan.
2. Transactions conducted by businesses as part of their operations.
3. Transactions involving consideration or payment.
4. Transactions involving the exchange of goods or services.

Transaction Classification from the Perspective of Consumption Tax

From the perspective of consumption tax, transactions are categorized as follows.

(1)Transactions Not Subject to Tax

Transactions that do not meet the criteria above are classified as not subject to tax. For example, gifting assets or lending without any compensation are not taxable because they do not involve any consideration or payment. Similarly, transactions conducted outside of Japan are also not subject to tax.

(2) Non-taxable Category 1 (Transactions not consistent with the nature of consumption tax)

・Transfer and lending of land

・Transfer of securities

・Transfer of postage stamps, revenue stamps, and similar items

・Fees for national and local government bodies, etc.

(3) Non-taxable Category 2 (Based on social policy considerations)

・Medical expenses under the social insurance law

・Rental of residential properties

・Tuition fees for compulsory education, etc.

(4)Tax-Exempt Transactions( Export Transactions)

Transactions with overseas entities are tax-exempt, with a 0% tax rate applied. Retaining documents such as export certificates and contracts are required for the exemption.
・Exports and international transportation
・Providing services to foreign businesses

Difference between tax-exempt and transactions not subject to tax

For tax-exempt transactions, you can receive a refund for the consumption tax paid on purchases. However, for non-taxable transactions, such as those conducted overseas, you cannot get a refund for taxes paid.

When is it necessary to pay consumption tax?

-If the annual taxable sales exceed 10 million yen. 

You are required to pay consumption tax to the tax office starting from the fiscal year after next.

-If both the taxable sales and personnel expenses for the first half of the year exceed 10 million yen. 

You are required to pay consumption tax to the tax office starting from the following fiscal year.

-When the amount of capital is not less than 10 million yen.
You must pay consumption tax from the beginning. However, this criteria amount is just capital. If you change 2 million to capital reserve from capital, you can avoid being taxed because the capital is less than 10 million.

-When a new company is owned by a specific parent company.
If a parent company’s taxed sales are more than 500 million yen or that of entire sales, including non-taxed, is more than 50 billion yen, a new Japanese company is taxed.

If you pay expenses with a credit card, do you need to keep receipts?

If you pay expenses with a credit card, it’s essential to collect receipts for all transactions. Based on a strict interpretation of the consumption tax law, even if you receive monthly statements from credit card companies, without the receipts issued by the vendors, you cannot treat the consumption tax paid as deductible tax.

The following blog mentions the invoice system.

https://kotsicpafirm.com/an-easy-explanation-of-japans-invoice-system/

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