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, subject to the applicable input tax credit rules.

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 transfer or leasing of assets or the provision of 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 basic requirements for domestic taxable transactions are classified as outside the scope of consumption tax. For example, gifting assets or lending without any compensation are generally not taxable because they do not involve consideration or payment. Similarly, transactions treated as being conducted outside Japan are generally outside the scope of Japanese consumption tax.

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

• Transfer and lending of land, subject to certain exceptions
• Transfer of securities
• Transfer of postage stamps, revenue stamps, and similar items under certain conditions
• Certain fees charged by national and local government bodies, etc.

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

• Medical services covered by social insurance
• Rental of residential properties, subject to certain exceptions
• Certain tuition fees and other educational charges, etc.

(4) Tax-Exempt Transactions (Export Transactions)

Certain export transactions are exempt from consumption tax and effectively subject to a 0% tax rate. Required supporting documents must be retained in order to apply the exemption.

• Exports and certain international transportation
• Certain services provided to non-residents or foreign businesses

However, not every service provided to an overseas customer qualifies for export exemption. For example, certain services that provide a direct benefit in Japan may still be subject to Japanese consumption tax.

(5) Taxable Transactions

Transactions that fall within the scope of Japanese consumption tax and are neither non-taxable nor tax-exempt are generally taxable transactions.

Difference between tax-exempt and transactions not subject to tax

Tax-exempt export transactions and transactions outside the scope of consumption tax are treated differently.

For qualifying tax-exempt export transactions, a taxable business may generally claim input tax credits for related purchases if the applicable requirements are satisfied. By contrast, input tax related to non-taxable transactions, such as residential rent or certain land transactions, is generally subject to restrictions. Transactions conducted outside Japan are generally treated as outside the scope of Japanese consumption tax rather than as domestic non-taxable transactions.

When is it necessary to pay consumption tax?

If taxable sales during the base period exceed JPY 10 million

In general, a business becomes subject to consumption tax if its taxable sales during the base period exceed JPY 10 million. For an individual, the base period is generally the year two years before the current year, while for a corporation it is generally the fiscal year two fiscal years before the current fiscal year.

If the special-period test is met

Even if taxable sales during the base period do not exceed JPY 10 million, a business may become taxable if taxable sales during the applicable first six-month special period exceed JPY 10 million. In many cases, the amount of salary and similar payments during that period may be used instead of taxable sales for this test.

When a newly established corporation has capital of JPY 10 million or more

A newly established corporation without a base period is generally subject to consumption tax if its stated capital or amount of capital contributions is JPY 10 million or more at the beginning of the fiscal year. The determination is based on the circumstances at the beginning of the relevant fiscal year, and other rules may also apply.

When a newly established company is controlled by a large business

Even if a newly established corporation has capital of less than JPY 10 million, it may still be subject to consumption tax under the rules for certain newly established corporations. This can apply where the corporation is controlled by another person or company and the relevant controlling person or related entity has taxable sales exceeding JPY 500 million, or total revenue including overseas revenue exceeding JPY 5 billion, during the applicable testing period.

In addition, a business that registers as a qualified invoice issuer generally becomes a taxable business even if its taxable sales are below JPY 10 million. For more information, see An Easy Explanation of Japan’s Invoice System.

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

If you pay expenses with a credit card, it is important to keep the invoices, receipts, or other documents issued by the vendor.

A credit card statement alone generally does not satisfy the invoice requirements for claiming an input tax credit. Under the Invoice System, the required qualified invoice or qualified simplified invoice generally needs to be retained, although certain exceptions apply.

Our accounting and tax office has been actively assisting foreign business owners in Japan with accounting and tax matters. Also, not only in the tax and accounting field, our office can support your business in Japan in the fields of visa, registration, social insurance, and law by networking with specialists. Plus, we have networked with specialists in web marketing, building websites, and business consulting suitable for Japanese customers. All services are provided in English. Please feel free to reach out to us through the inquiry form.

Don’t navigate the Japanese tax system alone. Contact us today for a free consultation and ensure your business in Japan starts on the right financial footing.

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