Japan Consumption Tax for Foreign Businesses: First-Year Rules and Refunds Explained
【Koshida Accounting Firm Column Date:】
”Every day is a new day.” ― Ernest Miller Hemingway
Hi, my name is Taisei Koshida, and I am a Certified Public Accountant and Licensed Tax Accountant in Japan. I specialize in helping foreign business owners understand Japanese accounting and tax rules. If you find Japan’s tax system challenging, I would be happy to assist you.
Many foreign entrepreneurs establish a company or start working as a sole proprietor in Japan while serving clients located overseas.
In these situations, one of the most confusing tax issues is Japan’s consumption tax (VAT). Depending on where your services are regarded as being provided, you may be entitled to a consumption tax refund—or you may not be subject to consumption tax at all.
This article explains the rules using practical examples and helps you decide whether you should voluntarily become a taxable business or register under Japan’s Invoice System.
１. Understanding Japan’s Consumption Tax
Whether Japanese consumption tax applies depends largely on where your services are regarded as being provided under Japanese tax law.
There are two common situations.
Services provided in Japan
If your services are regarded as being provided in Japan for overseas customers, the transaction is generally treated as a zero-rated export transaction.
Although no consumption tax is charged to your customer, you may be able to claim a refund of the consumption tax paid on your business expenses.
Services provided outside Japan
If your services are regarded as being provided outside Japan, they are classified as non-taxable transactions, meaning no consumption tax applies and no refund is available.
For a more detailed explanation of how Japan’s consumption tax applies to international services, please see the following article.
https://kotsicpafirm.com/the-consumption-tax-risks-when-providing-services-overseas/
２. Specific Example (Annual Basis)
Assume the following annual figures.
① Sales: ¥15,000,000 (all sales are made to foreign clients)
② Taxable business expenses: ¥2,200,000 (including consumption tax), such as office rent and entertainment expenses
③ Non-taxable expenses: ¥5,000,000, including executive compensation and social insurance premiums
（１）Calculation of Consumption Tax
Output Consumption Tax
¥0
Input Consumption Tax
¥2,200,000 × 10 ÷ 110 = ¥200,000
Potential Consumption Tax Refund
¥200,000
（２）Export Exemption Transaction: If Services Are Provided in Japan
Because all sales are zero-rated export transactions, the taxable sales ratio is 100%.
If you have elected to become a taxable business, you may claim a consumption tax refund of ¥200,000.
（３）International Transactions: If Services Are Provided Outside Japan
No refund is available because the taxable sales ratio is 0%.
３. Practical Judgment
１）To Submit or Not the Application for Taxable Business Status of Consumption Tax
If the service provision location is unclear, but the provider’s main base is in Japan, it is considered an export exemption transaction. This applies to foreign companies and individuals active in Japan.
In this situation, you have two options: either to submit the application for taxable business status under consumption tax or not to submit it.
If your business qualifies for a consumption tax refund, voluntarily becoming a taxable business may be worthwhile.
Although refund claims sometimes increase the likelihood of a tax audit, a modest refund of only a few hundred thousand yen rarely causes significant concern.
On the other hand, becoming a taxable business requires additional bookkeeping for consumption tax. This increases the administrative workload and may result in slightly higher accounting fees.
（２）Whether to Register as an Invoice Business or Not
If you plan to expand your business in Japan, registering under Japan’s Invoice System is often beneficial.
Many Japanese companies prefer to do business with suppliers that issue qualified invoices because they can claim input consumption tax credits.
However, registering under the Invoice System automatically makes you a taxable business.
（３）Conclusion
If you expect to receive a consumption tax refund, voluntarily becoming a taxable business is often worthwhile.
Even if the refund amount is relatively small, the risk of a tax audit is generally not a significant concern.
If the expected refund is substantial, becoming a taxable business is usually recommended so that you do not miss the opportunity to recover the consumption tax paid on your expenses.
If you expect to do business with Japanese companies, registering under Japan’s Invoice System from the beginning is often the better choice.
However, registration also means becoming a taxable business, requiring additional bookkeeping and the inclusion of your registration number on qualified invoices.
Our accounting and tax office specializes in supporting foreign entrepreneurs and international businesses operating in Japan. Through our trusted network of specialists, we can also assist with business visas, company registration, social insurance, legal matters, website development, digital marketing, and business consulting. All services are provided in English.
If you have any questions about Japan’s consumption tax or other tax matters, please feel free to contact us through our inquiry form.