The Japan consumption tax is a national tax applied according to the business volume, through self-assessment, and it functions similarly to the VAT in Europe. When a business becomes a taxable entity, it has to file a consumption tax in Japan on a regular basis.
The Japan consumption tax rate varies according to the types of goods or services that are being provided by the taxpayer and it has several values: the standard one, the reduced one, and the null one types of transactions such as those related to export.
Our company formation consultants in Japan can offer information on how often the consumption tax has to be acquitted by a Japanese business.
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Consumption tax registration for a foreign company
A foreign company doing business in Japan is liable for consumption tax according to the applicable registration threshold of 10 million yen.
For taxation purposes, a foreign company is a company that is not a domestic corporation, meaning that it is one that does not have its head office or main/principal office in Japan.
As per its definition, the consumption tax is levied on taxable sales. For a foreign company, these are the ones:
- – incurred in Japan;
- – incurred for a compensation;
- – incurred by the company for its company purposes in Japan.
- – incurred through the transfer or lease of assets.
As in the case of locally registered companies, a foreign company will, in principle, be exempted from the consumption tax when its taxable sales incurred in the taxable period are, as said, equal or less than 10 million yen.
A company that is not a taxable person submits a Report on the Selection of Taxable Status for Consumption Tax to the Tax Office that has jurisdiction over the location in which the tax payment is made. The submission is addressed to the District Director.
In most cases, the application for the selection of the taxpayer status is submitted no later than the day preceding the first day of the period for which the business intends to become a taxable person.
An important issue for foreign companies doing business in Japan is the fact that they are required to appoint a tax agent.
The following applies:
- · A company that does not have, nor will it have its head office or principal office in Japan will need to appoint a resident who will act as tax agent.
- · The appointed tax agent will be the one to make the tax payments on the behalf of the foreign company.
- · The appointment of the agent is made through a submission to the District Director of the Tax Office that has jurisdictions over the area in which the tax liability will take place.
- · For the purposes of a foreign company in Japan, the tax agent and the tax accounting proxy can be the same person.
As far as the tax payment is concerned for a foreign company in Japan, in principle, the tax returns for the consumption tax and other taxes are submitted to the District Director of the Tax Office that has jurisdiction over the place of payment.
For a foreign corporation, the place of payment can be:
- – the office or establishment in Japan, if the company has any;
- – the main asset, in case or corporations involved in real-estate lending (except for vessels and aircrafts subject to lending);
- – the most recent place of tax payment, if neither of the two above apply; or
- – when none of the situations above describe the company’s status, the location the company has selected for the purpose of tax claims, returns or others in relation to the consumption tax, when the registration was made;
- – in cases in which neither applies, the company will use the location within the district in which the Kojimachi Tax Office has jurisdiction.
As the tax agent can be the same person as the tax proxy, it is understood that for the purposes of the consumption tax, the tax proxy is also the representative who will submit the returns or made the applications for the consumption tax with the relevant Tax Office.
The tax proxy needs to be a Certified Public Tax Accountant, and persons who so not have this qualification cannot act as proxies.
Our team of accountants and agents specializing in taxation and company formation in Japan can give you more details on the exemption threshold and what you can expect if you plan on doing business in Japan.
Moreover, for interested foreign companies, we can provide tax agent services. You can reach out to us for more details.
What is the rate of the Japan consumption tax?
The consumption tax rate in Japan was increased to 8% since the 1st of April 2014, from a 5% rate prior to this date. The latest change to this tax occurred in October 2019 and the current regime includes two main rates, the standard and the reduced one, along with the null or 0% rate for certain types of goods and services (which was also applied prior to this change).
Taxpayers should note that this tax is composed of the national tax as well as the local tax, thus the 8% rate is 6.24% in national tax and 1.76% in local tax whereas the 10% rate is composed of 7.8% in national tax and 2.2% in local tax.
The standard Japan consumption tax rate was increased from 8% to 10% and now the 8% rate applies as the reduced one. The reduced tax applies in two cases:
- – for food and drinks, excluding alcoholic beverages and dining our;
- – in case of newspapers that are issued twice a week or more (for those by subscription).
Investors who open a company in Japan and wish to know more about the reduced tax rate and the conditions in which it applies can reach out to our agents.
When does a local company register for the consumption tax?
Registration for the Japan consumption tax takes place voluntarily when the taxable sales for consumption are lower than 10 million JPY during the base period.
This means that a newly incorporated company that has a share capital of less than 10 million JPY will not be asked to pay this tax until its taxable sales exceed this amount in the base period. For the purpose of taxation, the base period is two years before the year in course of the first six months of the prior year.
The Japan consumption tax is due on all transactions effectuated by companies in this country, as well as on business to business transactions. In essence, it is a tax that is imposed on the consumption of goods and services, and even of the burden of the tax is imposed on the final customer (the client), the company in Japan is the one that is liable for tax payment.
The consumption tax applies on taxable sales and a sale is considered to be taxable when it complies with the following four conditions: it takes place in Japan, it is performed by a business for its business purposes, it is performed for the purpose of obtaining compensation and it takes place through the transfer or lease of assets.
This tax implies that a company also has to pay it when it buys goods or services for its company activities. However, the acquitted consumption tax amount is compensated with the consumption tax amount which is collected.
Businesses that collect a consumption tax in Japan in their business activities have to file returns and are only due the difference between the received and the paid amount during the taxable period. Our company registration advisors in Japan can provide further details on this matter.
What are the main compliance requirements for the consumption tax in Japan?
The frequency of the periodic consumption tax depends on the turnover of the trader. The tax filing enlists all the transactions of the business which are connected to the supply of the applicable services or goods.
The Japan consumption tax is payable at the same time with the tax return filing. The tax bodies in Japan request payments of consumption tax liabilities to be effectuated in the country at an authorized post office or bank. Our Japan company formation professionals can offer more information related to this subject.
If you require further details about the consumption tax (VAT) in Japan, or if you are interested in starting a company in Japan, please reach out to our accountant in Japan.
Taxation in Japan
The Japan consumption tax is not the only corporate tax applicable to companies. Investors who are interested in starting a company here should take note of the other applicable taxes, listed below by our agents:
- – 23.3%: the national standard corporate income tax that applies to companies with a share capital of over 100 million JPY;
- – 20% is the withholding tax on dividend payments to a nonresident; this rate can be reduced under a double taxation treaty and Japan has signed more than 70 such agreements;
- – 2.1% the surtax that applies on the withholding tax, in case of certain types of income;
- – 16.43% is the approximate maximum social security contribution rate for the employer; the employee is also required to make his own contributions, as per the laws in force and the directors of the Ministry of Finance.
The tax year in Japan can be the same as the calendar year and investors who open a company in Japan can select this period upon registration (and it cannot exceed 12 months).
Companies are expected to file the final annual return and pat the taxes within two months after the end of the said fiscal year. However, a pre-payment is required in the following manner: 50% of the tax payable on the earnings recorded in the previous year or the current tax liability for the first six months.
The company will make this pre-payment within two months after the end of the sixth month of the financial year.
There are two types of tax returns in Japan, the white and the blue one. The latter has a number of advantages, such as deductions for the company as well as tax loss carryforwards.
One of our agents specializing in company formation in Japan can give you more details as companies may apply for this blue form at the beginning of the tax year.
Newly incorporated companies may apply for it before the end of their first financial year and it should be noted that companies that file the blue tax return must observe a set of requirements for recordkeeping and accounting.
We recommend reaching out to our agents as there are various penalties for failure to comply with the tax filing submission dates and the tax returns. There are also penalties for underreporting due taxes.
Contact our Japan company formation agents for more information on the consumption tax as well as the general taxation regime.