Consumption tax refers to taxes levied on “taxable sales” – that is, the transfer of assets by business operators within Japan. It also includes the transfer of foreign goods into the country. If you are looking to put up an office or business in Japan, it is important to understand how consumption taxes will apply to your particular case.
Below is a guide to the consumption tax as it applies to business operators in Japan. Please do note, however, that these guidelines are not definite and are therefore subject to change depending on the new regulations that the government might release.
Overview of Consumption Tax
Japan’s consumption tax covers all transactions related to the exchange of assets between and among business operators in the country. This includes the sale and rental of assets, and provision of services. For a transaction to be subject to levies, it has to satisfy the following conditions:
- The transaction was made in Japan
- The transaction was conducted by a business entity for the purpose of supporting its operations
- The transaction was made for compensation – i.e. salary for consulting services
- The transaction involves the transfer of assets or the provision of services
For instance, rental fees and proceeds from the sale of machinery and other business assets are subject to consumption tax. Contract work, consultancy services and other transactions meant to support business operations are also subject to the same tax.
Amount of Taxable Sales
The amount of taxable sales refers to the total amount of sales and transactions subject to consumption tax. Discounts, rebates and returns are not covered by consumption tax and are therefore deducted from this amount.
Businesses and entities that are required to file consumption tax returns in Japan include the following:
- Businesses with reported taxable sales of more than 10 million yen during the base period
- Businesses who may not have taxable sales of 10 million yen in the base period but have submitted the “Report on the Selection of Taxable Proprietor Status for Consumption Tax.”
- Businesses whose taxable sales for a Specified Period (the first six months before the Tax Period) is more than 10 million yen. The total amount is based on the total amount of salaries and other similar payments instead of on the amount of taxable sales.
All concerned business entities that fall under conditions 1 and 3 above are required to submit a notification to the District Director of the Tax Office. For Category 1 businesses, they need to submit the “Notification of Taxable Enterprise Status for Consumption Tax (for base period).” Meanwhile, Category 3 businesses are required to submit the “Notification of Taxable Enterprise Status for Consumption Tax (For specified period).”
Business entities whose taxable sales during the Base Period for the Taxable Period is equal or less than 10 million yen are exempt for consumption tax obligation. In addition, certain transactions are exempt from Consumption Tax.
For transfer of assets where a non-JPY currency is used, the amount of sales should be converted into JPY using the prevailing market rate on the date of the said transaction.
A foreign business per Article 2, Paragraph 1, Item 5 of the Income Tax Act refers to non-resident entity and to foreign corporations based on Article 2, Item 4 of the Corporation Tax Act.
Non-resident refers to an individual who is not a resident in Japan. Residents are referred to individuals whose domicile is in Japan and have resided in the country for more than one year. Meanwhile, corporation is considered a foreign entity if its head office or headquarters is located in another country. Domestic corporations refer to businesses whose head office is located in Japan.
Consumption Tax Rate
The consumption tax rate is 8%. This includes the National Consumption Tax rate of 6.3% and a Local Consumption Tax rate of 1.7%)
Filing of Consumption Tax Returns and Payment
Businesses and sole proprietors who do not have domicile and residence in Japan apart from their office in the country, or a foreign corporation needs to nominate a Tax Agent. The Tax Agent is the entity’s representative in Japan and will be responsible for submitting the Consumption Tax Returns and tax payments in the country on behalf of the taxpayer.
To nominate a tax agent, the taxpayer needs to submit a “Notification of Tax Agent” to the District Director of the local Tax Office where the business is located.
Tax Accountant Proxy
Certified Public Tax Accountants (CPTA) and Certified Public Tax Accountants Corporations refer to entities and professionals that provide services as per the Certified Public Tax Accountant Act. A CPTA is authorized to perform the following services:
- Tax proxy – to act as a representative in relation to the processing and submission of tax returns and applications with the Tax Office
- Tax document preparation – preparing the documents for submission to the Tax Office
- Tax Consultation Service – this involves all consulting assistance on matters related to the computation and preparation of taxable bases before filing the tax returns
Place for Tax Payment
Notifications, returns and other documents related to the filing and payment of Consumption Tax in Japan should be submitted to the District Director of the Tax Office that has jurisdiction over the company’s “Place for Tax Payment.”
For businesses owned by foreign national proprietors, as well as businesses whose head office is not located in Japan, the Place for Tax Payment refers to the following:
- Non-resident sole proprietor
- Office Location – for businesses with an office, facility or establishment located in Japan. If there is no physical location for the business in Japan, the Place for Tax Payment can be the sole proprietor’s relatives’ address or domicile.
- Primary Asset’s Location – if there is no physical office, the place for tax payment may be the location of the company’s primary asset.
- Most recent Place for Tax Payment – if the two conditions do not apply, the location of the previous place for tax payment will be used
- Location of other tax returns, claims and related transactions – if the conditions above are not applicable to the proprietor’s situation
- Kojimachi Tax Office – if the above conditions are not applicable.
- For foreign corporations
- Office Location – the location of the company’s office, business facility or any equivalent in Japan
- Location of the Primary Asset – if the above is not applicable, the location of the company’s primary asset or where it receives payment for real estate lending
- Most recent place for tax payment – in instances where the company used to have a Place for Tax Payment but no longer has this facility
- Location selected for tax returns, claims and other transactions in relation to consumption tax
- Kojimachi Tax Office – if the conditions above do not apply
Consumption Tax is a levy placed on the sale and rental of business assets in Japan. It also includes assets imported into Japan from other countries. Proper reporting and payment of tax returns is crucial for every business in the country. For foreign nationals that have set up offices in Japan but whose main office or headquarters is located elsewhere, nominating a tax agent and/or tax proxy is a must.
Consumption Tax FAQs
Is medical insurance for my staff subject to consumption tax?
Medical care and medical insurance is one of the many exemptions to the items and transactions subject to consumption tax. Other items include education fees (tuition, entrance and examination fees), lease of land and housing units,
My company produces items for export and transacts with foreign partners as part of its business. Do I need to pay consumption tax for these transactions?
Export of goods, including the transport of these products is exempted from consumption tax.
What transactions can be tax deductible?
The following transactions are eligible for tax deductions:
- Principle (regular consumption) – if the taxable sales are at least 95%, the consumption tax for this transaction is deductible; otherwise, the amount to be deducted is based on the itemised consumption tax for every purchase. Always keep your invoices and accounts ready to be able to qualify for this deduction.
- Special Provision (simplified taxation system) – if the taxable sales amount to 200 million yen or less during a specific base period, you may use the final sales tax and the deemed rate of purchases as the consumption tax for these transactions.
Is the consumption tax included in the price tag?
Yes, it is compulsory to include the consumption tax into the price tag.
Can the consumption tax change?
Yes. There are ongoing debates about raising the consumption tax to 10% starting October 2019.