JITACS - TIPS - Taxes in Japan - Overview of Consumption Tax (Shouhi Zei) in Japan

Overview of Consumption Tax (Shouhi Zei) in Japan

Last Update 2012/1/6

Nature of Consumption Tax
	Consumption Tax (CT) is similar to Value Added Tax in Europe. This can be categorized as a multistage indirect tax, and charged to almost all domestic transactions.


There are 2 types of Taxpayers for Consumption Tax.
1.	Business Person
		Generally, if a Business Person executes sale of taxable assets, lending of taxable assets, or performing of services with a price in Japan, the Business Person is liable for Consumption Tax. Business Person includes both individuals and corporations, but this overview describes Consumption Tax of corporations only. If the sale in the Base Period (usually 2 years ago) is equal to or less than JPY 10 million yen, the Business Person does not have to pay Consumption Tax, unless otherwise is elected. From 2013, another test to check the sales volume or total salaries of the first half of the previous year will be needed to decide whether the Business Person is liable for Consumption Tax or not. There is a special rule for a newly established corporation. Generally, if the amount of capital is less than JPY 10 million yen, it is not liable for consumption tax unless otherwise is elected.
		The above applies to foreign corporations even if the corporations do not have a branch or a Permanent Establishment (PE) in Japan.
2.	Goods imported from abroad
		Generally, all the persons who import goods from abroad have to pay Consumption Tax.

Tax Codes
	Consumption Tax Law (CTL, sometimes referred to as Consumption Tax Act, in Japanese Shouhi Zei Ho)

Filing Due Date
	Generally, Consumption Tax Return has to be filed within 2 months after a fiscal year end. Generally, NO EXTENSIONS are allowed !!

Tax Rate
	Currently, there is only 1 rate which is 5%. 4% is National Consumption Tax portion and 1% is Local Consumption Tax portion. As for the goods exported from Japan and services rendered to Non-Residents, generally, Consumption Tax Rate is 0%, and called as Tax Exempt (Men-zei) Transactions.
	* It is planned that Tax Rate is increased to 10 % by the middle of 2010’s. The increased revenue is planned to be used for social insurance.

Type of Transactions
	1.	Taxable Transaction: A transaction which CT is charged.
	2.	Tax Exempt (Men-Zei) Transaction: The same as 0% CT. A transaction which is similar to export that includes a transaction to export goods and certain services performed to a Non-Resident. Transportation of Passengers or Cargo, Telecommunication, or mail between Japan and other countries also falls into this category. It is required to keep certain documents to be eligible for this treatment.
	3.	Non-Taxable (Hi-Kazei) Transaction: A transaction which CT is not charged because of nature of transaction or because of government policy.
	4.	Out-Of-Scope (Fu-Kazei) Transaction: A transaction which CT is out of scope. This type includes a transaction in an overseas country, a transaction without a price such as a general donation, contribution, and dividend on equity.

Non-Taxable (Hi-Kazei) Transactions
	Major Non-Taxable Transactions include the following. It is considered that AP accountants need to understand these so that they can record the Consumption Tax correctly.
	1.	Sale or Lending of Land, including rights on Land. However, lending of land for shorter than 1 month, or lending of land in association with premises such as parking lot is not a Non-Taxable transaction.
	2.	Sale of certain Securities and Monetary Assets including Government Bond and Stocks.
	3.	Sale of Payment Means in general.
	4.	Interest, Guarantee Fee, Insurance Premium, etc.
	5.	Sale of Postal Stamp, Stamp Duty, etc.
	6.	Sale of Gift Certificate, Prepaid Card, etc.
	7.	Most of Service Fee performed by government body.
	8.	Service Fee for Foreign Exchange Operation.
	9.	Certain Medical Service Fee except for cosmetic treatments or over-the-counter medicines.
	10.	Certain Service Fee for services provided under Long-Term Care Insurance Act.
	11.	Certain Service Fee for services provided under Social Welfare Act.
	12.	Certain Service Fee for delivering a child provided by obstetricians and other persons.
	13.	Service Fee for cremation or burial.
	14.	Sale or Lending of certain equipments for handicapped persons.
	15.	Fee for certain Schools.
	16.	Sale of certain books to be used at elementary schools, junior high schools or high schools.
	17.	Lending of certain housing to be used for dwelling.


Whether a transaction was executed in Japan is decided depending on the location as follows in accordance with type of transaction.
1.	Sale or Lending of Asset
	General Rule: The location of Asset when the sale or lending is executed.
	Exceptions:
	(1)	Ships: The location of Registration Agency.
	(2)	Airplanes: The location of Registration Agency.
	(3)	Mining Right, Quarrying Right etc: The location where the mine, the quarry etc. is located.
	(4)	Patent Right, Trademark Right, etc: The location of Registration Agency. If registered at multiple agencies, the main office address of seller/lender.
	(5)	Copyrights and know-how: The main office address of seller/lender.
	(6)	Goodwill, Fishing Right: The main office address of the person who performs the business.
	(7)	Securities (except for Golf Facility Usage Stock): The place where the Securities are located.
	(8)	Registered Government Bonds: The location of Registration Agency.
	(9)	Investment in Certain Corporations: The main office address of the legal person.
	(10)	Monetary Assets: The location of an Lender’s Office in charge of the sale.
	(11)	Golf Facility Usage Stock: The location of the Golf Course.
	(12)	Asset whose location is not clear: The location of Office in charge of the sale or the lending.
2.	Performance of Services
	General Rule: The location where the service is performed.
	Exceptions:
	(1)	Transportation of Passengers and Cargo between Japan and foreign countries: Either Departing Location or Arriving Location
	(2)	Telecommunication between Japan and foreign countries: Either Outgoing Location or Incoming Location
	(3)	Mail Services between Japan and foreign countries: Either Outgoing Location or Incoming Location
	(4)	Insurance: The location of office involved in the insurance contract.
	(5)	Information Provision or Design The location of office involved in the Information Provision or Design.
	(6)	Service performed in association with Research and Planning requiring Professional Science Technology that involves Construction or Manufacturing of Production Plant etc: The location where most of materials required for Construction or Manufacturing of Production Plant etc are obtained.
	(7)	Service whose location of performance is not clear : The location of office which involves in the performance of the service.
3.	Lending of Money
	The location of the office in charge of the Lending.


The following transactions are exempt from Consumption Tax.
(1)	Sale or Lending of Asset in the form of Export from Japan
(2)	Sale or Lending of Foreign Cargo
(3)	Transportation of Passengers or Cargo, or Telecommunication between Japan and foreign countries.
(4)	Sale and Lending of Airplanes or Ships that are mostly used for transportation of (3) above to Vessel Operators, and certain repairs paid to Vessel Operators
(5)	Transactions similar to above
	(a)	Sale, Lending or Repairs of Overseas Vessels to Vessel Operators, and services in association with Overseas Vessels
	(b)	Services in association with Cargo Handling, Transportation, Storage, Tally, Appraisal, etc of Foreign Cargo
	(c)	Mail between Japan and foreign countries
	(d)	Sale and Lending of Intangible Fixed Asset etc to Non-Resident
	(e)	Services to Non-Resident except for the following:
		(i)	Transportation or Storage of Assets located in Japan.
		(ii)	Eating, Drinking and Accommodation in Japan
		(iii)	VERY SIMILAR (Junjiru) services to above whose benefits can be enjoyed in Japan directly.
In order to be treated as a tax exempt transaction, certain documents have to be kept for 7 years and 2 months after a fiscal year end. The definition of Non-Resident is different from the definition in the Individual Income Tax Law, and includes a branch in Japan. It is defined in Foreign Exchange and Foreign Trade Act.


There are 2 types of calculation.
1.	Standard Method
	The basic calculation is as follows:
	CT on Taxable Sale – (minus) Amount based on CT on Taxable Purchases (“Purchases CT Deduction”)
	Unfortunately, calculation of Purchases CT Deduction is complicated. The calculation is different depending on the Taxable Sale Ratio.
		Taxable Sale Ratio= Taxable Sale (excluding CT) Gross Sale (excluding CT)
		Both Gross Sale and Taxable Sale include Tax Exempt Sale and Bad Debt Sale. Gross Sales includes Non-Taxable Sale, but does not include Out-Of-Scope transactions, Sale of Payment Means, Sale of certain Account Receivables, certain Repurchase Agreement of bonds (sell and buy: similar to financing). However, the gain or loss from certain Resale Agreement of bonds (buy and sell: basically receiving interest) are included in Gross Sale. As for certain securities, the amount to be add in Gross Sale is 5% only of the Sale Price.
	In order to be eligible for Purchase CT Deduction, supporting documents such as invoices, accounting books have to be kept in the office for at least for 7 years and 2 months after a fiscal year end.
		(1) If Taxable Sale Ratio is equal to or more than 95%, and from the fiscal year starting on or after 2012 April, if the Taxable Sale is equal to or less than JPY 500 million,
			Purchases CT Deduction = The same amount as CT paid.
		(2) If Taxable Sale Ratio is less than 95%, or from the fiscal year starting on or after 2012 April, if the Taxable Sale is more than JPY 500 million,
			The amount of Purchases CT Deduction is limited to the amount that corresponds to Taxable Sale.
			The taxpayer has to elect either of the 2 options, and if Pro-Rata is elected, the taxpayer has to maintain the elected option at least for 2 years.
			(i)	Individual Matching Method
				All of transactions have to be categorized into 3 types.
				(a)	Purchases associated with Taxable Sale Only
				(b)	Purchases associated with Non-Taxable Sale Only
				(c)	Purchases associated with both Taxable Sale and Non-Taxable Sale
				Purchases CT Deduction = (a) + (c) x Taxable Sale Ratio
				Instead of Taxable Sale Ratio, other reasonable ratio can be used if approved by the Tax Authority.
			(ii)	Pro-Rata Method
				Purchases CT Deduction = CT Paid x Taxable Sale Ratio
2.	Simplified Method
	If the Taxable Sale in the Base Period is equal to or less than JPY 50 million, the taxpayer can elect to use Deemed Purchase Ratio. If the taxpayer performs only 1 Business Type, the calculation of Purchase CT Deduction is as follows:
		Purchases CT Deduction = Net CT Received X Deemed Purchase Ratio
	Deemed Purchase Ratio is different depending on the Business Type as follows:
		Wholesale Business:			90%
		Retail Business:			80%
		Manufacturing Business:			70%
		Other Business:			60%
		Service Business:			50%
	Because Simplified Method uses only the Sales side numbers, No Refund is possible even if Purchases are bigger than the Taxable Sale. An election should be made cautiously. Once Simplified Method is elected, it is not allowed to change the method for at least 2 years.

Legal

Prepared by JITACS. All rights reserved. This document contains overview only. Please contact your Tax Consultants for the details. JITACS is not responsible for accuracy of the contents nor is not liable for any damages caused.