Introduction
When Japanese companies conduct business in China, it is very important to understand the "transfer of input tax corresponding to exempt sales" and "costing due to the difference in export tax refund rates" in Chinese VAT compared to the Japanese consumption tax system.
In conclusion, there are situations in Japanese consumption tax law that are economically similar to the phenomenon of input VAT being expensed corresponding to exempt sales in Chinese VAT. However, since the terminology, system structure, and treatment of export transactions differ significantly between Japan and China, misunderstanding can arise if one judges the correspondence based solely on names.
1. The basic structure of "taxable," "non-taxable," and "exempt" in Japanese consumption tax
In Japanese consumption tax, consumption tax is generally imposed on the transfer of assets within the country. This is called a "taxable transaction."
In contrast, transactions such as the transfer of land, transfer of securities, rental of housing, social insurance medical care, and certain educational services, where it is not appropriate to impose consumption tax for policy or institutional reasons, are classified as "non-taxable transactions."
Additionally, export transactions and international transportation are classified as "exempt transactions." The "exemption" in Japanese consumption tax not only means that consumption tax is not imposed on sales but also allows for deductions or refunds of the input tax corresponding to those sales. Therefore, Japan's export exemption can be said to be a system that is close to a zero tax rate in economic substance.
This point is the most important when comparing with Chinese VAT. China's "exemption" is closer to Japan's "non-taxable," while China's "zero tax rate" is closer to Japan's "export exemption."
2. Restrictions on the deduction of input tax corresponding to non-taxable sales
In Japanese consumption tax, when a business engages in both taxable and non-taxable sales, not all input tax can be deducted.
In calculating the input tax credit, the input tax corresponding to taxable sales can be deducted, but the input tax corresponding only to non-taxable sales cannot be deducted. Additionally, for inputs common to both taxable and non-taxable sales, it is necessary to allocate the deductible amount based on the ratio of taxable sales.
In this case, the Japanese consumption tax has two main calculation methods: the "individual allocation method" and the "overall proportional allocation method."
In the individual allocation method, the consumption tax amount related to taxable purchases is classified into those corresponding only to taxable sales, those corresponding only to non-taxable sales, and those common to both taxable and non-taxable sales. The portion corresponding to taxable sales is fully deductible, the portion corresponding to non-taxable sales is not deductible, and for the common portion, the deductible tax amount is calculated by multiplying it by the ratio of taxable sales.
On the other hand, in the overall proportional allocation method, the entire consumption tax amount related to taxable purchases is multiplied by the ratio of taxable sales to calculate the deductible input tax amount. This method does not distinguish between taxable sales, non-taxable sales, and common allocations for individual purchases, or if it does, it simplifies the overall allocation. However, it is important to note that if the overall proportional allocation method is chosen, it cannot be changed to the individual allocation method unless it has been applied continuously for more than two years.
Thus, in the Japanese consumption tax system, the eligibility for input tax credit is not determined solely by whether the purchase includes consumption tax. The deductible amount is determined by whether the sales are taxable or non-taxable, and which sales category the respective purchase corresponds to.
As a result, the input tax corresponding to non-taxable sales is not deductible and becomes a cost for the company in accounting and economic terms. This point is similar in economic substance to the treatment in China's value-added tax, where the input value-added tax corresponding to exempt sales is transferred from the input tax amount to expenses or costs.
3. Purchases from Exempt Businesses and Deduction Restrictions
The Japanese consumption tax has a feature not commonly seen in China's value-added tax, which is the "exempt business" system. Small businesses with taxable sales below a certain threshold during the base period may be exempt from the obligation to pay consumption tax.
After the introduction of the invoice system, purchases from exempt businesses that are not qualified invoice issuers cannot, in principle, claim input tax credits. However, to mitigate the impact of the system transition, a transitional measure allows for a partial deduction of the equivalent amount of input tax for a certain period.
This point differs from the restrictions on input tax credits corresponding to exempt sales. In the case of exempt sales, the restriction on input tax credits is based on the "nature of the sales," while in the case of purchases from exempt businesses, the restriction is based on the fact that "the supplier cannot issue a qualified invoice."
However, in both cases, the amount of input tax that cannot be deducted becomes a cost for the company.
4. Comparison with China's Value-Added Tax
In China's value-added tax, classifications such as "taxable," "exempt," "zero rate," and "non-taxable" are used. From a Japanese perspective, China's "exempt" may seem similar to Japan's "exempt," but in reality, they are different.
China's exemption does not impose value-added tax on sales, while also not allowing deductions for the corresponding input tax. Therefore, in terms of Japanese consumption tax, it is more akin to exempt transactions rather than export exemptions.
On the other hand, China's zero rate system allows for a zero tax burden on sales while permitting deductions or refunds for the corresponding input tax. In this respect, it can be said to be similar to Japan's export exemption system.
However, in China, even for export transactions, the refund rate may be lower than the statutory tax rate. In this case, the difference between the tax rate and the refund rate is not deductible or refundable, becoming a cost for export companies. In Japan's export exemption, the corresponding input tax is generally fully deductible or refundable, making this a significant difference from the Japanese system.
5. Conclusion
There are situations in Japan's consumption tax law that are economically similar to the transfer of input tax amounts corresponding to exempt sales in China's value-added tax. A typical case is when the input tax amount corresponding to exempt sales cannot be deducted, becoming a cost for the company.
However, Japan's "exemption" primarily refers to export exemptions and is a system that recognizes input tax deductions or refunds, so it does not have the same meaning as China's "exemption." China's exemption is closer to Japan's non-taxable sales, and it is practically useful to organize that China's zero tax rate is closer to Japan's export exemption.
When comparing consumption tax and value-added tax in international transactions, it is important to focus on the economic substance, rather than the terminology, such as whether tax is imposed on sales, whether the corresponding input tax amount is deductible or refundable, or whether the non-deductible tax amount becomes a cost.
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