Introduction
With the growing presence of global companies in Japan, compliance with the country's Consumption Tax and its new Qualified Invoice System (commonly known as the "Invoice System") has become a critical issue in international taxation. This is especially true for foreign companies, as the system directly impacts consumption tax calculations, input tax credits, and invoice issuance obligations for transactions within Japan. This article summarizes the key considerations for foreign corporations and foreign-affiliated companies to achieve compliance.
1. Overview of the Invoice System
Japan Invoice System is a consumption tax mechanism where sellers issue a "Qualified Invoice," enabling buyers to claim an input tax credit upon retaining that invoice. The system was fully implemented on October 1, 2023.
Foreign corporations and foreign-affiliated companies are also affected by this system when conducting business in Japan. The main points of the system are summarized as follows.
- Unless you register as an issuer of qualified invoices (referred to as a "qualified invoice issuing business") and obtain a registration number, you cannot issue qualified invoices.
- In order for the buyer to receive a deduction for input tax, it is necessary to receive a qualified invoice from the seller and to keep it in the records.
- After the introduction of the system, purchases from sellers who do not issue qualified invoices are generally not eligible for input tax deductions.
- However, for a certain period after the system starts, a limited measure is established as a "transitional measure," allowing deductions even for purchases from unregistered sellers (e.g., from October 1, 2023, to September 30, 2026, the input tax credit is 80%).
In this way, the introduction of the Invoice System changes the transaction structure, bookkeeping system, selection of business partners, and system compatibility, making it a "revision to be aware of," especially for corporations engaged in international transactions (foreign-affiliated companies, transactions between foreign corporations, and domestic bases in Japan).
2. Points Foreign Investment and Foreign Corporations Should Note in Japan
When foreign corporations and foreign-affiliated companies conduct transactions within Japan, it is important to organize the practical points that require special attention from the perspective of the Invoice System.
2.1 Registration Obligations and Issuance Obligations
If a foreign corporation records sales in Japan or issues invoices to Japanese clients, it is necessary to consider registration. Separately from the perspective of whether a foreign corporation should pay consumption tax in Japan as a "taxable business operator," registering as a qualified invoice issuer can be advantageous in terms of gaining trust from clients (buyers) and obtaining input tax deductions.
However, it is important to note that registering does not automatically make you a taxable business for consumption tax. For example, even if you were a tax-exempt business, registering could create an obligation to file consumption tax returns.
2.2 Restrictions on Input Tax Credit and Transitional Measures
From the buyer's perspective, the fact that purchases from unregistered sellers are not eligible for deductions is serious. This is particularly concerning when foreign companies engage in transactions with taxable entities in Japan, as becoming a "seller that cannot issue qualified invoices" means that the buyer cannot deduct the input tax amount, potentially affecting the business relationship.
As a transitional measure, from October 1, 2023, to September 30, 2026, sellers can deduct 80% of the input tax even before registration, and from October 1, 2026, to September 30, 2029, they can deduct 50%. However, after October 1, 2029, the requirement for a qualified invoice will be mandatory.
In the case of foreign companies, there are also changes regarding the special treatment of tax-exempt businesses, such as the exclusion from the simplified taxation system. For example, it is stated that from the tax period starting on or after October 1, 2024, "foreign enterprises" will not be subject to the simplified taxation system.
2.3 Impact of Transaction Structure, Contracts, Books, and System Compatibility
The introduction of the Invoice System goes beyond just changing the invoice format; it requires modifications to transaction flows, invoice issuance and receipt, record-keeping, and accounting and tax systems.
When foreign companies and foreign corporations expand their business in Japan, it is important not to overlook Japan-specific invoice compliance within the global ERP of the group headquarters and the international connection system of business partners.
Specifically, the following points should be considered:
- Establishment of a system to include the qualified invoice issuer registration number (registration number) on invoices
- Understanding whether there are sales or transactions within Japan, determining taxable business status, and confirming the obligation to file consumption tax returns
- Building a process to verify whether the trading partner (buyer/seller) is a registrant or not
- Whether invoices, delivery notes, contracts, payment documents, etc. meet the requirements as qualified invoices (verification of listed items)
- Renovation of the accounting system, invoice issuance system, and data storage system (electronic transactions and electronic ledgers) to be compliant with regulations
- Analysis of the impact on transaction structure and input tax credit practices, including group companies and affiliated companies / Preparation of explanatory materials for business partners
3. Risks and Countermeasures Commonly Faced by Foreign Investment and Foreign Corporations
In relation to the Invoice System, we will organize the risks that foreign companies should particularly pay attention to, along with the corresponding countermeasures.
3.1 Risk of Not Being Able to Claim Input Tax Credit
If a buyer (a Japanese company or a Japan-based entity) receives an invoice from a seller that is not a registered business (such as a foreign corporation), they may not be able to claim input tax deductions, which could lead to a deterioration of transaction conditions. This may affect price competitiveness and the continuity of transactions.
As a countermeasure, it is effective for the seller to register as a qualified invoice issuer themselves or to provide explanations to the buyer to encourage transactions with registered businesses.
3.2 Risk of Becoming a Taxable Business Due to Registration
When registered as a qualified invoice issuer, even tax-exempt businesses may incur a consumption tax filing obligation. Neglecting this point can lead to the risk of unreported consumption tax. This is particularly important for foreign corporations that record taxable sales in Japan, and it is necessary to confirm this point.
As a countermeasure, it is important to carefully examine the company's transaction status, sales scale, eligibility as a tax-exempt business, and tax period with a tax advisor before registration.
3.3 Risks of Intersection with Permanent Establishment (PE) and Tax Obligation Determination
The Invoice System is a framework related to consumption tax (indirect tax), but through seller registration and invoice issuance within Japan, it may induce risks related to income tax and corporate tax concerning the existence of a fixed place of business for foreign corporations in Japan, from the perspective of "permanent establishment (PE)." For example, if a foreign corporation establishes a base in Japan and engages in activities such as issuing invoices and sales, this could impact the determination of PE.
As a countermeasure, it is necessary to organize the actual situation regarding invoice issuance, inventory storage, and sales activities, and to discuss with a tax advisor the presence or absence of permanent establishment (PE) status, as well as to understand what implications invoice registration may have from this perspective.
3.4 Changes in Transaction Structure and Explanation Burden to the Release Destination
In the case of foreign capital or foreign corporations, whether the Japanese business partner is a registered business or not, as well as how to position the obligation to issue invoices in the transaction contract, can easily lead to revisions of contracts, price negotiations, and changes in transaction conditions.
As a countermeasure, it is important to explain the impact of the introduction of the Invoice System on invoice issuance and deductibility to existing business partners, and to establish the necessary processes.
4. Summary
The introduction of the Invoice System in Japan goes beyond a mere change in the format of invoices; it requires foreign corporations and foreign-affiliated companies to address multiple aspects such as transaction structures, tax calculations, group compliance, and system development.
As a foreign investment or foreign corporation, the following points should be particularly considered:
- Consider the registration status as a qualified invoice issuer at an early stage.
- Review the relationship with business partners (within Japan) and confirm whether they are registered businesses from the perspective of transaction conditions.
- Establish the accounting, billing, and record-keeping system in accordance with Japanese regulatory requirements.
- In anticipation of the transition period of the system (end of transitional measures), we will implement responses considering the impacts from 2026 to 2029.
- Recognize that compliance with the Invoice System may intersect with other international tax risks, such as permanent establishment (PE) risks and tax audit risks related to income tax and corporate tax.
The Invoice System is directly linked not only to domestic matters in Japan but also to risk management in international taxation.
Early response, system development, and collaboration with tax advisors are key to the stable operation of foreign companies' businesses in Japan.