Introduction
For foreign companies operating in the Japanese market, compliance with consumption tax is becoming increasingly complex. The invoice system (Qualified Invoice Preservation Method) that started in October 2023 requires foreign corporations conducting business in Japan to adhere to stricter tax management than ever before. Additionally, there are many cases where businesses start without a sufficient understanding of the system, including issues related to cross-border transactions such as the provision of "telecommunications services" (so-called electronic services), the taxability of non-resident businesses, registration obligations, and filing obligations.
This article systematically organizes the consumption tax responses that overseas companies entering Japan should be aware of, from the perspective of international tax experts, and explains the practical pitfalls and points of tax audits.
1. The Basic Structure of Japan's Consumption Tax for Foreign Companies
The Japanese consumption tax is levied on "the transfer of assets within the country" and "the provision of services conducted within the country." Even foreign companies are obligated to pay consumption tax if they conduct taxable transactions in Japan.
The specific issues unique to foreign companies are as follows.
・Taxable transactions can occur even if there is no legal entity in Japan.
Examples: Providing services to Japanese companies, sales through a Japanese base, offering electronic services, etc.
・Whether there is a PE (Permanent Establishment) in the country is irrelevant to consumption tax.
In corporate tax, a PE determination is necessary, but for consumption tax, the focus is on the "location of the transaction," which means it can be subject to taxation regardless of the presence of a PE.
・The determination of the "location" for taxable transactions is complex
Service provision has different criteria for judgment depending on the type of transaction, and it is an area with a lot of misunderstandings.
In particular, "telecommunications services" such as e-books, SaaS, online advertising, and hosting services are subject to taxation even when provided by non-residents, as long as they are directed towards Japan, which creates the necessity for consumption tax registration.
2. Invoice System and Registration Obligations for Foreign Companies
As of October 2023, taxable businesses in Japan are required to keep invoices (qualified invoices) in order to claim input tax credits. This also applies to foreign companies.
The key points for registering a foreign company are as follows.
・If there are taxable sales in Japan, registration is required.
Even foreign companies are required to issue qualified invoices (with T numbers).
・Optional registration is also possible.
Due to requests from business partners, there are many cases where registration becomes practically essential.
・It is often necessary to appoint a Tax administrator.
When foreign businesses without an address in Japan register, it is often necessary to appoint a Tax administrator.
One common misunderstanding among foreign companies is the belief that "registration is not required because they are non-residents" and "they are not subject to taxation because they do not have a company in Japan." After the introduction of the invoice system, Japanese companies are increasingly requiring foreign companies to provide invoices for input tax deductions, making registration a necessary condition for doing business.
3. Examples of Taxable Transactions in Japan by Foreign Companies
A typical example of transactions conducted by foreign companies in Japan that incur consumption tax is as follows.
・Transfer of assets within the country
Example: Sales of products for Japan, import sales, etc.
・Provision of services within the country
Example: maintenance services, on-site consulting, technical service provision.
・Provision of telecommunications services
For example: SaaS, cloud, online advertising, app billing. In the case of B2C, foreign companies have a tax obligation.
・Cross-border service provision
The determination of the "place of service provision" is complex and requires specialized knowledge.
・Secondment of personnel to Japanese companies
Due to the mechanism of personnel cost settlement, it may be evaluated as "provision of services" and become a taxable transaction.
Areas with many errors in tax audits include the provision of services between overseas headquarters and Japanese subsidiaries, licensing fees, and the provision of marketing services. There are tax risks in both transfer pricing and consumption tax.
4. Consumption Tax Registration and Tax Agent System
When foreign businesses file and pay consumption tax in Japan, in many cases, the appointment of a Tax administrator is required.
The role of the Tax administrator is as follows.
・Receipt of Notification from the Tax Office
・Submission of the declaration
・Tax filing services
The typical examples where appointment is necessary are when becoming an invoice issuing business or when conducting continuous taxable transactions in Japan. It is important to note that this is a different system from the Tax administrator system for corporate tax and income tax.
5. Practical Response to Invoice Issuance and Consumption Tax Declaration
When foreign companies handle consumption tax in Japan, the following items are particularly important in practice.
・Entry of registration number (T number) on the invoice
・Standardization of Exchange Rates in Foreign Currency Transactions
・Compliance with the Electronic Books Preservation Act (Obligation to Preserve Electronic Transaction Data)
・Management of Reporting Frequency (Annually, Quarterly, Monthly)
・Record of Tax Determination for Electronic Service Provision
・Organization of materials for tax audit response
Since the introduction of the invoice system, tax audits on foreign companies have clearly increased, with many formal errors (omissions and misjudgments) being pointed out.
6. Internal Management and Documentation that Overseas Companies Should Establish
Proper internal controls and documentation significantly reduce tax risks. The items that overseas companies should establish are as follows.
・Invoice Issuance Flow and Invoice Template
・Internal Rules for B2B and B2C Classification
・Tax Classification Manual by Transaction Type
・Documentation of Foreign Currency Conversion Rules
・Systematic storage of contracts, billing data, customer information, and log data
・Standardization of Tax Audit Response Materials
Documentation also leads to improved explanatory power for partner companies and is essential from a compliance perspective.
7. Summary
For foreign companies, Japan's consumption tax can sometimes impose a greater practical burden than corporate tax. Particularly with the introduction of the invoice system, formal requirements such as registration obligations, invoice requirements, and electronic data storage have been strengthened. Additionally, transactions involving non-residents, such as the provision of telecommunications services and the dispatch of personnel, have complex tax determination criteria, and making incorrect judgments can lead to significant additional taxes during tax audits.
When foreign companies expand their business in Japan, the following three points are the most important.
・Understanding the invoice system and taxable transactions correctly
・Establishing the appointment of a tax manager and the declaration system
・Do not make mistakes in the tax determination of cross-border transactions, including electronic services.
To balance business reliability and tax compliance in the Japanese market, a professional understanding of the consumption tax system and the establishment of a continuously functioning internal structure are essential. By collaborating with tax accountants who have practical experience in international taxation, foreign companies can appropriately respond to Japan's complex consumption tax system while focusing on business growth.