Introduction
In October 2023, Japan introduced the "Qualified Invoice Preservation Method (commonly known as the Invoice System)" as a way to claim input tax credits for consumption tax. Under this system, in principle,input tax credits are not allowed without the preservation of invoices issued by qualified invoice issuers.。
However, at the start of the system, there were many exempt businesses, and not all business partners would immediately become invoice issuers. Therefore, in Japan's tax system, to alleviate the burden on businesses due to sudden system changes,transitional measures regarding input tax creditshave been established.
Under these transitional measures, for a limited period, even transactions without invoices can deduct 80% or 50% of the equivalent amount of input tax.
1. Basics of the Invoice System and Input Tax Credits
Japan's consumption tax adopts a system of "input tax credits," where businesses calculate the tax amount to be paid by deducting the consumption tax paid on purchases and expenses from the consumption tax received on sales.
Before the introduction of the invoice system, it was possible to claim input tax credits as long as records and invoices were preserved, and there was not necessarily a strict distinction between whether the issuer of the invoice was a taxable or exempt business.
However, from October 2023 onwards, the following conditions became the principle.
- The invoice must be issued by a qualified invoice issuer.
- The qualified invoice must include necessary information (registration number, consumption tax amount by tax rate, etc.).
- Records and qualified invoices must be preserved.
If these requirements are not met, in principle, input tax deductions will not be allowed. This change particularly affectscompanies that have many transactions with tax-exempt businesses.Therefore, a transitional measure has been established as a phased transition.
2. Overview of the transitional measures for input tax deductions
The transitional measures for the invoice system allow for a certain percentage of input tax deductions for taxable purchases from businesses that are not qualified invoice issuers.Specifically, the following deduction rates have been set.From October 1, 2023, to September 30, 2026
80% of the input tax amount is deductible.
From October 1, 2026, to September 30, 2029
50% of the input tax amount is deductible.After October 1, 2029
No deductions (invoices will be required as a rule).
This measure allows for partial input tax deductions in transactions with tax-exempt businesses for a certain period after the introduction of the system.To apply this transitional measure, the following document retention is required.
- Retention of books
- Retention of invoices or receipts that comply with the invoice format.
In other words, it does not have to be a qualified invoice, but it is essential to retain documents that can confirm the transaction details.
In order to apply this transitional measure, the following document retention is required.
・Retention of books
・Retention of invoices or receipts that are in accordance with invoices
In other words, it does not have to be a qualified invoice,but it is essential to retain documents that can confirm the transaction details.である。
3. Transactions Subject to Transitional Measures
The transactions subject to transitional measures mainly include the following.
First,transactions with tax-exempt businesses.
Tax-exempt businesses are not required to register as qualified invoice issuers, so they cannot issue invoices. Therefore, purchases from tax-exempt businesses typically do not qualify for input tax deductions, but during the transitional period, a deduction of 80% or 50% is allowed.
Second,transactions with taxable businesses that are not invoice issuers.
Even if a business is taxable, it cannot issue invoices if it has not submitted a registration application. This case is also subject to transitional measures.
Third,small transactions with sole proprietors.
Many freelancers and small businesses are tax-exempt, and this transitional measure has a significant impact, especially in advertising production, IT development, and design work.
However, it is important to note that transactions that are originally not subject to input tax deductions (such as salaries, donations, and non-compensatory expenses) are also not subject to these transitional measures.
4. Practical Points for Foreign Companies
For foreign companies and foreign corporations based in Japan, the transitional measures of the invoice system include several important practical points.
First,confirmation of the registration status of business partners.
Whether or not a business is an invoice issuer can be confirmed by the registration number from the National Tax Agency, so it is desirable to manage the registration numbers within the supplier master management.
Next,management of the input tax credit rateis necessary.
During the transitional period, a deduction rate of 80% or 50% applies, so it is necessary to manage this separately from the usual input tax credits in the accounting system.
Furthermore,reviewing contract termsis also a consideration.
In transactions with exempt businesses, there may be cases where price negotiations and changes to contract terms are discussed, as input tax credits will not be possible in the future.
Especially in the case of Japanese subsidiaries or branches of foreign companies, the accounting departments at headquarters often do not fully understand Japan's invoice system, making the establishment of internal guidelines and accounting manuals important.
5. Risks After the Transitional Period
After October 2029, in principle,input tax credits will not be allowed without an invoice.Therefore, the transitional period can be seen as a preparation period for companies to establish their practical systems.
The following risks are anticipated after the end of the transitional period.
- Increased tax costs in transactions with exempt businesses
- Additional tax payments due to denial of input tax credits
- Strengthened verification of evidence during tax audits
Particularly in Japanese tax audits,the consistency of record-keeping and invoice preservationis a key focus, making the establishment of an invoice management system essential.
As a company, it is advisable to organize the registration status of business partners during the transitional period and consider procurement strategies based on future invoice acquisition status.
Summary
Japan's invoice system has established transitional measures regarding input tax credits to mitigate the sudden impact of the system's introduction.
Specifically, for purchases from non-invoice issuing businesses, input tax credits of 80% are allowed until September 2026, and 50% until September 2029. However, after October 2029, in principle, deductions will not be allowed without an invoice.
For foreign-affiliated companies and foreign corporations in Japan, managing the registration status of business partners, improving accounting processes, and reviewing contract terms are important practical issues.
The invoice system is not merely a change in invoice format; it significantly impacts corporate transaction management and tax compliance. Effectively utilizing the transitional period and preparing for the complete transition of the system in the future is also important from the perspective of tax risk management in Japan.
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