Tax Accountant for Foreign Companies and Foreigners in Japan

I. Japan consumption tax on overseas online service provider from October 2015

1. Taxable online service
Consumption tax at the rate of currently 8% and 10% as from October 2019 is levied on provision of copyrighted work (including licensing of copyrighted work) and provision of other service in Japan through telecommunication lines (“online service”) by overseas provider for remuneration as from October, 1 2015.
It is previously recognized as out-of-scope of the consumption tax based on location of the service provider, and redefined as taxable service in Japan based on location of the client.

Tax authority illustrates taxable transaction as follows;

• Provision of digital content of book, news, music, movie, software through internet
• Provision of crowd software, data base, data storage
  Internet advertisement
• Provision of site of shopping, auction, software sales,
  
• Provision of hotel or restaurant reservation for commission from hotel and restaurant,
• Language lesson through internet, Continuous consultation by e-mail, telephone.

Not taxable;

• Simply allowing use of telecommunication lines
• Cross-border report supplementary to service completed outside Japan, like internet banking, reply from analyst or researcher, correspondence with lawyer for litigation outside Japan

Location of online service provider and its client is determined principally by location of head office or domicile as follows;

• Corporation: Head or main office is located in Japan (“Japanese corporation”), otherwise foreign corporation
• Individual: domiciled in Japan for 1 year or longer (“resident”), otherwise non-resident

The service provider is supposed to judge the location of the client by reconciliation with the client’s credit card information or other reasonable measure.

Change of scope of consumption tax on online service is summarized as follows;

Provider of online service	Client	Previously	New rule
Japanese corporation	Japan branch of Japanese corporation	Taxable	Taxable
	Foreign branch of Japanese corporation	Taxable (but export exemption)	Taxable or Out-of-scope (Note 1)
	Foreign branch of Foreign corporation	Taxable (but export exemption)	Out-of-scope
	Japan branch of Foreign corporation	Taxable	Taxable or Out-of-scope (Note 2)
Foreign corporation	Japan branch of Japanese corporation	Out-of-scope	Taxable
	Foreign branch of Japanese corporation	Out-of-scope	Taxable or Out-of-scope (Note 1)
	Foreign branch of Foreign corporation	Out-of-scope	Out-of-scope
	Japan branch of Foreign corporation	Out-of-scope	Taxable or Out-of-scope (Note 2)

(Note 1) Online service attributable only to Client's sales outside Japan is out-of-scope, otherwise taxable.
(Note 2) Online service attributable to Client's sales in Japan is taxable, otherwise out-of-scope.

Taxable online service is classified into 2 types, either service to business use (“B2B”) or service to a consumer (“B2C”), on which the taxation varies;

(1) B2B
B2B should be characterized by either;

• Service in nature of those provided to Japanese corporation or resident carrying business (“enterprise”) such as internet advertisement, provision of online reservation of hotel and restaurant (for commission from hotel and restaurant), provision of internet sales site of game or software, or
• Business use is stipulated in contract concluded through negotiation and tailored for the client. Transaction through online application is excluded from B2B when the online site cannot actually bar the consumer from entering into contract. Warning of “business use only” does not suffice.

(2) B2C
Any taxable online service which does not qualify for B2B is classified to B2C. B2C is provided for consideration generally to the public, including but not limited to;

• Online service of digital book, news, music, movie and software
• Online service of software, data base, data storage available from cloud server
• Online shopping or auction site (while provision of internet sales site of game or software is B2B)

2. Taxation on B2B
Although B2B overseas provider of online service charges the client at a price exclusive consumption tax, the client is supposed to recognize the consumption tax as if the price included consumption tax and bear the consumption tax liability so calculated as its own liability called “reverse charge”. The client recognizes not only the consumption tax liability (“output consumption tax”) reversed from B2B overseas provider but also consumption tax deemed to be paid to B2B overseas provider (“Input consumption tax”)
B2B overseas provider is required to notify the client of the client’s obligation of the consumption tax filing and settlement or state “the transaction is subject to reverse charge for Japan consumption tax purpose”, while lack of the notification or statement does not exempt the client from the obligation.

Differently from EU country’s invoice system not introduced to Japan, the client’ accounting record needs to state “reverse charge” to claim for consumption tax credit against its output consumption tax, while extent to which it is creditable varies on client’s taxable sales ratio (note 1).

Output consumption tax liability shifted from and input consumption tax paid to the overseas provider is identical. The client expenses nothing further when the input consumption tax can be fully creditable against the output consumption tax or when the client qualifies for certain small scale enterprise or other relief to be described in the next.

Certain small scale enterprise as described in I.5. is exempt from consumption tax filing and payment no matter the reverse charge is involved.
For the time being, another relief is provided to the following client. They are exempt from recognizing both output and input consumption tax on B2B transaction.

• The client having taxable sale ratio of 95% or over (note 1), or
• The client users the simplified taxation (note 2).

(note 1) Taxable sales ratio = Taxable transfer of asset, lease, service provision / Transfer of asset lease, service provision in Japan. The calculation excludes B2B transaction.
(note 2) input consumption tax is generally creditable against output consumption tax to the extent partially or entirely proportional to the taxable sale ratio. However when the taxable sales in Japan during the year 2 years prior to the current year is not more than JPY50 million, the enterprise is allowed to calculate the amount of creditable input consumption tax simply by a fixed proportion to the output consumption tax at the rate of 40% to 90% varying on the business category (so called “simplified taxation”), e.g. retail seller can treat 80% of the output consumption tax creditable (offset) resulting in net tax liability equivalent to 20% of the output consumption tax regardless of the amount of the input consumption tax.

3. Taxation on B2C
B2C overseas provider charges the client at a price inclusive consumption tax and B2C overseas provider must file and settle the consumption tax in Japan. B2C overseas provider having no office in Japan needs to appoint the tax representative in Japan to administrate the consumption tax filing and the payment in Japan.
In addition B2C overseas provider is supposed to be registered with Japan National Tax Agency and receive the registration number. Differently from EU country’s invoice system not introduced to Japan, the client of B2C needs to keep the invoice/receipt from B2C overseas provider corroborating both the service provider’s burden of consumption tax liability and the registration number valid at the time of service provision. Otherwise the client of B2C cannot claim for credit of the input consumption tax credit charged by B2C overseas provider against the client’s output consumption tax, resulting in additional cost of the client. B2C provider also must keep the copy of the invoice/receipt for 7 years.

Ata Tax Accountant Office provides services for overseas online provider including the consumption tax representative role for overseas online provider, registration with National Tax Agency and preparation of the consumption tax return.

4. Arrangement on continuing contract across October 1, 2015
The new rule is effective on the online service provided on and after October 1, 2015. However online service across the date of October 1, 2105 based on the contract concluded by March 31, 2015 is not subject to the new rule. If this is the case, online service by overseas provider is out of scope of Japan consumption tax. Exceptionally following contract across the date of October 1, 2105 is excluded from this arrangement and so captured by the new rule;

• Contract changing price on and after April 1, 2015
• Contract on monthly renewal

5. Exemption for small scale overseas online provider from consumption tax filing and payment
Enterprise is exempt from consumption tax filing and payment when the taxable sales in Japan during the year 2 years prior to the current year is not more than JPY10 million. (Special rules apply for the initial and the second year after establishment, but not explained here) This small scale exemption applies also to overseas online service provider.

• B2B. Small scale exemption of B2B overseas provider does not affect the client’s consumption tax obligation as illustrated below;

		Overseas provider qualifies for small scale exemption
		Yes	No
Client in Japan qualifies for small scale exemption	Yes	Neither the client nor the provider is required to file or pay the consumption tax
	No	The client bears the consumption tax liability on "reverse charge" regardless of whether the overseas provider qualifies for small scale exemption

• B2C. No matter whether B2C overseas provider qualifies for small scale exemption, B2C provider charges the client at a price inclusive consumption tax. However B2C overseas provider is not required to file or pay the consumption tax when the provider qualifies for small scale exemption. When B2C overseas provider’s taxable sales in Japan during the year 2 years prior to the current year is not more than JPY50 million, B2C overseas provider can elect the simplified taxation described in 2. (note2).

6. Tax filing and payment
The tax filing and the settlement of the consumption tax is due 2 months after the fiscal year-end for the corporation and 3 months after the following calendar year-end for the individual. The provisional tax paid, if any, is netted with the annual tax. When the creditable input consumption exceeds the output consumption, the excess will be refundable through filing the consumption tax return. The company who want to collect the tax refund early can elects the consumption tax filing monthly or quarterly instead of annually. Tax payer having no office in Japan needs to appoint the tax representative in Japan to administrate the consumption tax filing and the payment in Japan.

Ata Tax Accountant Office provides services including the consumption tax representative for foreign corporation and preparation of the consumption tax return

II. Reverse charge to consumption tax on B2B sports or entertainment by overseas provider

As from April 1, 2016, provision of the following service from overseas provider defined by the same as of overseas online provider in I.1. to sponsor or promoter in Japan for remuneration (“B2B entertainment or sport”) is subject to consumption tax at the rate of currently 8% and 10% as from April 2017, and the sponsor or promoter in Japan bears the consumption tax liability on B2B entertainment or sport through reverse charge described in I. 2.

• Featuring in movie, TV in Japan as professional
• Theatrical or musical performance as actor, actress or musician
• Participation in athlete competition (including remunerated or awarded amateur)

Overseas provider’s provision of service to many and unspecified people without involvement of sponsor or promoter in Japan is not subject to reverse charge. If this is the case, the overseas provider itself bears the obligation of the consumption tax filing and settlement as is the case before the new rule.

Accommodation or other travel expense born and paid directly by sponsor or promoter in Japan can be treated as expense of sponsor or promoter differently from remuneration of B2B entertainment or sport subject to reverse charge.

Same manner of taxation on B2B online service in I.2. applies to B2B sport or entertainment on the following;

• Overseas provider ‘s notification to sponsor or promoter in Japan
• Exemption from recognizing both output and input consumption tax on B2B transaction
• Exemption of consumption tax filing and payment. Small scale exemption of B2B sport or entertainment provider does not affect the client’s consumption tax obligation as summarized in I.5. as well.
• Tax filing and payment also in I.6.

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