Japanese eCommerce – new eServices consumption tax

Mon Jan 25, 2016

Japanese eCommerce has been revamped with the government now requiring foreign businesses supplying eServices to Japanese consumers to account for the current 8% consumption tax. The new rules came into effect on October 1, 2015.

Japanese eCommerce

The bill amending the Japanese Consumption Tax (JCT) was passed on March 31. Registrations for the new digital consumption tax opened on July 1 and on August 17 Japan’s National Tax Agency (NTA) released a list of foreign digital service businesses thus far registered.

The key drivers behind Japan’s decision to produce this legislation are the concerns from Japanese eCommerce businesses of an unbalanced marketplace as they compete with foreign eCommerce businesses. Currently, under the existing Japanese Consumption Tax Act, foreign businesses are not taxed for the digital services that they supply to Japanese-based consumers.

A September 30 piece on the new Japanese eCommerce consumption tax, in The Japan Times, outlined the extent of this marketplace – and the potential revenues for the Japanese government:

“According to Daiwa Institute of Research Holdings, market sales pertaining to e-books and music purchased from overseas providers totaled ¥35.2 billion ($292.9 million) and ¥23.1 billion, respectively, in 2012.”

Affected eServices will include the purchase of digital books, music and game downloads, as well as advertising via the internet or telecommunications.

A registration system for foreign businesses will be established. This registration requires that the foreign business appoint a qualified agent, or to have its offices in Japan.

The new JCT aims to eradicate this trade imbalance by taxing foreign businesses supplying digital services to Japanese-based consumers, at the rate of 8% per transaction value. Just like the recent EU legislation on the cross-border supply of digital services, the new JCT only affects B2C supplies.

The Diet (the Japanese legislature) approved the bill on March 31 and the plan is to allow registrations for foreign businesses from July 1 this year.

Taxamo support for Japan Consumption Tax

The Taxamo solution will support compliance with Japanese Consumption Tax (JCT) via one simple integration.

Taxamo can also reveal the threshold for foreign businesses supplying these digital services. Only businesses with a taxable turnover of ¥10 million in Japan will be affected. This threshold of ¥10 million is the equivalent of USD$83,350, €74,700, or £55,000. 1

A business whose taxable turnover in Japan (2013 FY) is more than ¥10 million shall be a “taxable person” (2015 FY) under the new Japanese Consumption Tax Law and shall in turn account for Japanese Consumption Tax. With regard to B2C transactions, the foreign business will declare and pay Japanese Consumption Tax.

Definition of Japanese eCommerce

So what comes under the scope of the new legislation, what type of Japanese eCommerce will be affected? Well, there is a clear definition of eCommerce as services supplied via electric and telecommunication networks, excluding those ancillary to other transactions.

Affected services, therefore, are the cross-border supply of digital books, music downloads, and advertising via the internet or telecommunications to Japanese-based consumers.

The current Japanese legislative plans follow on from a series of countries and jurisdictions implementing similar rules for the taxation of the digital economy. The key change in legislation is that the location of the consumer dictates what tax to apply (be it in VAT or GST).

South Africa was one of the first countries (in June 2014) to introduce such a rule and since then the EU (on January 1, 2015) has followed suit. Other states across the globe such as Japan, Canada, Australia, New Zealand, Russia, and India are also preparing to introduce similar rules on the cross-border supply of eServices.

Definition of B2B and B2C transactions

Japanese “B2B transactions” are services that are clearly for businesses, concerning the nature, terms, etc., of the services provided (e.g. the provision of advertisement). Other transactions are “B2C transactions” (e.g. the provision of digital books and music), where a ‘non-taxable’ person i.e. not a business is the end consumer.

Japanese Consumption Tax (JCT) explained

From October 1, 2015, a foreign business providing B2C electronic commerce to Japanese residents will have to account for JCT.

Here are some of the precise details included in the new legislation:

  • A foreign business wishing to allow its customers to deduct their input tax for its B2C supplies of services will need to register with Japan’s National Tax Agency (here: http://www.nta.go.jp/foreign_language/).
  • A foreign business will be able to account for JCT without the above registration. However, in this case, their Japanese customers will not be able to deduct input tax for its B2C transactions.
  • ‘Reverse charge mechanism’ (where service recipients are required to pay tax rather than service providers) to be introduced for B2B transactions.
  • With regard to B2C transactions, the foreign business will declare and pay JCT.
  • A registration system for foreign businesses will be established (this registration requires that the foreign business appoint a qualified agent to represent its interests in Japan, or to have its offices in Japan). Input tax deduction will be permitted only if the foreign service provider is registered, in order to prevent input tax deduction without tax payment.
  • Registration procedures for foreign businesses are planned to start on July 1.

Diet approval

Update (Wednesday, April 8 – 11.30am)

On Tuesday, March 31, the Diet approved the bill to amend JCT. More details here: http://www.mof.go.jp/english/tax_policy/tax_reform/fy2015/tax2015ct.htm.

The Japanese government have also created a dedicated English language page on their Ministry of Finance page. This page can be accessed here: http://www.mof.go.jp/english/tax_policy/tax_reform/fy2015/fy2015ct_00.pdf

The new version of JCT affecting Japanese eCommerce will come into effect on Thursday, October 1.

Japanese government contact details

Here’s the contact website and this email address, for Japan’s METI (Ministry for Economy, Trade, and Industry – the ministry responsible for IT businesses) is also useful.

The Japanese government also plans to publish more English-language materials relating to the new JCT on their METI website in the near future.

Website: https://wwws.meti.go.jp/interface/honsho/committee/index.cgi/committee/9926

Email: consumption-tax-info@meti.go.jp

Note: Exchange rates correct as of 11.30am GMT on October 1, 2015 – via xe.com.

Note: Taxamo content is created for guidance only, please consult your local tax advisor for professional advice.

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