Transactions subject to consumption tax

Japanese Consumption tax is imposed on domestic transactions. In the case of a service provision, if the service is provided in Japan, it is a domestic transaction (Article 4, Paragraph 3, Item 2 of the Consumption Tax Act).

Determining whether a service transaction is domestic or foreign

With respect to the provision of services via the Internet, such as the distribution of e-books, music, and advertisements (provision of electronic services), if, in principle, the “address, etc. of the person receiving the services” is in Japan, the provision of such services is a domestic transaction subject to consumption taxation.

Specific taxation methods for foreign businesses

First, the provision of electronic services is classified into “electronic services for business operators” and other services, and different taxation methods are applied to these two types of services.

Provision of electronic services for business operators

In the case of “electronic service provision for business operators,” the domestic operator receiving the service is obliged to file and pay consumption tax (reverse charge method). The foreign business operator providing such services must indicate in advance that the domestic business operator receiving the services will be required to file and pay consumption tax when the services are provided.

Whether or not a service falls under the category of “for business operators” is determined by the nature of the service or the transaction terms related to the provision of the service, and if the recipient of the service is “normally limited to a business operator”. In other words, services that are expected to be used by consumers other than business operators do not fall under the category of “for business operators” here.

Provision of electronic services for consumers

The provision of electronic services that do not fall under the “for-business-operators” category described above is defined as “provision of electronic services for consumers. With regard to the provision of electronic services for consumers, the foreign business operator that provides such services is required to file a tax return and pay tax.

Foreign businesses that do not have a domicile in Japan are required to appoint a tax agent to handle matters related to national taxation, such as the submission of tax returns and notifications and the payment of taxes.

With respect to the “provision of electronic services for consumers” provided by a foreign business operator, the domestic business operator that receives the provision of such services is, in principle, limited to deduct taxes on purchases, but those provided by a registered foreign business operator are eligible for the tax credit.

After the introduction of the invoice system in Japan, the registration system for foreign businesses will be absorbed into the registration system for qualified invoicing businesses, and those who have registered as foreign businesses as of September 1, 2023 will be deemed to have registered as qualified invoicing businesses (Article 45, Paragraph 4 of the Supplementary Provisions of the Consumption Tax Act effective October 1, 2023).

Conclusion

From the viewpoint of the taxation authorities, when the provider of services that are domestic transactions is a foreign business, there are more difficulties in actually ensuring effective tax reporting and tax payment than there are for ordinary domestic businesses. Therefore, the tax authorities try to achieve effective tax payment by providing incentives to the recipient of the services.

In other words, in the case of business transactions, the recipient of the service usually wants to take a credit for taxable purchases, so the service recipient is obliged to pay the tax declared by the service recipient (reverse charge). In this way, the service recipient can take a credit for taxable purchases.

In the case of consumer services, consumers are not concerned about the credit for taxable purchases, but there are cases where a business uses consumer services. In this case, only services provided by a registered foreign business operator (or a qualified invoicing business operator after the introduction of the invoice system) are eligible for the tax credit.