October 31, 2022
Japanís consumption tax reform will be effective from 1 October 2023
Japan is introducing a Qualified Invoicing System for consumption tax purposes (JCT) from 1 October 2023. In many cases, taxpayers do not understand the full impact of this change on their systems and business processes. In addition, the efforts and time required for the implementation are often underestimated. It is important to be aware of the new rule-set since non-compliance would negatively impact both the taxpayer as well as its business partners. For example, buyers could find themselves in a situation where they cannot credit input JCT in domestic purchases of goods and services. Moreover, they may face penalty taxes if inadvertently claiming an input JCT credit in their tax returns. Sellers could also damage their business relationship with their partners if they do not issue proper Qualified Invoices.
This Tax Alert summarizes implementation of the JCT Qualified Invoicing System and highlights common practical issues to consider.
Japanese consumption tax (JCT) is similar to European Value Added Tax in many respects. It applies at 10% on domestic sales of goods and services as well as upon importation into Japan. There is also a reduced 8% applicable to certain food products and beverages. In addition, some transactions such as export transactions are exempt from JCT.
Japan is introducing a new invoicing system (Qualified Invoicing System) from 1 October 2023 that will closely follow VAT invoicing and hence will have features that are largely absent from the current JCT legislation. In summary, the fundamental changes are: (i) JCT taxpayers should register with the Tax Office to get a registration number as Qualified Invoice Issuers;1 (ii) Such Qualified Invoice Issuers need to issue Qualified Invoices to their business partners;2 and (iii) A buyer of products or services can only credit input consumption tax if the buyer receives a Qualified Invoice from a Qualified Invoice Issuer.3
In our interaction with companies, we see cases where taxpayers believe that the only thing to do is to register as a Qualified Invoice Issuer to get a registration number and to start to issue Qualified Invoices by adding that number and some other changes to the content and format. However, the introduction of the Qualified Invoice System goes beyond tax technical aspects and may require profound changes to companies' operational processes and IT systems on both their purchase and their and sales side.
The following is a (non-exhaustive) list of questions frequently asked by taxpayers that want to prepare for the introduction of new rules.
Issues for the sales side:
Issues for the purchase side:
The scope of the questions indicates that the impact of Qualified Invoices is not limited to tax. Taxpayers should also upgrade their IT systems and revise their internal procedures to address the above issues. Changes in IT systems can require time especially in cases where the taxpayer uses a global IT system which should be amended to meet Japan-specific requirements for Qualified Invoices.
An approach towards implementation
As the above shows, the introduction of Qualified Invoices can become a complex matter but what would be a reasonable approach? As a first step, taxpayers should look at the current operations (as-is) and conduct a Fit-Gap analysis. The second step would be to identify and to agree on what changes should be made from an operational and IT systems perspective to be in line with the Qualified Invoicing System. The third step would be to implement these changes.
Potential next steps
Time considerations are very important. It is difficult to say how long it would take to be ready to issue Qualified Invoices. Generally speaking, our experience shows that the length of the process would largely depend on the scale of the business, the volume of transaction types and complexity and number of IT systems at the taxpayer. Time is limited and there is less than one year remaining to implement the necessary changes.
It is important to keep in mind that non-compliance with these new rules can cause issues for the taxpayer and its business partners as well. For example, the buyer cannot credit input JCT if it does not receive a proper Qualified Invoice. Taxpayers should start implementation of the Qualified Invoicing System as soon as possible if they have not done so yet.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Tokyo