Consumption taxes

Main points

• The Consumption tax rate in Japan is 10%, except for food stuffs which is 8%
• It has to be collected and paid between businesses (B2B transactions)
• Qualified invoices need to be used in transactions, specifying CT
• The amount paid during B2B transactions is compensated by the amount collected during sales
• Price tags have to include the Consumption tax amount
• For businesses without taxable sales in Japan, a refund of CT paid in Japan is not possible.

Consumption tax is a national tax levied against the volume of business and through self-assessment. The consumption tax rate has been raised to 10% since October 1^st, 2019 for most goods and services.  This 10% includes a 2.2% local consumption tax rate. The reduced tax rate of 8% (local consumption tax, 1.76%) is applied to sales of food and beverages, except for alcoholic drinks and dining out, and sales of newspapers published more than twice a week (under subscription contracts). This raise has been decided as a measure to help reduce the national debt.

Domestic transactions subject to consumption tax include the transfer or rental of assets or the provision of services as a business in Japan by an enterprise. Import transactions such as cargo retrieved from a bonded zone are also liable.

Notable exemptions include export transactions and export-like transactions such as international communications and international transport. Capital transactions, financial transactions, and some transactions in the fields of medical care, welfare and education are also non-taxable.

Under the Japanese Consumption Tax Law (JCT), small enterprises with taxable sales of ¥10 million or less in the base period (e.g. the period two terms prior to the current tax year) do not need to file a CT return. This is only an exemption from filing, and as such, tax-exempt companies are still required to pay JCT to the vendor or service supplier when purchases are made.

Similarly, the JCT Law does not prohibit tax-exempt enterprises from charging CT to its customers. Tax-exempt enterprises are, in effect, allowed to keep the collected taxes minus the CT on purchases. For some businesses this may result in significant windfalls, although these are subject to corporate income tax.

CT has to be collected on all transactions made by companies, even business to business transactions. It means that a company will also pay the Consumption tax when it purchases goods or services for its business activities. However, the amount of CT paid will be compensated with the amount of the CT collected. Companies collecting Consumption Tax in their business activities must file returns and pay only the difference between the amount received and the amount paid during the taxable period. If the amount of consumption taxes on purchases is more than the amount of consumption tax on taxable sales, the difference can be refunded by filing in a tax return. Foreign companies should be aware that they cannot obtain a refund for CT paid in Japan, without having taxable sales in the country.

CT is due on all incomes deriving from domestic business transactions done by companies. In retail businesses, price tags will have to include the Consumption tax amount. In a business-to-business environment though, invoices are usually issued with the net value of the service rendered on which CT is separately applied to result in the total amount due.

Further reading:

• JETRO, Taxes in Japan: Overview of Consumption Tax
• National Tax Agency: Information about Consumption Tax
• Tokyo Metropolitan Tax Guide

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