November 22, 2019
Japan: Overview of consumption tax hike and related tax reforms
The Japanese consumption tax increased to 10% on 1 October 2019 alongside the introduction of a new reduced rate system. The consumption tax in Japan now consists of two different rates: the standard rate of 10% and a reduced rate of 8%. This change will be followed by the introduction of the Qualified Invoice System (commonly referred to as the Japan Invoice Method) as the primary requirement for crediting input consumption tax from 1 October 2023 onward. The Itemized Invoice System will be adopted as a transitional measure prior to the introduction of the Qualified Invoice System. The timeline for reforms relating to these invoice systems is outlined below.
Consumption tax hike
The consumption tax rate increased to 10% on 1 October 2019 alongside the simultaneous introduction of a reduced rate of 8%. Taxable transactions taking place on or after 1 October 2019 are subject to either the standard rate of 10% or the reduced rate of 8%.
In the same manner as the transitional measures introduced with the previous tax hike from 5% to 8%, certain transactions taking place on or after 1 October 2019 are subject to transitional measures which provide for the application of the former rate of 8%. However, the transitional measures do not apply to transactions subject to the reduced rate. A summary of the transitional measures is as follows:
Implementation of the reduced rate system
The following transactions (sales) taking place on or after 1 October 2019 are subject to a reduced rate of 8%, comprised of a national tax of 6.24% and a local tax of 1.76%.
Requirements on accounting records and invoices
As the consumption tax now consists of two different rates, accounting records must state which taxable purchases are subject to the reduced rate in order to credit input consumption tax paid for taxable purchases. Moreover, under the Itemized Invoice System, invoices must state which items are subject to the reduced rate, have subtotal tax-inclusive amounts aggregated by tax rate, and be stored along with other relevant documents.
Qualified Invoice System
The Itemized Invoice System described above will be replaced by the Qualified Invoice System (commonly referred to as the Japan Invoice Method) on 1 October 2023. Under the Qualified Invoice System, the principle requirement for the crediting of input consumption tax will be the storage of qualified invoices which contain certain types of information including registration numbers and applicable tax rates. Qualified invoices will be issued by businesses which submit applications to a tax office and are registered as Qualified Invoice Issuers. Note that only taxable businesses can be registered as Qualified Invoice Issuers.
In principle, input consumption tax paid for taxable purchases from businesses other than Qualified Invoice Issuers, such as consumers and tax-exempt businesses, is not creditable. Notwithstanding the above, a transitional measure will allow for a certain ratio of input consumption tax to be credited and will be applicable for the designated periods described below.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Chiyoda-ku
Ernst & Young LLP (United States), Japan Tax Desk, New York