When the consumption tax rate was increased in Japan on October 1, 2019, the “Rate-Classified Invoice Retention Method” was introduced. This method was implemented as a transitional measure for the four-year period until September 30, 2023, to facilitate separate accounting for multiple consumption tax rates of 8% and 10%.

The rate-classified invoice was an invoice that—in addition to the items included in the previously common invoices with a uniform tax rate—specified items eligible for a reduced tax rate and the total amount (including tax), with each tax rate classified. Delivery slips, bills, and receipts were also included in rate-classified invoices.

On October 1, 2023, the “Qualified Invoice Retention Method” (commonly known as, and hereafter referred to as the “Invoice System”) started, and we will cover this method also. This article discusses points such as the differences between rate-classified and qualified invoices, keeping in mind their respective methods and systems.

What’s in this article?

• What was the Rate-Classified Invoice Retention Method?
  
• Required information for rate-classified invoices and qualified invoices
  
• Other differences between the Rate-Classified Invoice Retention Method and the Invoice System
  
• Exemption from invoice retention: Transactions of less than ¥30,000
  
• Complying with changes in the tax system
  

What was the Rate-Classified Invoice Retention Method?

The Rate-Classified Invoice Retention Method was a method for saving account books and rate-classified invoices, etc. that accommodated multiple consumption tax rates. Under this method, businesses were required to perform separate accounting, recording items separately according to each tax rate.

Currently, Japan has consumption tax rates of 8% and 10%. This is because, when the consumption tax rate was raised to 10% in October 2019, a reduced tax rate system* was established, applying an 8% consumption tax rate to certain items to reduce the impact on low-income earners. Consequently, businesses are now required to implement cash register systems that can handle multiple tax rates and to create and issue invoices and other documents that separate items by tax rate.

As noted at the beginning, use of the Rate-Classified Invoice Retention Method ended on September 30, 2023, and instead, the Invoice System came into effect from October 1, 2023.

(*) The reduced tax rate system applies to daily essentials, but not all such items are eligible; the reduced tax rate is limited to the following types of items:

• General food and beverage (excluding medicines, quasi-drugs, alcohol, dining out, catering, and so on)
  
• Subscriptions to newspapers that are published two or more times a week
  

Required information for rate-classified invoices and qualified invoices

Before the consumption tax rate increased in October 2019, the previously common invoices required the names (or the company names) of the issuer and the recipient, as well as the date, amount, and details of the transaction.

In addition to these items, rate-classified invoices and qualified invoices each have other mandatory information that should be included.

Rate-classified invoices

Rate-classified invoices, which were active until the end of September, 2023, required the mandatory information from the previously common invoices plus the last two items in the list below:

• Issuer’s name or company name
  
• Transaction date
  
• Transaction details
  
• Transaction amount
  
• Name or company name of invoice recipient
  
• Eligibility for reduced tax rate
  
• Applicable tax rates (8% or 10%) and total transaction amount (including tax), with each tax rate classified
  

Qualified invoices

The qualified invoice, which is now active, is recognized as such when the two items below are added to the content of a rate-classified invoice. These invoices can state the total transaction amount (per tax rate) as either excluding or including tax.

• Registration number of the qualified invoice issuing business (explained in the following section)
  
• Consumption tax classified by tax rate
  

For examples of qualified invoices and how to fill them in, refer to the National Tax Agency’s “Outline of the Qualified Invoice Retention Method”.

Other differences between the Rate-Classified Invoice Retention Method and the Invoice System

Compared to the Rate-Classified Invoice Retention Method, the Invoice System is different in areas such as requiring prior registration of businesses, and tax-exempt businesses not being eligible for purchase tax credits.

Rate-Classified Invoice Retention Method

Before implementation of the Invoice System, the Rate-Classified Invoice Retention Method allowed for purchase tax credits on purchases through the retention of rate-classified invoices (or delivery notes, receipts, etc.) and corresponding account books for separate accounting. Taxable purchases from tax-exempt businesses were also eligible for purchase tax credits.

Furthermore, issuing rate-classified invoices was optional; there was no obligation to provide them as long as both the buyer and the seller agreed to this. (However, if the buyer requested a rate-classified invoice, the seller was obliged to issue it.)

On the other hand, businesses dealing only with the standard tax rate of 10% and businesses that were exempt from declaring and paying consumption tax could use the traditional invoices. However, for purchasers to benefit from purchase tax credits, sellers—regardless of whether they were tax-exempt or not—would still need to distinguish between the 10% and 8% tax rates and reflect this in their accounting system (including using rate-classified invoices).

Invoice System

Under the Invoice System, for buyers to receive purchase tax credits, they must retain qualified invoices including all mandatory details mentioned above, and sellers are obligated to issue such invoices.

Furthermore, a business must first register as a “qualified invoice issuing business” before it can create and issue such invoices. Once registered, the business will receive a registration number that can be printed on its qualified invoices. Prior application is needed to obtain this. If businesses previously exempt from paying consumption tax apply for this registration, they become taxable businesses. In other words, regardless of the business form—whether corporations, sole proprietorships, freelancers, etc.—even if their taxable sales are ¥10 million or less, by registering, they become businesses that must pay consumption tax.

For more information on business registration under the Invoice System, check the National Tax Agency’s “Procedure for Applying for Registration as a Qualified Invoice Issuing Business (For Domestic Businesses)”. Templates for the business registration application can be downloaded from the National Tax Agency’s “Application Form for Registration as a Qualified Invoice Issuing Business (PDF)”.

As described above, the Invoice System has more detailed entry items and restrictions than the Rate-Classified Invoice Retention Method. Nevertheless, there is a transitional measure for purchases from tax-exempt businesses until September 30, 2029, under which a certain percentage of the amount equivalent to the consumption tax on purchases may be deducted. For more information, check “Transitional Measures for Taxable Purchases from Tax-Exempt Businesses” in the National Tax Agency’s "Outline of the Qualified Invoice Retention Method".

Note, it is prohibited for nonregistered businesses or individuals to issue qualified invoices, or to issue or provide documents that could be mistaken for qualified invoices. Violations are subject to penalties, so due caution is required.

Exemption from invoice retention: Transactions of less than ¥30,000

Under both the old Rate-Classified Invoice Retention Method and the new Invoice System, there are exemptions and special cases regarding retaining invoices for transactions of less than ¥30,000. When an exemption is applied, there is no need to retain invoices; instead, recording certain details in the accounts would be enough to meet the requirements for purchase tax credits.

Under the Rate-Classified Invoice Retention Method, if the transaction value of taxable purchases was less than ¥30,000 including tax, or if there was an unavoidable reason for not receiving an invoice, businesses were not required to retain such invoices. Additionally, if suppliers issued invoices that did not include information on items eligible for reduced tax rates or tax rate classifications, invoice recipients were granted an exception to add this classification information based on the actual transaction details. Note that these measures have been abolished with the current Invoice System in place.

The Invoice System generally has a requirement to retain qualified invoices from qualified invoice-issuing businesses to be eligible for purchase tax credits, but there are some exceptions for transactions where issuing qualified invoices is difficult or for the following types of transactions of less than ¥30,000:

• Passenger transport by public transportation (bus, rail, ship) when the fare is less than ¥30,000
  
• Purchases of less than ¥30,000 from vending machines and other automated service equipment
  

For more information on exemptions and other special cases, check the National Tax Agency’s “Outline of the Qualified Invoice Retention Method”.

Complying with changes in the tax system

In this article, we have discussed the required entries and differences between the old Rate-Classified Invoice Retention Method and the new Invoice System. Knowing both systems helps us to deepen our understanding of the Invoice System that is now in place.

As consumption tax rates increase over time—and in order to make use of the tax system and apply tax credits—we need to know in advance any new changes in methods and the tax system that accommodate multiple tax rates, and always be ready to implement these.

Stripe Japan, Inc. is registered as a qualified invoice issuing business, and is therefore capable of issuing qualified invoices. Stripe users in Japan can log in to their Stripe account and download invoices related to Stripe fees monthly from the Dashboard. For more information on the newly introduced Invoice System, refer to Stripe’s invoice guide for compliance in Japan and our support page on the Invoice System.