The Qualified Invoice System was launched 1 October 2023, in Japan. The system is related to the tax credit for purchases, and after the Invoice System was introduced, taxable purchases from tax-exempt enterprises were, in principle, exempt from the tax credit for purchases.

However, there is a concern the Invoice System will increase the consumption tax burden on purchases all at once for businesses that have mainly purchased from tax-exempt businesses.

Therefore, to reduce the burden on such businesses, the Invoice System provides tiered transitional measures for purchases from tax-exempt businesses.

This article explains the transitional measures that came into effect with the start of the Invoice System and the requirements for their application.

What’s in this article?

• What are the transitional measures for the Invoice System?
  
• Requirements for application of transitional measures
  
• Burden reduction measures associated with the Invoice System
  
• Using transitional measures to handle the Invoice System
  

What are the transitional measures for the Invoice System?

Transitional measures for the Invoice System allow a certain percentage of consumption tax on taxable purchases from tax-exempt businesses to be treated as purchases and eligible for a credit during a certain period specified in the transitional measures. (See these reference materials from the National Tax Agency (NTA): Transitional measures for purchases from tax-exempt businesses, etc.)

Under the Invoice System, a qualified invoice (typically known as an invoice) issued by the seller is required for a business to receive a consumption tax credit for purchases. However, tax-exempt businesses cannot issue qualified invoices because only taxable businesses that are registered as qualified invoice issuers at the local tax office can issue qualified invoices.

Therefore, after the Invoice System launched, a common concern is that in many transactions between tax-exempt and taxable businesses, taxable businesses on the customer side will not be able to apply the purchase tax credit and the consumption tax burden will increase.

For tax-exempt businesses, including sole proprietors and freelancers, there are risks such as not registering for the Invoice System and being unable to issue qualified invoices, resulting in termination of contracts with taxable business partners.

The transitional measures reduce the consumption tax burden on taxable businesses and help avoid obstacles to business for tax-exempt businesses.

Subjects of transitional measures

The transitional measures in effect under the Invoice System are available to all businesses for taxable purchases from “tax-exempt businesses, etc.”, including freelancers and sole proprietors who are not qualified invoice issuers.

The term “tax-exempt businesses, etc.” includes tax-exempt businesses, taxable businesses that have not registered with the Invoice System, and customers. Note that even if a business is a taxable entity, it can not issue qualified invoices if it is not registered as a qualified invoice issuer.

When a tax-exempt business becomes a taxable business, it must apply for registration to the Invoice System in addition to the original procedure to change to a taxable business. However, until 30 September 2029, a business can change from a tax-exempt business to a taxable business at the same time it becomes a qualified invoice issuer by filing an application for registration to the Invoice System.

Applicable period of transitional measures and percentage of deductions

• 1 October 2023 to 30 September 2026: 80% of the amount equivalent to purchase tax
  
• 1 October 2026 to 30 September 2029: 50% of the amount equivalent to purchase tax
  

Example: Assume the amount of the tax credit for purchases applied to purchases made by a business from a qualified invoice issuer (taxable business) is ¥500. (See our article on tax credit for purchases for the normal tax calculation.)

If this is a purchase from a tax-exempt business, the partial tax credit for purchases under the transitional measures is as follows:

• 1 October 2023 to 30 September 2026: ¥500 × 80% = ¥400 (Consumption tax burden to be paid by the customer: ¥100)
  
• 1 October 2026 to 30 September 2029: ¥500 × 50% = ¥250 (Consumption tax burden to be paid by the customer: ¥250)
  

Thus, compared with the original ¥500 credit for transactions with taxable businesses, the credit amount for transactions with tax-exempt businesses is lower, but if the transitional measures are used, 100% of the consumption tax on purchases will not be borne by the taxpayer.

Note that the transitional measures will be implemented in phases as described above, and no sales tax credit will be allowed for purchases from tax-exempt businesses after 1 October 2029.

Requirements for application of transitional measures

To obtain a tax credit for purchases from a tax-exempt entity that is not allowed to issue qualified invoices during the applicable period of the above transitional measures, these two requirements must be met:

Items to be included on invoices, etc.

• Name or title of person making invoice, etc.
  
• Transaction date
  
• Details of the transaction (statement that the transaction is a taxable purchase to which the transitional measures apply)
  
• Value of total transaction broken down by tax rate (including tax)
  
• Name or title of the business receiving the invoice, etc.
  

In addition to the content based on the items described in invoice with classification that are classified by multiple consumption tax rates (8% and 10%), the content of the transaction should show that the purchase is subject to the transitional measures.

Bookkeeping requirements

• Name or title of the source of the taxable purchases (tax-exempt business)
  
• Transaction date
  
• Details of the transaction (statement that the transaction is a taxable purchase to which the transitional measures apply)
  
• Transaction amount incurred as taxable purchases
  

Therefore, to use the transitional measures to obtain a tax credit on purchases, you must also prepare your accounts to meet the requirements.

As for the details of the transaction, clearly indicate it is a transaction related to the transitional measures, as with invoices, etc. You should indicate “subject to 80% deduction” or “purchases from exempt businesses” for each transaction that qualifies for the exemption. Simplified entries can be made by using an asterisk () and writing in the space provided, for example, “ is subject to 80% deduction”.

For more information on how to journalise consumption tax on purchases from tax-exempt businesses, refer to “Transactions and purchases with tax-exempt businesses after the start of the Invoice System”.

Burden reduction measures associated with the Invoice System

The transitional measures include the above-mentioned gradual transitional measures for purchases from tax-exempt businesses and several other burden-reducing measures, as described below.

• 20% special provision: This special exception applies to businesses that have changed from tax-exempt to taxable businesses and is intended to reduce the tax burden. For more information, refer to “Benefits for sole proprietors to register for the Invoice System” (applicable period: Taxable period from 1 October 2023 to 30 September 2026).
  
• Small Amount Special Provisions: The Small Amount Special Provisions are special provisions for businesses under a certain size that allow tax credits for purchases made by keeping only books with certain entries (applicable period: 1 October 2023 to 30 September 2029).
  
• Exemption from issuing small-amount refund invoices: If the tax-inclusive value of a return or discount is less than ¥10,000, the requirement to issue a return invoice is waived. This issue exemption is a permanent burden reduction measure.
  
• Flexible application period for registration: As explained in “Subjects of transitional measures,” if done by 30 September 2029, the tax-exempt business can become a qualified invoice issuer by applying for registration under the Invoice System. As a reminder, when applying for registration, include the desired date of registration in your application.
  

(Reference material: Ministry of Finance, “Frequently asked questions and answers on the burden reduction measures of the Invoice System

Using transitional measures to handle the Invoice System

The above explains the transitional measures applicable to purchases from tax-exempt businesses under the Invoice System.

With the implementation of the Invoice System, taxable purchases from tax-exempt businesses can no longer receive a credit for taxable purchases, which in some cases makes business-to-business (B2B) transactions more difficult.

Therefore, regardless of whether you are a tax-exempt or taxable business, you need to have a thorough understanding of the Invoice System and closely watch changes and trends in the tax system to ensure the Invoice System does not become a hindrance to your business.

Another way to deal with the Invoice System is to consider using it to improve operational efficiency by introducing new tools and functions. For example, Stripe can create invoices compliant with the Invoice System, and Stripe Invoicing can meet various needs of invoicing and back-office operations more efficiently.

If your business partner falls under the category of tax-exempt business operator, etc., be prepared to properly respond to the Invoice System while fully using the transitional measures that are effective within a certain period. On the other hand, tax-exempt businesses that are considering registering for the Invoice System should make a comprehensive decision after analysing their business size and customer base.