The Qualified Invoice System was launched in Japan in October 2023. It requires businesses to issue qualified invoices, which are the documents necessary to receive input tax credits. The current invoice system also established various requirements regarding the issuance of qualified invoices. Businesses must understand and pay attention to these requirements, including how to fill out qualified invoices.

This article covers basic information about qualified invoices, how to fill them out and their advantages and disadvantages. It also goes over points that Japanese businesses need to keep in mind about invoicing.

What's in this article?

• What are qualified invoices?
  
• Are qualified invoices required even if the standard tax rate is applied?
  
• Can receipts be treated as qualified invoices?
  
• Who can issue qualified invoices?
  
• How to fill out a qualified invoice
  
• The advantages of using qualified invoices
  
• The disadvantages of using qualified invoices
  
• Points to note about qualified invoices
  
• Facilitating B2B transactions under the Qualified Invoice System
  

What are qualified invoices?

As explained above, a qualified invoice is a document that is issued per the current invoice system. Qualified invoices are sometimes referred to simply as "invoices", but this isn't ideal; the general term "invoices" can also refer to documents that are issued for other purposes (e.g. trade-related documents). So, it is important to use the correct, distinct term.

Qualified invoices are extremely important documents related to input tax credits. By issuing a qualified invoice that meets the requirements stipulated by the current invoice system, the business enables the customer to apply an input tax credit. In other words, without a qualified invoice, the customer cannot receive an input tax credit.

Qualified invoices vs. rate-classified invoices

A rate-classified invoice is a document that complies with the rate-classified invoice retention system that was in effect prior to the commencement of the Qualified Invoice System. Under the current invoice system, qualified invoices are required.

Qualified invoices contain more detailed information than conventional rate-classified invoices. For example, a qualified invoice requires an invoice system registration number, which is not included on a rate-classified invoice.

A rate-classified invoice is not sufficient enough to qualify for an input tax credit under the current invoice system. And thus, a qualified invoice should be issued to each business partner in order for them to receive a credit.

Qualified invoices vs. qualified simplified invoices (also called simplified invoices)

A qualified simplified invoice or simplified invoice, is a document that complies with the current invoice system, just like a qualified invoice. The difference between the two is that a simplified invoice has fewer items listed on it and only businesses in certain industries are allowed to issue it. For example, retail stores, restaurants and taxi companies, which serve an unspecified number of customers, can find it difficult to issue qualified invoices due to the nature of their businesses. For this reason, qualified simplified invoices are permitted in these industries.

Even though a simplified invoice has fewer items listed on it, it has the same effect as a qualified invoice. Therefore, customers that receive simplified invoices can apply input tax credits without any problems.

Qualified invoices vs. qualified refund claim forms

A qualified invoice is issued by the business to the customer to provide proof that a sale took place and goods or services were provided. It also communicates the consumption tax rate and amount applied. On the other hand, a qualified refund claim form is a document issued when a product is returned or discounted. Qualified refund claim forms are also called "refund invoices".

Like qualified invoices, qualified refund claim forms are important documents related to input tax credits. Therefore, it is important for businesses to thoroughly understand their use.

Are qualified invoices required even if the standard tax rate is applied?

Currently, there are two consumption tax rates in Japan: a standard tax rate of 10% and a reduced tax rate of 8%. The Qualified Invoice System was created with these consumption tax rates in mind – replacing the rate-classified invoice retention system – as a way for businesses to obtain input tax credits. But while qualified invoices were originally introduced to ensure that the proper tax rate was applied, they're still necessary to issue even if a business only ever applies the standard consumption tax rate of 10%. The reason for this is that customers need a qualified invoice to receive input tax credits. So, even if the transaction is subject only to the standard tax rate of 10%, issuing invoices or receipts that do not meet the requirements of the Qualified Invoice System will likely result in the customer requesting the creation of a qualified invoice.

Can receipts be treated as qualified invoices?

Under the current invoice system, receipts can be treated as qualified invoices. "Qualified invoice" is a general term for a document required to receive an input tax credit under the invoice system. It can include receipts, sales slips, delivery slips and purchase statements, so long as they meet the requirements specified by the Qualified Invoice System.

The same general rule applies to qualified simplified invoices. As previously explained, the types of businesses permitted to issue these kinds of invoices are limited. However, in many cases, these businesses can use receipts and sales slips as simplified invoices.

Who can issue qualified invoices?

Only taxable businesses that are registered in advance as qualified invoice issuers can issue qualified invoices. When you become a qualified invoice issuer, you are assigned an invoice system registration number that proves that you are registered with the Qualified Invoice System.

It should be noted that both corporations and sole proprietors can become qualified invoice issuers if their registration application under the Qualified Invoice System is approved. However, if a sole proprietor running a tax-exempt business becomes a qualified invoice issuer in order to comply with the invoice system, their business will automatically become taxable. As such, they will be required to pay consumption tax.

How to fill out a qualified invoice

There are no legal requirements regarding the format of a qualified invoice or the template used, as long as the required information is included and is accurate. Qualified invoices can therefore be handwritten or electronic.

The most important thing when issuing a qualified invoice is to ensure that it meets the requirements established by the current invoice system. The following information must be listed on qualified invoices, as stipulated by the Japanese National Tax Agency (NTA):

• The name or title of the qualified invoice issuer.
  
• The transaction date.
  
• The transaction details. Note that if any goods are eligible for a reduced tax rate, information to that effect must be provided. Use a symbol, such as an asterisk, next to the item to denote the reduced rate.
  
• The name or title of the entity receiving the qualified invoice.
  
• The registration number of the qualified invoice issuer.
  
• The total cost and applied tax rate using either the tax-excluded or tax-included price by tax rate (8% or 10%).
  
• The total consumption tax amount for each respective tax rate.
  

The advantages of issuing qualified invoices

Registration with the Qualified Invoice System and becoming a qualified invoice issuer is not mandatory, but voluntary. Therefore, the decision to implement qualified invoices is left to the discretion of the business owner. However, without qualified invoices, various problems might arise in transactions between businesses, so it is best to comply with qualified invoices to the greatest extent possible.

The following are some of the advantages to implementing qualified invoices.

Qualified invoices make it more likely that you'll be chosen as a supplier

If your business doesn't issue qualified invoices, the consumption tax paid by the customer to your business won't be eligible for input tax credits. Even if you've been doing business with a customer for many years, there is a risk of losing them as a result. Let's say you are a sole proprietor and your business isn't registered under the current invoice system; perhaps you have a tax-exempt business with sales of 10 million yen or less. Upon realising they won't receive an input tax credit, a customer might propose terminating their transaction or request an adjustment of the transaction price.

If your business issues qualified invoices in compliance with the current invoice system, customers will be able to apply input tax credits, allowing them to continue to place orders with peace of mind. You can also expect to be prioritised as a supplier by new customers.

The current invoice system allows your business to switch to electronic invoicing

The Qualified Invoice System allows for the issuance and storage of qualified invoices in electronic format. For many businesses, this is a golden opportunity to review their back office operations and make the switch to a paperless system.

When handling electronic data, it is necessary to comply with the Electronic Books Preservation Act, which might feel like a challenge. However, by digitising the invoicing process, all accounting operations – including issuing and storing qualified invoices and exchanging them between businesses – can be performed more efficiently.

The disadvantages of issuing qualified invoices

Let's now take a look at the disadvantages of using qualified invoices.

Tax liability arises when dealing with qualified invoices

If a tax-exempt business decides not to register with the Qualified Invoice System and remains a tax-exempt business, it does not need to pay consumption tax. It is therefore possible to avoid the risk of revenue pressure due to consumption tax. In addition, there is no need to worry about an increase in the administrative burden associated with tax payments, so the business can continue to operate as usual.

On the other hand, businesses that were previously exempt from paying consumption tax become liable for it once they implement qualified invoices. Consequently, the time and effort needed for filing tax returns increases. This can make it more difficult to concentrate on the actual business.

You need to implement and comply with the Qualified Invoice System

In order to issue qualified invoices, you need to introduce the Qualified Invoice System and change the format of your documents in compliance with it. It is necessary to consider not only the time and effort required, but also the cost of introducing the system.

That said, since qualified invoices can be issued and stored electronically, once the system is in place, management and storage become easier. So, although various preparations are necessary for the current invoice system, taking the opportunity to implement it can improve operational efficiency and productivity. This can have an overall positive impact on your business.

Points to note about qualified invoices

You need to register as a qualified invoice issuer

Under the conventional invoicing requirements, any business can issue invoices as needed. However, only taxable businesses that have become qualified invoice issuers and have been assigned a registration number are permitted to issue qualified invoices. Be sure to register with the current invoice system so that you don't find yourself unable to issue a qualified invoice when asked to do so by a customer.

Note that qualified invoice issuers registered under the current invoice system must issue qualified invoices when asked to do so by their business partners.

Qualified invoices must be retained for a certain period of time

Under the Qualified Invoice System, regardless of whether an invoice is qualified or qualified simplified, the business must issue a qualified invoice to the customer and retain a copy for a certain period of time. The customer is also required to keep the qualified invoice for a certain period of time.

According to the NTA's Overview of the Qualified Invoice Retention System, in principle, the retention period is 7 years and 2 months from the day following the last day of the tax period of the qualified invoice. For example, for sole proprietors, the tax period is from 1 January–31 December. In this case, the last day of the tax period is 31 December, so a qualified invoice that was issued on 1 December 2024 must be saved for 7 years from 1 March 2025 – two months after the start of 2025.

Incorrect qualified invoices can lead to losses for customers

As already mentioned, a qualified invoice is required for the customer to apply an input tax credit. If a qualified invoice is not correctly filled out, it will not be accepted as one. In this case, the customer will no longer be able to receive an input tax credit, which will ultimately increase the customer's consumption tax liability. Therefore, it is very important for businesses to take great care when creating qualified invoices to ensure that there are no mistakes or omissions on them.

On the other hand, there are special exceptions; the obligation to issue a qualified invoice is waived in situations where it is difficult to issue one, such as with the public transportation of passengers (e.g. by bus, train or ship) at a fare of less than 30,000 yen or the purchase of goods from vending machines or automated service equipment. And since qualified invoices are not required for these transactions, they are eligible for input tax credits even if no qualified invoices are issued. For details, again, check the NTA's Overview of the Qualified Invoice Retention System.

You need to understand the transitional measures necessary for the Qualified Invoice System

The Qualified Invoice System includes phased transitional measures designed to achieve the following two objectives:

• For taxable businesses: To reduce the burden of consumption tax
  
• For tax-exempt businesses: To avoid disruptions to business operations
  

Specifically, during the period established by the transitional measures, a certain percentage of the consumption tax amount applied to taxable purchases from tax-exempt businesses will be treated as input tax, thereby enabling the application of input tax credits.

The transitional measure application periods and deduction rates are as follows:

• 1 October 2023 – 30 September 2026 (3 years): 80% of the purchase tax amount is deductible on taxable purchases made by tax-exempt businesses.
  
• 1 October 2026 – 30 September 2029 (3 years): 50% of the purchase tax amount is deductible on taxable purchases made by tax-exempt businesses.
  

Since the introduction of the Qualified Invoice System, any transactions made with tax-exempt businesses are a concern for customers, as they aren't able to receive input tax credits. However, by taking advantage of these transitional measures, the burden of consumption tax on the customer can be reduced.

Facilitating B2B transactions under the Qualified Invoice System

In order for businesses to receive input tax credits under the current invoice system without any problems, appropriate action by both the seller and the buyer is required. In particular, it is important for sellers that are qualified invoice issuers to create an environment that is compatible with the Qualified Invoice System, ensuring documents are delivered and stored smoothly.

In addition, it can be helpful to introduce online tools that optimise work, such as automatic consumption tax calculation tools and accounting software, as they are extremely useful for creating qualified invoices. Stripe Invoicing, provided by Stripe, supports the Qualified Invoice System, enabling businesses to issue and store invoices appropriately using automatic generation. In addition, because it provides all functions related to billing operations – such as accounts receivable management, payment collection and transaction reconciliation – businesses can improve their back office operations to be smoother and more efficient.

There are various requirements for issuing qualified invoices and it's necessary to make preparations in advance, such as introducing forms and systems that are compatible with qualified invoices and registering for the Qualified Invoice System. However, once these preparations are complete, accounting operations can be carried out smoothly going forward.

It might be difficult for tax-exempt businesses to determine whether or not they should comply with the current invoice system. Therefore, it is important to thoroughly understand the advantages and disadvantages of implementing qualified invoices. Carefully assess whether any sales will be lost and consider the needs of your business partners before making a decision.