On October 1, 2023, the Invoice System went into effect in Japan. The Invoice System is an important system related to purchase tax credits for taxable business operators subject to consumption tax.

Japanese businesses applying for purchase tax credits must pay attention to how they calculate consumption tax under the Invoice System. This article explains the relationship between the Invoice System and consumption tax, how the method of calculation for consumption tax has changed under the Invoice System, and what measures businesses need to take.

What’s in this article?

• What is the Invoice System?
  
• The relationship between the Invoice System and consumption tax
  
• The impact of the Invoice System on consumption tax calculations
  
• Consumption tax calculation methods used in the Invoice System
  
• Why the accumulation calculation method is more beneficial under the Invoice System
  
• Calculating the amount of tax payable under the Invoice System
  
• How Stripe Invoicing can help
  

What is the Invoice System?

The Invoice System requires taxable businesses to take certain measures when calculating the amount of consumption tax they must pay. The current consumption taxes in Japan are a standard tax rate of 10% and a reduced tax rate of 8%. The Invoice System started as a purchase tax credit method (i.e., a method of deducting taxes on purchases) that corresponds to the multiple consumption tax rates, replacing the Rate-Classified Invoice Retention Method.

The items to be included in a qualified invoice—commonly known as an “invoice”—issued under the Invoice System are more detailed than those required for the rate-classified invoices that were in effect prior to the start of the Invoice System. If there are any errors in the information recorded on the qualified invoice issued by the seller, the buyer will not be able to claim the purchase tax credit. Therefore, it is very important for sellers issuing qualified invoices to properly understand the requirements stipulated in the Invoice System.

It should be noted that, as long as the required information is correctly and accurately recorded, there are no specific legal requirements regarding the format of a qualified invoice. However, for purchase tax credits to be applied without issue based on the Invoice System, it would be ideal to use a qualified invoice format that takes into consideration the buyer receiving the qualified invoice.

The relationship between the Invoice System and consumption tax

The Invoice System and consumption tax are connected. Below, we discuss the specific ways the Invoice System and consumption tax are linked to each other. To understand this relationship, it is necessary to first understand the consumption tax system.

Consumption tax is a tax levied on the purchase of goods and services that is paid by customers. However, individual customers do not pay the consumption tax directly to the government. Instead, it is added to the price of goods and paid by customers to businesses along with the price of goods. After that, there is an indirect mechanism where the business pays the consumption tax collected from customers to the relevant tax office.

For example, in the retail industry, before a product is delivered to a store, it goes through a number of different processes. It starts with the procurement of raw materials, followed by manufacturing and packaging, and finally arriving at the store as a finished product. At each stage of these B2B transactions, consumption tax is incurred.

It is also important to be aware of double taxation. The Invoice System is designed to prevent double taxation by ensuring that businesses involved in each stage of the process can claim the appropriate purchase tax credit.

The consumption tax amount can be easily calculated using the following formula:

Payable Consumption Tax = Consumption Tax on the Price of Goods (Sales) (Provisional Consumption Tax) - Consumption Tax Paid on Purchases (Inputs)

In other words, Retailer A—who collects consumption tax from customers—pays consumption tax to Supplier B when purchasing goods. Retailer A deducts the amount of consumption tax it paid to Supplier B from the amount of consumption tax received from customers and pays the difference to the relevant tax office. This deduction is the most important element of the Invoice System, and it is commonly called the purchase tax credit.

Customers pay consumption tax to businesses. Businesses involved in handling products calculate how much consumption tax customers should pay. Then, that amount is paid to the tax authorities. However, when a tax-exempt business is involved in the process, extra care and caution is needed. In principle, businesses purchasing from tax-exempt businesses are not eligible for purchase tax credits.

Here’s an example: The purchaser of a product is a retailer. In this case, because the seller is a tax-exempt business, no consumption tax is incurred on the purchase. In other words, since the amount of consumption tax deducted is “0,” the retailer who purchased the goods from the tax-exempt business is responsible for paying the full amount of consumption tax on the sales of those goods.

At first glance, this can seem simple. However, let’s compare a ¥500,000 transaction with a taxable business to a transaction with a tax-exempt business of the same amount. The transaction with the taxable business allows for purchase tax credit to be claimed later, thereby reducing the tax burden. The transaction with the tax-exempt business does not allow for purchase tax credit to be claimed. Therefore, from the buyer’s perspective, transactions with taxable businesses ultimately result in lower tax payments and greater profits.

Whether or not the purchase tax credit can be applied is an important point to confirm. The larger the transaction amount, the greater the impact on the company’s profit and loss. Therefore, regardless of whether they are tax-exempt or subject to taxation, all businesses should conduct simulations to identify potential issues that the current Invoice System can have on their operations. They should also take proactive measures to manage risks in advance.

The impact of the Invoice System on consumption tax calculations

What specific effects will the Invoice System have on businesses when calculating consumption tax? In this section, we explain the key points about consumption tax calculations resulting from the implementation of the Invoice System.

Confirm purchase tax credit eligibility in advance

Under the current Invoice System, the key point in determining whether a transaction is eligible for purchase tax credit is whether it meets the following conditions:

• The issuer of a qualified invoice must be a taxable business operator that has an Invoice System registration number. In other words, the issuer must be a qualified invoice issuer. Even if the issuer is a taxable business operator, it still must be registered in the Invoice System to issue qualified invoices.
  
• The documents clearly record the required items for a qualified invoice, as specified under the Invoice System.
  

As a result, the buyer’s accounting staff that receives the documents must pay attention to the above points, such as the seller’s business type and whether they are fully compliant with the Invoice System.

Round once for each tax rate per invoice

“Rounding” refers to the method of handling amounts less than one yen when calculating consumption tax. Before the Invoice System was implemented—under the Rate-Classified Invoice Retention Method—rounding was performed for the consumption tax of each product or service. However, under the current Invoice System, fractional amounts must be rounded up or down once for each tax rate per eligible invoice.

In other words, businesses should no longer calculate the consumption tax individually for each item and then add them together. Instead, calculate the total consumption tax for each tax rate (i.e., 8% and 10%) and then round off the total.

Here’s an example: A buyer purchases Product A and Product B, which are both subject to 8% consumption tax. The buyer also purchases Product C and Product D, which are subject to 10% consumption tax. In this case, calculate the total amount excluding tax for the 8% tax products and the total amount excluding tax for the 10% tax products. Then, calculate the total consumption tax for each tax rate.

In this example, when calculating the consumption tax for the products with a tax rate of 8%, the result is ¥2,032.80. After rounding, the consumption tax becomes ¥2,032. Similarly, for the 10% tax rate, the result is ¥2,274.80, which rounds to ¥2,274.

Select calculation method

When the Invoice System was introduced, it became possible to choose between the conventional deduction calculation or the accumulation calculation to calculate consumption tax payment amount. Therefore, it is important to fully understand both calculation methods and select the one that is beneficial for your company. In the next section, we explain in more detail the methods for calculating both the deduction and accumulation amounts.

Consumption tax calculation methods used in the Invoice System

Under the Invoice System, businesses can choose either the accumulation calculation or the deduction calculation. Here is a closer look at each of these calculation methods:

Accumulation calculation

The accumulation calculation, as the name suggests, involves accumulating the consumption tax amounts listed on eligible invoices. The tax amount is determined by adding up the consumption tax amounts incurred for each transaction.

The accumulated consumption tax amount is the amount after rounding has been applied to each eligible invoice. It is important to note that the accumulation calculation is a calculation method that can only be selected by eligible invoice issuers.

Example of accumulation calculation

10,000 units of a product with a price of ¥300 (tax included, 10% tax rate)

• Consumption tax amount per item:
  

¥300 × 100/110 × 10% ＝ ¥27

The result is ¥27.27 and is rounded down.

• Calculation of accumulated amount of tax based on 10,000 units sold:
  

¥27 × 10,000 units = ¥270,000

Consumption tax amount: ¥270,000

Deduction calculation

The deduction calculation has been used since before the introduction of the Invoice System. It calculates the amount of consumption tax based on total sales for one year. In other words, the consumption tax amount is determined by converting the total amount—including tax for one year—back to the total amount, excluding tax. In addition, the rounding is performed at this point.

For the deduction calculation method, there is no need to add up the consumption tax amounts listed on each qualified invoice, as is the case for the accumulation calculation. Therefore, the burden on accounting operations is relatively small.

Example of deduction calculation

10,000 units of a product with a price of ¥300 (tax included, 10% tax rate)

• Sales including tax:
  

¥300 × 10,000 units ＝ ¥3,000,000

• Amount excluding tax:
  

¥3,000,000 × 100/110 ＝ ¥2,727,000

The result is ¥2,727,272 and is rounded down to the nearest thousand yen.

• Tax amount on sales:
  

¥2,727,000 × 10% ＝ ¥272,700

• Consumption tax amount: ¥272,700
  

Please note that when actually filing consumption tax returns, national tax and local tax are calculated separately. For the purposes of these examples, the tax rate used in the calculations is the combined rate of national tax and local tax.

Calculation method for the payable amount of consumption tax

The payable consumption tax calculation method includes the following:

Amount of Consumption Tax on Sales – Amount of Consumption Tax on Purchases

Therefore, you must first select either the accumulation method or the deduction method to calculate the “amount of consumption tax on sales” and the “amount on consumption tax on purchases.” Then, calculate each amount.

Businesses can choose the accumulation calculation or the deduction calculation for consumption tax on sales. Please note that if you use the accumulation calculation method for consumption tax on sales, you must also use the accumulation calculation method for consumption tax on purchases. You cannot choose the deduction calculation method. On the other hand, when calculating consumption tax on sales using the deduction calculation method, you can choose either the accumulation calculation method or the deduction calculation method to calculate consumption tax on purchases.

Why the accumulation calculation method is more beneficial under the Invoice System

Above, we introduced examples of each calculation method. They showed that the accumulation calculation results in a lower tax amount than the deduction calculation. This is due to differences in the timing of when rounding is performed.

The rounding of consumption tax amounts recorded on qualified invoices can be rounded to the nearest whole number, rounded up, or rounded down at the discretion of the issuer. If the consumption tax amount on eligible invoices for sales is rounded down, the consumption tax amount less than one yen will be rounded down each time a qualified invoice is issued, as in the accumulation calculation method. Therefore, the amount of consumption tax on sales becomes lower. The amount of consumption tax to be paid also becomes lower in the above calculation formula, making the accumulation calculation method more beneficial.

For industries such as retail—where the nature of the business involves frequent issuance of qualified invoices—the accumulation calculation method can significantly reduce consumption tax payments compared with the deduction calculation method.

Calculating amount of tax payable under the Invoice System

In this article, we explained the consumption tax calculation methods that businesses need to know about under the new Invoice System. Consumption tax collected from customers when providing goods or services is a tax that all businesses are responsible for paying to the government.

For taxable businesses to pay consumption tax correctly, they must calculate the amount of tax payable and remit it to the tax office. Therefore, when filing tax returns, you should fully understand the method of calculating consumption tax and accurately perform the procedures. Under the Invoice System, businesses have the choice of either the accumulation calculation or the deduction calculation. It is important to select the method that is most suitable for your company.

In addition, when sellers create qualified invoices that comply with the Invoice System, it is important to prepare an environment that supports the Invoice System in advance so that the work can be carried out smoothly. We recommend using online tools that can simplify work—such as automatic consumption tax calculation functions and accounting software—as they are extremely useful for creating qualified invoices. Stripe Invoicing supports the 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.

There are various requirements for issuing qualified invoices, and it is necessary to make preparations in advance, such as introducing systems that are compatible with qualified invoices and registering for the Invoice System. However, once these preparations are complete, subsequent qualified invoice-related tasks should become significantly more efficient.

How Stripe Invoicing can help

Stripe Invoicing simplifies your accounts receivable (AR) process—from invoice creation to payment collection. Whether you’re managing one-time or recurring billing, Stripe helps businesses get paid faster and streamline operations:

• Automate accounts receivable: Easily create, customize, and send professional invoices—no coding required. Stripe automatically tracks invoice status, sends payment reminders, and processes refunds, helping you stay on top of your cash flow.
  
• Accelerate cash flow: Reduce days sales outstanding (DSO) and get paid faster with integrated global payments, automatic reminders, and AI-powered dunning tools that help you recover more revenue.
  
• Enhance the customer experience: Deliver a modern payment experience with support for 25+ languages, 135+ currencies, and 100+ payment methods. Invoices are easy to access and pay through a self-serve customer portal.
  
• Reduce back-office workload: Generate invoices in minutes and reduce time spent on collections through automatic reminders and a Stripe-hosted invoice payment page.
  
• Integrate with your existing systems: Stripe Invoicing integrates with popular accounting and enterprise resource planning (ERP) software, helping you keep systems in sync and reduce manual data entry.
  

Learn more about how Stripe can simplify your accounts receivable process, or get started today.