The Japanese consumption tax (JCT) applied to goods and services is familiar to most Japanese people. Businesses that receive payment and associated JCT for goods sold in Japan must calculate the amount of JCT when filing their final tax returns and remit that amount to the government.

For a business that has made a purchase to claim purchase tax credit for JCT in a transaction, the seller must issue a qualified invoice that meets the requirements of the Invoice System. The seller must retain a copy, and the buyer must retain the original document they received. The handling of JCT for transactions determines whether the purchase tax credit applies. Therefore, it is necessary for businesses to correctly understand whether a transaction is taxable before proceeding.

Especially in today’s increasingly globalized world, there are frequent questions about whether or not JCT applies to overseas transactions—such as procurement outside Japan—and how to handle JCT when dealing with overseas corporations. This article explains how Japanese companies conducting business overseas should handle JCT.

What’s in this article?

• Overseas transactions and Japanese consumption tax (JCT)
  
• Defining overseas transactions
  
• Transactions subject to Japanese consumption tax (JCT)
  
• Export transactions and tax exemption
  
• Impacts of the Japanese Invoice System on overseas transactions
  
• How Stripe Tax can help
  

Overseas transactions and Japanese consumption tax (JCT)

Generally speaking, JCT is imposed on goods and services purchased and consumed in Japan. The handling of JCT is broadly categorized into taxable, tax-free, nontaxable, and tax-exempt. The category that applies depends on the transaction.

Overseas transactions (i.e., transactions outside of Japan) fall under the category of “transactions not subject to taxation” or “tax-free transactions,” as defined by Japan’s National Tax Agency (NTA). Therefore, JCT is not incurred for overseas transactions. On the other hand, transactions that are subject to JCT are categorized as “domestic transactions” and “import transactions.” We provide detailed explanations of these terms below.

Defining overseas transactions

Overseas transactions are tax-free transactions. As a general rule, JCT is not applied to them. However, it is important to know what kinds of transactions are classified as overseas transactions.

The criteria that determine whether or not a transaction is an overseas transaction include the following:

• When the transaction is completed, the product is located outside of Japan.
  
• When the transaction is completed, the location of the provided services is outside of Japan.
  

Taking the points above into account, we discuss some cases below that are considered overseas transactions. We have divided them into “asset transfers and loans” and “provision of services.”

Overseas transactions classified as asset transfers and loans

According to the NTA, asset transfers and asset loans refer to the following:

• Asset transfers: Transferring an asset to another party through a contract (e.g., a sale) while maintaining the asset’s identity, including its quality
  
• Asset loans: Establishing rights concerning assets and lending assets to others for their use
  

If the location of the assets is within Japan, the transaction is considered domestic. For example, when an overseas business purchases real estate—such as a building within Japan—it is not regarded as an overseas transaction. Instead, it is classified as a domestic transaction. On the other hand, when a Japanese business purchases real estate overseas, this constitutes an overseas transaction and is classified as a tax-free transaction that is exempt from JCT.

However, as explained in detail below, it is important to understand that transferring or leasing land constitutes a nontaxable transaction and is not subject to JCT.

Overseas transactions classified as provision of services

Although there are various terms that mean “services” in Japanese, the provision of services primarily refers to the following:

• Provision of services: Providing services such as lodging and dining, as well as services that are based on specialized knowledge and skills, such as those of doctors and lawyers
  

For example, when a Japanese business pays a web designer residing overseas for website creation services, this constitutes a service not located within Japan. In other words, it is an overseas transaction when the services are provided from abroad. Therefore, the overseas transaction is treated as a tax-free transaction, and JCT does not apply.

In contrast, inbound tourism spending within Japan is one example of services that are subject to JCT. When overseas tourists use lodging facilities—such as hotels or Japanese-style inns—during their stays in Japan, JCT applies to the lodging because both the location of the service and the place of provision are within Japan. This tax is levied even when the service is used by foreigners who do not have domestic addresses in Japan. However, health care services—such as medical care and midwifery—are treated as nontaxable transactions, similar to the transfer or lease of land described above.

Based on this explanation, one might assume that sales of goods or services within Japan are always classified as domestic transactions. However, the following cases are considered export transactions, even though they were originally located within Japan. We explain export transactions in detail below. However, the most important detail to remember about them is that they are exempt from JCT:

• Goods located within Japan: Goods not consumed domestically that are purchased by customers who live outside of Japan
  
• Services located within Japan: Transactions not completed domestically with recipients located abroad rather than within Japan
  

Thus, in cases where JCT does not apply, there are tax-free, nontaxable, and tax-exempt categories. It is important to thoroughly understand the differences between each category.

Transactions subject to Japanese consumption tax (JCT)

JCT can apply to domestic and import transactions. Below, we take a closer look at each one.

Domestic transactions

Transactions that incur JCT are called “taxable transactions.” Transactions conducted within Japan that meet all of the following requirements are subject to taxation. The taxable business operator must remit the JCT collected during the transaction to the national government. Here are the transaction requirements:

• Conducted by businesses as part of their operations: These are transfers of assets for business purposes rather than personal use and are carried out repeatedly, continuously, and independently.
  
• Performed in exchange for consideration: Transactions for consideration involve the transfer of goods or the provision of services.
  
• Involve transferred assets or services: These can include asset transfers, asset loans, or the provision of services, as discussed above.
  

Transactions conducted for goods or services within Japan are generally considered domestic transactions. Therefore, contracts with overseas businesses for services provided within Japan are considered domestic transactions and are subject to JCT.

However, some transactions are considered either transactions where JCT collection is undesirable or transactions requiring social policy considerations. Therefore, even if they are domestic transactions, they qualify as nontaxable transactions and are not subject to JCT. Here are examples of these transactions:

• Transfer or leasing of land
  
• Transfer of securities and gift certificates
  
• Provision of health care services (e.g., medical, midwifery, nursing care services)
  
• Tuition fees as stipulated in the School Education Act
  

The NTA provides information about the details of other nontaxable transactions.

Import transactions

As their name suggests, import transactions are transactions involving the importation of goods from overseas countries into Japan. The NTA generally applies JCT on goods imported from overseas.

Furthermore, goods imported from overseas are temporarily stored in bonded areas within the country designated by the Customs Commissioner. When these imported goods are collected from the bonded area, an import declaration must be submitted, and the necessary JCT must be paid. However, with the exception of specific products, if the taxable value of the imported goods is less than ¥10,000, the Customs Agency can waive JCT.

Export transactions and tax exemption

“Tax-exempt” means not having to pay taxes. In recent years, as a way of more effectively attracting inbound tourism customers, apparel shops and drugstores have been proactively working to offer tax-exempt shopping. Tax-exempt purchases at these stores are available only to nonresidents without a domestic address in Japan, such as overseas tourists visiting Japan. Tax exemption only applies to goods and services that will not be consumed within the country. In other words, tax exemption is a measure that is only applied to export transactions for goods that will not be consumed inside Japan.

Tax exemption is applied for export transactions in the following cases:

• Transfer or loan of assets as domestic exports
  
• Provision of services to nonresidents
  

Cross-border ecommerce is one of the major examples of export transactions. When a Japanese business conducts overseas mail-order sales targeting overseas customers—such as with cross-border ecommerce—JCT is not levied. This is because the products purchased by overseas customers are intended to be exported outside of Japan and consumed abroad. For businesses operating online shops targeting overseas customers, it is important to understand JCT for cross-border ecommerce to ensure that overseas customers are not charged JCT.

Overseas sales and distribution of digital content—such as Japanese anime and TV shows—has gained worldwide popularity in recent years. These transactions are similarly exempt from JCT for customers residing overseas. For digital content, the determination is based on where the person receiving the service actually resides. When the customer lives overseas, the transaction is considered as a service provided to a nonresident, which is tax exempt.

It is important to remember that JCT is levied on goods and services consumed within Japan.

Impacts of the Japanese Invoice System on overseas transactions

Now that the Invoice System has been launched in Japan, business operators might wonder whether or not they must issue qualified invoices for overseas transactions or domestic transactions with overseas businesses.

Domestic transactions subject to JCT must comply with the Invoice System. This is the case even if the transaction is with an overseas business operator. On the other hand, JCT is not levied on the import of goods with transactions concluded overseas. In these cases, the Invoice System does not apply.

The following are cases where the Invoice System impacts overseas transactions.

Transactions with overseas companies with permanent establishments (PEs) in Japan

Overseas companies with PEs—such as branches or factories within Japan—are treated as taxable entities for JCT because the PE itself engages in domestic transactions. For a taxable business to apply the purchase tax credit, it must receive a qualified invoice from the supplier. This means that the other business must comply with the Invoice System. Additionally, the PE will also need to issue qualified invoices to all companies it does business with. Therefore, it is necessary to take the appropriate measures, such as obtaining an Invoice System registration number.

Transactions with overseas businesses subject to JCT without PEs

Using the Invoice System is not solely determined by a business having a PE within Japan. Therefore, Japanese businesses must use caution when conducting transactions with overseas companies that actively trade within Japan.

First, overseas companies that meet the conditions established by the NTA must register as taxable entities when conducting domestic transactions. This is true even if the companies do not have PEs within Japan. In other words, a Japanese business that conducts transactions with this kind of overseas company must request that the company become a qualified invoice issuer. This ultimately means that both companies are required to comply with the Invoice System.

Whether transactions occur within or outside of Japan, it is important for business operators to understand how JCT must be handled. This is particularly true when conducting transactions with overseas businesses. Business operators that need to create qualified invoices in compliance with the Invoice System should understand the mandatory items for qualified invoices in advance.

When creating qualified invoices, it is important to use an automatic invoice generation tool or accounting software that is compliant with the Invoice System. This can include tools with automatic JCT calculation features. Using a comprehensive online tool that supports accounting operations can help simplify the issuance and storing of qualified invoices. It can also reduce the time and effort required for managing accounts receivable, collecting payments, and reconciling transactions. This can provide more efficient handling of billing operations.

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