In Japan, consumption tax is a tax levied on goods and services purchased and consumed within the country. This means that customers living in Japan pay consumption tax on various everyday products they purchase. The consumption tax collected from the customer is then paid to the government of Japan by the company or business which received the tax, on behalf of the customer.

Consumption tax is levied broadly and equally in Japan, with the exception of products sold through cross-border ecommerce (EC)—these are tax exempt. However, a cross-border ecommerce business in Japan might be charged consumption tax when it purchases products from other businesses in Japan to sell overseas. In this case, the cross-border ecommerce business can get a refund of the consumption tax paid.

This article explains the consumption tax refund process for businesses selling products through cross-border ecommerce.

What’s in this article?

• What is cross-border ecommerce?
  
• Are cross-border ecommerce products tax-exempt?
  
• How to receive a consumption tax refund for cross-border ecommerce
  
• Considerations for consumption tax refunds in cross-border ecommerce
  
• Customs duties and VAT for cross-border ecommerce businesses
  
• Properly handling consumption tax in cross-border ecommerce
  

What is cross-border ecommerce?

Cross-border ecommerce allows businesses in Japan to sell products to overseas customers, including those in China, the United States (US), and Europe. Thanks to advancements in communication technology and the widespread use of the internet and social media, the cross-border ecommerce market is growing rapidly—led by major markets like China and the US.

For businesses in Japan, expanding into cross-border ecommerce offers a valuable opportunity to reach customers beyond the domestic market. The recent surge in Japan’s inbound tourism has also created a strong base of potential repeat customers. Many visitors to Japan develop an interest in the country’s products during their stays and, after returning home, purchase those products online. Businesses with cross-border ecommerce platforms are therefore well positioned to take advantage of this interest in their goods.

Take, for example, skincare products from Japan. A tourist who discovers and loves a particular brand while visiting Japan would previously have had difficulty purchasing it once they were back in their home country. However, with a well-established cross-border ecommerce site, that customer can easily order their favorite products from anywhere in the world. In this way, cross-border ecommerce helps brands from Japan build global recognition and expand beyond national borders.

Are cross-border ecommerce products tax-exempt?

In the case of cross-border ecommerce, where businesses in Japan sell products targeted to overseas customers, no consumption tax is charged. The reason for this is that consumption tax is intended for products consumed in Japan; cross-border ecommerce products are exported from Japan and are therefore intended for consumption overseas. This exemption is called an export tax exemption. It is an advantage for overseas customers who don’t have to pay consumption tax.
Since consumption tax is not applied to products sold through cross-border ecommerce, if a cross-border ecommerce business has to pay this tax when purchasing goods, it is eligible for a refund, also known as a “duty drawback.”

A cross-border ecommerce business can avoid consumption tax in two ways: by obtaining an export tax exemption or by paying the consumption tax and obtaining a refund at a later date.

Export tax exemptions

Goods consumed abroad are not subject to Japan’s consumption tax. This means that products sold through cross-border ecommerce are considered import transactions and are therefore tax-exempt. According to the National Tax Agency’s guidelines, “Tax exemptions for export transactions,” the following types of transactions qualify for tax exemptions:

• The transfer or leasing of assets classified as domestic exports
  
• Domestic and international mail, postal services, and correspondence
  
• The transfer or leasing of intangible property rights—such as mining rights, industrial property rights, copyrights, and business rights—to nonresidents
  
• The provision of services to nonresidents (however, services directly received in Japan, such as dining and accommodation, are subject to consumption tax)
  

To qualify for an export tax exemption, businesses must provide supporting documentation, such as an export license or contract, that verifies a transaction is an export. Additionally, this documentation must be retained at the place of tax payment for at least seven years.

Consumption tax refunds

If you are a cross-border ecommerce business owner who has paid consumption tax that you should not have paid in the first place, you might be entitled to a refund (i.e., a duty drawback). For example, consumption tax applied to purchases and shipments of cross-border ecommerce products and export transactions is eligible for refund.

In order to obtain a consumption tax refund, certain conditions must be met and necessary documents prepared. Check the details of the submission documents listed in the National Tax Agency’s “Tax-exempt businesses and input tax refunds,” and follow the appropriate tax refund procedures.

How to receive a consumption tax refund for cross-border ecommerce

Cross-border ecommerce operators based in Japan must meet certain requirements and follow specific steps to receive a consumption tax refund. Here is what the process entails.

Be subject to consumption tax in the first place

As a precondition, consumption tax refunds are only available to businesses that are subject to consumption tax.

A taxable business is one with taxable sales of over ¥10 million.
- For sole proprietorships: Taxable sales from the year before last must exceed ¥10 million.
- For corporations: Taxable sales from the fiscal year before last must exceed ¥10 million.

Newly established corporations are ineligible for consumption tax refunds, as they do not have a sales history and therefore do not meet the taxable sales requirements. However, there is an exception: if you operate a newly established corporation and your capital exceeds ¥10 million, or if you have submitted a notification form electing to be a business subject to consumption tax at the time you started your business, you will be recognized as a taxable business and will thereby be able to receive a consumption tax refund.

If you are a sole proprietor with annual sales of ¥10 million or less, or you own an otherwise tax-exempt business, you are exempt from paying consumption tax in the first place. However, if you apply with the notification form mentioned above and change your status to a business subject to taxation, you will be eligible for a refund of the consumption tax applied to your purchases.

Select the regular taxation method (principle taxation)

There are two consumption tax calculation methods: the regular tax method—also known as general taxation or principle taxation—and the simplified tax method.

The regular taxation method is a method of paying consumption tax to the government by deducting the amount of consumption tax on purchases and expenses from the amount of consumption tax on taxable sales.

In contrast, under the simplified method, the amount of tax to be paid is calculated using the amount of consumption tax on taxable sales and the deemed purchase ratio, which is a percentage. This method does not calculate a refund amount, so the requirements for obtaining a refund cannot be met. Therefore, you must select the regular taxation method when applying for a consumption tax refund.

Submit the necessary tax refund application documents by the deadline

A business must submit the necessary documents to the relevant tax office in order to receive a consumption tax refund. Here are the documents that a business must prepare:

• Final consumption tax and local consumption tax return forms (these should be for the tax period in question): The forms required for a consumption tax refund are the same as the forms for a consumption tax return (Form 1 and Form 2). The tax return forms are divided into forms for corporations and forms for sole proprietorships, so businesses need to download the correct documents from the National Tax Agency website.

• A detailed statement regarding the refund claim: Businesses need to prepare a detailed statement regarding the tax refund application, clearly stating the reason a tax refund is necessary, the amount of the purchase price, etc. When preparing a detailed statement, it is a good idea to refer to the National Tax Agency’s sample detailed statement.

• Statement of taxable sales ratio, deductible input tax, etc.: On the statement, information such as taxable sales and taxable purchase tax amounts are recorded.

• Export license and supporting evidence: Along with an export license, businesses should also prepare documents to support the fact that the product was shipped outside Japan through cross-border ecommerce.

• Forms related to purchasing, such as delivery documentation, invoices, and receipts: Businesses will also need to submit documentation that proves they have made consumption tax purchases, such as delivery documentation, invoices, and receipts.

These are the application periods and deadlines:

• For corporations: Within two months of the day after the last day of the fiscal period (the last day of the closing month). For example, if the fiscal year begins on April 1 and ends on March 31, the application deadline would be May 31 (i.e., two months after March 31).

• For sole proprietorships: By the end of March of the year following the tax period (if the tax period falls on a weekend, it will be the following Monday).

Considerations for consumption tax refunds in cross-border ecommerce

When applying for a consumption tax refund, there are a few things you should know about the process.

You should meet all the requirements for a consumption tax refund before applying

In order to receive a consumption tax refund, you must have satisfied each of the requirements previously described. If you are applying for a refund, make sure you understand the requirements first.

You need to keep the necessary application documents safe and organized

When applying for a consumption tax refund, you might eventually be contacted by the tax office. It is important to keep all documents related to your tax refund so that you can answer any questions from the tax office.

Waybills (also known as shipping bills or invoices)

For cross-border ecommerce, if the total value of goods shipped overseas is ¥200,000 or less, an export license will not be issued because an export declaration is not required. In this case, you can use a shipping document known as a waybill in lieu of an export license.

A waybill is a document required for trade transactions. It is also known as a shipping bill or invoice. Customs will use the declarations you make on this form as the basis for inspecting your goods. Please note that this is different from an invoice (i.e., a qualified invoice) issued by a qualified invoice issuer under the Qualified Invoice System in Japan.

You could wait a while to receive your refund

Once you have applied for a tax refund at the tax office, you will need to wait for the refund to be processed due to the time required for verification and other procedures. According to the National Tax Agency, this generally takes one to one and a half months. Because tax refunds can serve as a source of capital that companies can use to develop cross-border ecommerce businesses, it is beneficial to start the tax refund application process as early as possible.

Customs duties and VAT for cross-border ecommerce businesses

Although products sold through cross-border ecommerce are exempt from consumption tax, cross-border ecommerce is still subject to customs duties and value-added tax (VAT). Consumption tax is not placed on cross-border ecommerce solely to prevent the double taxation that would occur if both consumption tax and customs duties and VAT were applied to the same transaction.

Customs duties

Customs duties are taxes related to the import and export of goods. These duties are imposed on goods imported from overseas. Since customs duties differ depending on the country, region, and item, and are classified into a large number of categories, businesses need to be well informed about customs duties in cross-border ecommerce, especially in the countries they are expanding into (i.e., target countries).

Since customs duties are basically taxes borne by the customer, it is very important for cross-border ecommerce businesses to be transparent with customers about costs. For example, a customer shouldn’t be informed of taxes or duties only after ordering goods via cross-border ecommerce and having them imported into their own country. It would be preferable, instead, for the business to set prices with the expectation that duties will be charged, or to include the tariff rate and estimated duties at the time of purchase.

The two main purposes of collecting tariffs are to secure national revenue and protect domestic industry. The reason protecting domestic industry, in particular, is considered an important objective of tariffs is that if large quantities of cheap imported goods flow into a country from overseas, there is a danger that the domestic market will be dominated by these imported goods. If domestically produced equivalent products are not sold because they are displaced by cheap imported products, the country’s industry might decline. To avoid such a situation, each country imposes taxes based on its respective customs system.

Value-added tax (VAT)

Value-added tax (VAT) is similar to Japan’s consumption tax and is a tax that is imposed when goods or services are provided. Even in cross-border ecommerce you need to be aware that VAT might apply depending on the country of sale.

VAT has been introduced in European Union (EU) member states and countries in Asia, and the tax rate varies from country to country. In particular, in EU member states, the lower limit of the standard tax rate is set at 15%, while there is no upper limit. Given this significant amount, it is important for cross-border ecommerce businesses to be aware that VAT might be charged in addition to customs duties in their target countries.

Properly handling consumption tax in cross-border ecommerce

Cross-border ecommerce requires knowledge not only of Japan’s consumption tax, but also of overseas VAT and customs duties. As a cross-border ecommerce business owner, make sure you understand how these taxes work wherever you sell products overseas. In addition, when conducting business, it can be a good idea to consider introducing support functions that can streamline operations related to consumption tax.

Stripe offers a variety of functions to support the growth of cross-border ecommerce businesses. For example, Stripe Tax can handle tax calculations for over 90 countries—including those with consumption tax—and all states in the United States, reducing the complexity of global tax compliance. Stripe Tax also automates the calculation and collection of taxes for online transactions, and helps generate the comprehensive reports required for tax filing.