In recent years, the expansion of the internet and improvements in communication technology have led to the rapid global development of platform services, including app stores and ecommerce malls. In Japan, sites such as Mercari, Rakuten, and Yodobashi.com are particularly prominent examples of platform businesses. And all of these businesses are obligated to pay Japan’s consumption tax.

Overseas businesses that do not have a physical location in Japan also incur a consumption tax when selling digital services (e.g., online games) to customers in Japan. In this case, a system called “platform taxation” is applied. This means that the platform operator must file and pay consumption tax on behalf of the overseas business.

In this article, we’ll explain the basics of platform taxation and the background of its adoption in Japan. We’ll also go over the different kinds of businesses it applies to and when.

What’s in this article?

• What is platform taxation?
  
• What is the background of the platform taxation system in Japan?
  
• What businesses are subject to platform taxation?
  
• Why it’s important to understand platform taxation in Japan
  

What is platform taxation?

Platform taxation applies to all businesses that operate digital platforms. For example, when a business (i.e., the supplier) outside of Japan sells digital services to customers in Japan via a platform, the platform operator is deemed to have provided the service to customers in Japan. This means that the platform operator must file and pay consumption tax on behalf of that supplier outside of Japan.

The goal of platform taxation is to ensure a fair and even playing field for all businesses participating in the competitive digital market. This tax system has already been adopted in Europe, North America, and Asia. The exact details vary from country to country.

What is a platform?

Digital platforms are online sites where transactions take place, and they include a wide variety of different sites: business-to-business (B2B) marketplaces that provide a place for suppliers and customers to connect, social networks that connect people, and app stores that distribute things such as online games. All of these fall broadly under the category of “platforms.”

How the platform taxation system works

Under the platform taxation system, customers in Japan who use a platform to purchase digital services from overseas pay the service fee and consumption tax to the platform operator; the overseas business selling the service does not. Consequently, platform operators who receive consumption tax from customers have a duty to declare and pay consumption tax.

The platform taxation system is a system that focuses on ensuring that all businesses, regardless of whether they are located in Japan or overseas, can conduct business fairly. It ensures businesses are treated equally by classifying platform operators as “final service providers to consumers” and imposing appropriate tax obligations onto them.

What is the background of the platform taxation system in Japan?

The spread of overseas digital services in Japan

In recent years, the market for digital services has expanded rapidly in both Japan and other countries. For example, many overseas businesses have entered the mobile app market—particularly for online games—and are offering a variety of services to customers in Japan.

The obligation to pay consumption tax on digital services purchased via a platform originally lies with the supplier—that is, the business that sells those services on the platform.

In the case of services like mobile apps, it’s common for customers to pay the fee or price for the service directly to the supplier in addition to the consumption tax, and then the supplier declares the consumption tax to the tax office. This is known as the “sales agent system.” In this system, the platform operator is only in the position of acting as an intermediary for transactions, and the supplier is ultimately responsible for paying the consumption tax.

That said, with the sales agent system, many overseas suppliers fail to declare and pay the consumption tax they owe in Japan. One of the reasons why consumption tax is not always properly declared is that it’s possible for suppliers without an office or location in Japan to provide services to customers in Japan online. The tax office in Japan has consequently faced a problem: how to collect consumption tax when digital service providers can simply bypass it.

To solve this problem, a platform tax was introduced. This imposed a tax liability on platform operators by having them collect consumption tax on behalf of suppliers outside of Japan.

Insufficient understanding of the payment of Japan’s consumption tax

On online platforms, many businesses from around the world are developing digital services that transcend national borders. Transactions that go beyond the limited market of one’s own country can go a long way toward a business’s expansion efforts. However, the payment of Japanese consumption tax on digital services provided through platforms is still not widely accepted by overseas suppliers.

In the sales agent system mentioned above, there have been problems with services sold to foreign customers not being taxed properly. For quite some time, the tax office in Japan has been concerned about the problem of unpaid taxes due to a lack of understanding of the tax system.

In the case of Japan’s consumption tax, some overseas businesses intentionally do not pay the tax, but many businesses simply do not understand Japan’s tax system. Although tax collection for these businesses is supposed to be carried out through investigation by the tax office, there are limits as to how much money can realistically be collected after identifying all unpaid taxpayers.

However, with the introduction of the platform taxation system in Japan, the hope is that the consumption tax on digital services will now be collected more fairly, consistently, and appropriately.

What businesses are subject to platform taxation?

Platform taxation applies when a supplier from outside of Japan provides digital services (i.e., telecommunications services) to private customers—not businesses—in Japan via “specified platform operators.” Platform taxation does not apply to: transactions made by suppliers in Japan, transactions that do not involve a specified platform operator, or B2B payments and transactions. In other words, only select transactions made through a platform are subject to the platform tax.

Specific examples of platforms that are subject to platform taxation include the Nintendo eShop, Apple’s App Store, and Google Play. These platforms are used by overseas businesses that do not have a location in Japan to distribute apps to private customers in the country.

Specified platform operators

A specified platform operator is a business that has been designated by the commissioner of the National Tax Agency. A specified platform operator is only designated when a business’s total amount of telecommunications services sold exceeds 5 billion yen in its tax period. If the business meets this specified platform requirement, it must submit the designation notification to the commissioner of the National Tax Agency via the head of the tax office in charge; this must be done by the deadline for submitting the final tax return for that tax period.

Specified platform operators announced by the National Tax Agency

A specified platform operator is a business operator that has been designated by the commissioner of the National Tax Agency. According to the list of specified platform operators published by the National Tax Agency, as of December 6, 2024, the following businesses have been designated as specified platform operators:

• iTunes K.K.
  
• Amazon Web Services Japan G.K.
  
• Google Asia Pacific Private Ltd.
  
• Nintendo Co., Ltd.
  

When does the application of platform taxation start?

As stipulated in the tax reform for fiscal 2024, the application of the platform tax will begin with specified platform operators for the provision of telecommunications services on and after April 1, 2025.

This means that from now on, any business designated as a specific platform operator—regardless of whether it is domestic or foreign—will be required to declare and pay consumption tax, as it is the business providing the relevant services.

Why it’s important to understand platform taxation in Japan

In this article, we explained the platform taxation system, the backstory behind its adoption, and the types of businesses that are subject to taxation. Platform taxation does not directly affect all businesses. However, it is a tax system that platform businesses offering digital services must understand.

Platform taxation has been implemented in many other countries aside from Japan. If you are considering developing a platform business, make sure you understand the platform taxation in each country you will potentially do business in.

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