Each country and region has their own set of tax laws. In the US, there is sales tax, which is governed at the state level. In the EU and in most other countries, value-added tax (VAT) is in place. In Japan, there is a consumption tax. While the Japanese consumption tax (JCT) operates similarly to VAT, there are some important differences to be aware of if your business is considering expanding to Japan.

Here’s a guide to what you need to know about JCT, including when you should be collecting it from your customers, the correct rate to charge, and what to do when it is time to file and remit.

What’s in this article?

• What is the Japanese consumption tax (JCT)?
  
• When am I required to collect JCT from customers?
  
• What is the JCT rate?
  
• How do I register to collect JCT?
  
• When to file and remit JCT
  

What is the Japanese consumption tax (JCT)?

The Japanese consumption tax (JCT) is a type of indirect tax that applies to physical goods or services sold domestically in Japan as well as goods and services imported into the country.

JCT also applies to cross-border sales of digital services by foreign service providers. In this scenario, a reverse-charge mechanism applies to business-to-business (B2B) transactions, but foreign service providers may need to register for consumption tax purposes with regard to business-to-consumer (B2C) transactions.

When am I required to collect JCT from customers?

Businesses are required to collect JCT from customers in Japan if they meet the mandatory threshold of ¥10 million JPY in the base period. The base period is the calendar year two years prior to the current one. For example, the base period for the year of 2023 is 2021.

In addition, businesses are required to collect JCT if their taxable sales or salaries paid exceed ¥10 million JPY in the specified period. The specified period refers to the first six months of the previous calendar year (for sole proprietors) or the first six months of a fiscal year (for corporations).

In Japan, nonresident businesses are required to have an office located in Japan or have a tax representative in Japan.

What is the JCT rate?

As of October 2019, the JCT rate is 10% for most goods and services, with a reduced rate of 8% for certain food, beverage, and newspaper sales. These rates are a combination of the national and local consumption rates. Exports and certain services to nonresidents are taxed at a zero rate.

How do I register to collect JCT?

As of October 2015, a simplified procedure for the registration of nonresident businesses providing digital services was introduced. Nonresident businesses are required to appoint a Japanese tax representative. This representative will be the intermediary between the business and the Japanese tax authorities.

On October 1, 2023, Japan is introducing a new invoicing system, Qualified Invoicing System (QIS), that will introduce some fundamental changes to tax registration and invoicing procedures. The main changes are:

• JCT taxpayers must register with the tax office to get a registration number as qualified invoice issuers.
  
• Qualified invoice issuers must issue qualified invoices to their business customers.
  
• Businesses can only deduct input consumption tax if they have received a qualified invoice from a qualified invoice issuer.
  

When to file and remit JCT

In general, JCT returns must be filed annually. A corporation must file its annual JCT return within two months after its fiscal year-end. Businesses may opt to file JCT returns monthly or quarterly instead of annually.