The Electronic Books Preservation Act refers to the law that regulates the ways in which electronic national tax data can be preserved in Japan, such as bookkeeping documents and invoices and receipts. It is also known as the “Electronic Bookkeeping Act.”
Beginning in January 2024, The Electronic Books Preservation Act stipulates that data related to electronic transactions such as invoices, receipts, and other documents issued electronically must be preserved as-is in electronic format.
The Electronic Books Preservation Act stipulates three types of documents to be retained. These are the optional “electronic bookkeeping records” and “scanned documents,” and the mandatory “electronic transactions.”
This article will focus on the storage of electronic transactions, which has been made mandatory, with simple explanations and a discussion on the relevant documents and requirements around maintaining electronic transaction records.
What’s in this article?
- What is the Electronic Books Preservation Act?
- Requirements of the Electronic Books Preservation Act
- How do time stamps work under the Electronic Books Preservation Act?
- Improving back office operations under the Electronic Books Preservation Act
What is the Electronic Books Preservation Act?
As we’ve mentioned, the electronic data retention required by the Electronic Books Preservation Act can be divided into three categories: electronic accounting records, scanned documents, and electronic transaction data.
Storing electronic bookkeeping data (optional)
Electronic accounting data refers to national tax-related accounting records created electronically on personal computers (accounting journals, general ledgers, cash receipt journals), as well as documents related to national taxes (documents related to financial results and transactions). Since the storage of electronic accounting data is optional, business owners can choose whether to keep their records electronically or in physical, printed form.Storing scanned documents (optional)
Scanned documents are electronic copies of transaction-related documents that were created on paper (invoices, receipts, etc.), as well as transaction-related documents that were received on paper and scanned under certain conditions. Because the storage of scanned documents is optional, business owners can choose whether to digitize paper documents for storage or maintain them in physical, printed form.Electronic transactions (required)
Business owners should note that Japan now requires the preservation of electronic transaction data, such as electronic data relating to contracts, invoices, and other data received or issued via electronic transactions, including email. However, electronic transactions as defined in the Electronic Books Preservation Act refer to transactions conducted through the exchange of electronic data. Transactions originally conducted on paper—where digitization of documents is optional (storage of scanned documents)—may be preserved in paper form and do not need to be digitized.
When should you begin preserving electronic transaction data?
The Electronic Books Preservation Act has been revised several times over the years. While it was first enacted in 1998, it has been gradually revised to keep pace with technological developments—such as when it allowed the storage of scanned paper documents in PDF formats in 2005, and when it allowed data storage using images captured by smartphone devices in 2016.
The requirement to store electronic transaction data was introduced in January 2022. However, there was a grace period lasting through the end of 2023, during which businesses that could not meet the requirements were allowed to print invoices and receipts received digitally and store them in paper format. This grace period of the Electronic Books Preservation Act was not extended and has now expired.
The grace period ended on January 1, 2024. Therefore, the retention of electronic data is now fully mandatory. This requirement aims to ensure the authenticity of electronic documents and prevent tampering.
As part of these requirements of the Electronic Books Preservation Act, invoices and receipts issued as electronic data must now be preserved as electronic data. Additionally, all corporations and sole proprietorships—regardless of business type or size—are subject to the provisions of the Act, and all businesses must faithfully comply with its requirements.
However, corporations and sole proprietors that do not handle electronic data at all are not required to take additional action by the Act, as they are not subject to its stipulations. So long as all transaction documents produced during the course of business are produced on paper, they may also be preserved in paper format without issue.
Unlimited preparatory period for businesses with “substantial cause”
For businesses that have found it difficult to make the transition to electronic data storage for electronic transactions and have a “substantial reason” that prevents them from complying with the law on electronic data storage, recognized by the head of their regional tax office, the previous preparation period may be applied even after January 2024.
Businesses that fall under this preparatory period will be required to download electronic data or output it in the form of documents at the request of tax authority employees. For further details, consult Japan’s National Tax Agency’s page on methods for preserving electronic transaction data and its page on revisions to the Electronic Books Preservation Act.
What happens if electronic transaction data isn’t maintained?
The following penalties may be imposed under the Electronic Books Preservation Act in situations that do not fall under the “substantial cause” qualification discussed above and are therefore considered violations of the law.
Additional taxes (applies to preservation of scanned documents and preservation of electronic transaction data)
If preservation methods stipulated in the Electronic Books Preservation Act are not followed and electronic data are falsified or tampered with, a tax surcharge of 10% may be assessed on the transactions in question—on top of an additional tax (of 35% or 40%).Revocation of approval for blue return
As a penalty for not properly conducting the preservation of electronic transaction data and not fulfilling the preservation requirements stipulated in the Electronic Books Preservation Act, approval of a business’s blue tax return may be revoked. However, as natural disasters and other unavoidable situations are taken into consideration, a business is not immediately considered to have acted illegally. This determination is only made upon a complete examination of the relevant circumstances. (See the following reference materials from the National Tax Agency:Penalties under the Companies Act
Failure to comply with the provisions of the Electronic Books Preservation Act and engaging in improper acts such as falsifying or altering relevant documents or books may result in a fine of up to ¥1 million (Companies Act, Article 976).
How should individual business owners act to comply with the Electronic Books Preservation Act?
As previously discussed, not only corporations, but all businesses that handle electronic transaction data—including freelancers, sole proprietors, etc.—are subject to the Electronic Books Preservation Act. This means that if sole proprietors fail to properly preserve electronic transaction data using one of the preservation methods under the Electronic Books Preservation Act, they may be subject to penalties just as corporations are. Therefore, it is important to fully understand how to preserve electronic transaction data and to establish a framework for doing so, such as with software or other systems that comply with the Electronic Books Preservation Act.
In addition to the requirement that preserved electronic data in need of review be easily accessible and both searchable and printable, it is also recommended that backups be made to avoid the possibility of data loss due to system failure.
Thus, individual business owners might be more comfortable complying with the Electronic Books Preservation Act if they have installed an accounting system that allows for the retention and production of documents that meet the Act’s retention requirements.
Stripe complies with the requirements of the Electronic Books Preservation Act and also makes the issuing and maintenance of invoices and receipts possible through our automatic generation feature. Additionally by using Stripe Invoicing, it’s possible to achieve improvements that lead to smoother and more efficient back office operations.
Documents subject to electronic transaction data preservation
Under the Electronic Books Preservation Act, documents subject to electronic transaction data preservation include primarily the following:
- Invoices
- Cost estimates
- Delivery notes
- Purchase orders
- Receipts
If these documents are exchanged as electronic data via email, electronic data interchange (EDI) systems, cloud services, or other similar means, they must be preserved as electronic data in that format.
Furthermore, the documents listed above are also transaction-related documents subject to electronic books preservation and scanned document preservation as detailed in the preceding section, “What is the Electronic Books Preservation Act?”
How to save a qualified invoice based on the Electronic Books Preservation Act
In principle, under the Invoice System that began on October 1, 2023, the buyer and seller are obligated to save qualified invoices (i.e., the seller saves a copy while the buyer saves the original document received from the seller).
Saving these qualified invoices now requires proper compliance with the Electronic Books Preservation Act. As such, qualified invoices issued via electronic means must be saved electronically, rather than via paper copies. If these documents are not properly saved in compliance with the Electronic Books Preservation Act, the buyer may be unable to receive tax credits for purchases. Therefore, in addition to complying with the new Invoice System, business owners must also carefully manage the retention of documents based on the Electronic Books Preservation Act. Details on the requirements for storing these documents are discussed in the next section.
In this way, there is a strong connection between the Electronic Books Preservation Act and the Invoice System, so it’s a good idea to obtain a solid understanding of how to save electronic document data in advance.
Requirements of the Electronic Books Preservation Act
Electronic ledgers are divided into two categories: “high-quality electronic ledgers” and “other electronic ledgers,” and the difference between the two lies in the extent to which the preservation requirements are met.
Japan’s National Tax Agency requires that documents preserved under the Electronic Books Preservation Act meet all conditions related to both “ensuring visibility” and “ensuring authenticity.” See below for the specific conditions that qualify as “high-quality” and “other” electronic ledgers. (Reference material: National Tax Agency’s page on the revision of the Electronic Books Preservation Act)
A circle ◯ in the “Other” column indicates conditions that must be met based on the Electronic Books Preservation Act.
|
Maintenance Requirement
|
High quality
|
Other
|
|---|---|---|
| When recorded items (data) are edited or deleted, a system is used that provides a record so that the circumstances and content of the change can be verified. | ◯ | – |
| A system is in place that allows for review of the circumstances under which information is entered after the normal business processing time has elapsed. | ◯ | – |
| The relationship between items recorded in digitized accounting ledgers and items recorded in related accounting ledgers can be verified. | ◯ | – |
| Documents related to the operation of the system are provided(e.g., system overview, specifications, user guide, manual, etc.). | ◯ | ◯ |
| A computer, printer, etc., is provided at the location where data is stored—along with an operating manual, so that data can be exported in a readable state in a timely manner. | ◯ | ◯ |
| Search requirementsSearch is possible by the transaction date, transaction amount, and transaction partner. | ◯ | – |
| Search requirementsSearch is possible by date or within a specific monetary scope. | ◯ * | – |
| Search requirementsSearch can be performed using two or more combined optional criteria. | ◯ * | – |
| The system is able to respond to requests for the download of digital records from tax officers exercising their right to inquiry and inspection. | – * | ◯ ** |
(*) Persons required to store data are exempt from search requirements 2 and 3 if tax officials making requests under their right of inquiry and inspection can download digital records in response to their requests.
(**) Not required if all other conditions at the “high-quality” level are met.
In addition, if a company stores relevant accounting books and invoices to meet the conditions of high-quality electronic accounting books and has previously submitted a notification to the head of its regional tax office indicating that it wishes to use the measure to reduce penalty taxes for the underreporting of income related to high-quality electronic accounting books, the special deduction on income tax for blue returns (¥650,000) can be applied.
As shown in the table above, high-quality electronic ledgers do not allow for amendments that do not leave a history of deletions or corrections. It is also important for a high-quality electronic ledger to ensure the interrelationship of records.
Meeting the requirements for “high quality” will ensure credibility with financial institutions and tax authorities.
Also, if reporting omissions are made regarding matters recorded in an electronic accounting book that is “high quality,” favorable treatment involving a 5% reduction in the penalty for the underreporting of income may be applied—excluding cases of falsification or imagined facts. (Reference material: National Tax Agency’s self-assessment system).
How do time stamps work under the Electronic Books Preservation Act?
Time stamps, according to the Electronic Books Preservation Act, are a system for certifying the reliability and transparency of documents to fulfill the role of the original document and should specify a date and time to prevent the modification of electronic data. These time stamps are not to be issued by companies, but are to be issued and distributed by third-party institutions called Time Stamp Authorities or TSAs.
The amendment to the Electronic Books Preservation Act in January 2022 relaxed the requirements for time stamps, including allowing cases in which time stamps may not be required if certain requirements are met. In addition, there are no specific requirements for documents that must be time stamped in cases of preservation of scanned documents, preservation of electronic transaction data, or preservation of accounting records related to national taxes—leaving the use of these time stamps to the judgment of the business owner.
When time stamps are not required
The provision of time stamps when storing electronic transaction data is not required in the following cases:
- Where a history reference function allows the circumstances of the modification or deletion of electronic data and the exchange and storage of electronic data to be verified.
- If the creator and issuer of the electronic data (the seller) has already provided a time stamp, a time stamp from the receiver (the buyer) is not required.
- If the receiving entity uses a system that prevents the free editing and deletion of electronic data, or if administrative procedures to prevent editing or deletion have been established and are followed.
However, note that time stamps are required in cases that do not meet the above conditions.
Important points to be aware of when using a free time stamp service
There is usually a charge for providing time stamps that comply with the Electronic Books Preservation Act, but several tools are available that provide this service free of charge. Whether a tool is free or not, the authenticity of its time stamps is maintained by the fact that they are issued by TSAs accredited by the Japan Data Communications Association. This means that if a free time stamp is not issued by a TSA, it does not meet the requirements of the Electronic Books Preservation Act, and its use may be considered illegal. (Reference materials: National Tax Agency’s page on Application Requirements (Basic Matters)).
Because providing time stamps takes time and effort, it is important to determine how much the use of a particular tool will increase the workload before selecting it.
Improving back office operations under the Electronic Books Preservation Act
Above, we provided an explanation of the Electronic Books Preservation Act. As digitization is rapidly advancing and paperless processes are becoming ubiquitous, even companies that have not been able to transition to electronic transactions are now embracing digital transformation. Moreover, electronic transactions will increasingly become the standard in the future.
Especially today, when the retention of electronic transaction data has become fully mandatory, it is key for companies to fully understand the data retention requirements of the Electronic Books Preservation Act, the types of documents covered by the Act, and to comply with the provisions of the Act to avoid the risk of penalties or other issues. While there is no problem with maintaining paper documents if the exchange is paper-based, using the data in a manner that complies with the requirements of the Electronic Books Preservation Act eliminates the need to maintain the original paper documents.
Using this as an opportunity to improve back office operations—including moving to paperless accounting—allows for business optimization, and also reduces the need for storage space, lowers costs, and eliminates the risks associated with the potential loss or alteration of paper records.
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