Category: VAT

6. International Transactions ① Are exported goods subject to VAT in Japan?

Posted on by KAZUHISA MOCHIZUKI


No, exported goods are not subject to VAT in Japan. Exports are generally zero-rated, which means that while VAT is technically applicable, it is levied at a rate of 0%. Here’s how it works:

  1. Zero-Rated VAT:
    When goods are exported from Japan, they are treated as zero-rated for VAT purposes. This means that exporters do not charge VAT on these sales.
  2. Input VAT Reclamation:
    Although no VAT is charged on exports, businesses can still reclaim any input VAT paid on purchases related to the production of these exported goods. This is intended to ensure that goods exported from Japan are competitively priced in international markets, free of tax cost.
  3. Documentation Requirements:
    To qualify for zero-rating, businesses must provide appropriate documentation proving that the goods have been exported. This includes customs declarations, shipping documents, and other relevant export evidence.
  4. Compliance and Reporting:
    Businesses must still report these zero-rated sales in their regular VAT returns. Detailed records of exports and related input VAT credits should be meticulously maintained to support these filings.
  5. Risk of Audit:
    Export transactions are often scrutinized by tax authorities to ensure compliance with zero-rating requirements. Businesses must ensure that all necessary documentation is accurate and readily available in case of an audit.

By effectively managing these aspects, businesses can ensure compliance with Japanese VAT laws while optimizing their VAT position in relation to exports. Consulting a tax professional experienced in international trade and VAT can help navigate these rules and ensure that all necessary documentation and reporting are correctly handled.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ⑩ What records should be maintained for VAT purposes when selling digital goods?

Posted on by KAZUHISA MOCHIZUKI

When selling digital goods, especially in a VAT-regulated environment like Japan, maintaining accurate and comprehensive records is crucial. Here are the types of records that should be kept:

  1. Sales Records:
    Detailed records of all sales transactions, including dates, amounts, types of digital goods sold, and the VAT charged. Each transaction should be traceable with sufficient details to identify the customer and the nature of the goods or services provided.
  2. Customer Information:
    Information about the customers, particularly their location, to determine the correct VAT treatment. For digital goods, it’s important to establish whether customers are consumers or businesses and in which country they are located.
  3. Invoices and Receipts:
    Copies of all invoices and receipts issued. These should clearly show the amount of VAT charged and state that the figures include VAT if that is the case. For sales with qualified invoices to be issued, invoices should meet the local VAT invoice requirements, including details like the VAT number of the customer if applicable.
  4. Payment Records:
    Documentation of payments received, including the method and date of payment. These records should link payments to their respective invoices.
  5. VAT Return Filings:
    Copies of all VAT returns filed and any corresponding documentation supporting the return. This includes calculations of how much VAT was due and how much was actually collected.
  6. Refund and Adjustment Records:
    Details of any refunds, discounts, or adjustments made on sales of digital goods. These records should explain the reason for the adjustment and show how the VAT calculation was altered as a result.
  7. Audit Trail:
    An audit trail that links all documents and records for each transaction to facilitate reviews and audits by tax authorities.
  8. Access to Digital Platforms:
    If using third-party platforms or marketplaces, ensure access to transactional data that might be held on these platforms, as it’s essential for VAT reporting and compliance.

These records typically need to be retained for a number of years, according to local tax laws (often around seven years in Japan). Maintaining these records not only supports compliance with VAT regulations but also helps in financial management and audit preparedness. Engaging with a tax professional who understands the specifics of digital goods and VAT requirements can provide additional guidance and ensure that record-keeping practices meet all necessary standards.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ⑨ How often must foreign digital service providers submit VAT returns in Japan?

Posted on by KAZUHISA MOCHIZUKI

Foreign digital service providers who are registered for VAT in Japan are typically required to submit VAT returns on a quarterly basis. Here’s how the process generally works:

  1. Quarterly Interim Filing:
    VAT returns are typically filed every quarter, depending on the amount of VAT from the previous year. These returns reflect the VAT collected from sales to Japanese consumers during that period. Deadlines for filing and payment are generally set within two months after the end of each quarter.
  2. Annual Return:
    In addition to interim returns, businesses must submit an annual return. This return provides a consolidated overview of all VAT transactions throughout the year.
  3. Electronic Filing:
    VAT returns are generally filed electronically, making the process more convenient and accessible for foreign companies. The Japanese tax authorities provide online platforms for the submission of these returns. However, note that all displays and instructions are in Japanese.
  4. Payment of VAT:
    The VAT collected must be remitted to the Japanese tax authorities by the deadline associated with each quarterly filing. Late payments can incur penalties and interest charges.
  5. Record-Keeping:
    It is crucial for digital service providers to maintain accurate records of all sales, VAT collected, and any adjustments. These records must support the figures reported in the VAT returns and may be required for audit purposes.

Foreign digital service providers should ensure they understand and meet these filing requirements to avoid penalties and maintain good standing with the Japanese tax authorities. Consulting with a tax professional experienced in Japanese VAT can provide valuable assistance in managing these obligations effectively.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ⑧ Are VAT rates for digital services different from the standard VAT rates?

Posted on by KAZUHISA MOCHIZUKI

In Japan, the VAT rates for digital services are the same as the standard VAT rates applied to most other goods and services. Here’s a brief overview:

  1. Standard VAT Rate:
    Digital services are subject to the standard VAT rate of 10%. This applies to various types of digital services provided to consumers in Japan, including streaming of music and videos, downloadable software, cloud services, ebooks, and online games.
  2. Reduced VAT Rate:
    Unlike some physical goods such as food and certain beverages that may qualify for a reduced VAT rate of 8%, digital services generally do not benefit from this reduced rate.
  3. Consistent Application:
    The VAT treatment of digital services aims to ensure that there is a level playing field between traditional and digital businesses. The same VAT rate helps simplify the tax system for both providers and consumers.
  4. VAT Registration for Foreign Providers:
    Foreign businesses providing digital services to Japanese consumers are required to register for VAT in Japan, collect VAT at the standard rate, and remit it to the Japanese tax authorities. This is regardless of whether the business has a physical presence in Japan.
  5. VAT Inclusive Pricing:
    Typically, prices for digital services must be presented VAT-inclusive, ensuring transparency for consumers and compliance with Japanese consumer protection laws.

For foreign providers of digital services, understanding and applying these VAT rules correctly is crucial to ensure compliance and avoid potential penalties. Consulting with a tax professional who specializes in Japanese VAT law can provide valuable guidance and support in navigating these regulations effectively.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ⑦ How do foreign businesses calculate VAT on Japanese sales?

Posted on by KAZUHISA MOCHIZUKI

Foreign businesses that sell goods or services in Japan need to calculate VAT accurately to comply with Japanese tax regulations. Here’s a step-by-step guide on how to calculate VAT for sales in Japan:

  1. Determine VAT Registration Requirement:
    First, determine if your business needs to register for VAT in Japan. This is mandatory for foreign businesses selling digital services directly to Japanese consumers and may be required for other types of goods or services depending on your business operations.
  2. Understand VAT Rates:
    Japan’s standard VAT rate is 10%. A reduced rate of 8% applies to specific items like food and certain beverages. Ensure you apply the correct VAT rate based on the type of product or service being sold.
  3. Calculate VAT on the Sale Price:
    VAT is calculated by applying the appropriate VAT rate to the sale price of the goods or services. For example, if you sell an item for ¥10,000 and the applicable VAT rate is 10%, the VAT amount would be ¥1,000. Thus, the total amount charged to the customer would be ¥11,000.
  4. Include VAT in Prices:
    In Japan, consumer prices typically include VAT. Ensure that the price displayed to customers includes VAT to avoid any confusion or legal issues.
  5. Issue Proper Invoices:
    Provide invoices that clearly state the VAT amount charged. This is crucial for both compliance and transparency, and it helps customers understand exactly what they are being charged.
  6. Adjust for Discounts and Promotions:
    If you offer discounts or promotions, calculate VAT on the final sale price after the discount has been applied.
  7. Handle Reverse Charge Mechanism for B2B Sales:
    If foreign businesses are selling digital services to other businesses located in Japan, understand that the reverse charge mechanism may apply. In this case, the Japanese buyer is responsible for accounting for VAT, and you should not charge VAT directly.
  8. File VAT Returns and Remit Payments:
    Regularly file VAT returns and remit the VAT collected to the Japanese tax authorities. The frequency of filing and payments depends on your registration details and the volume of sales.
  9. Keep Accurate Records:
    Maintain detailed records of all sales, VAT collected, VAT paid on purchases (if reclaiming input VAT), and any adjustments made. This is essential for accurate VAT filings and for audit purposes.

Foreign businesses operating in Japan or selling to Japanese consumers should consider consulting with a Japanese tax professional to ensure that they are fully compliant with local VAT regulations and to navigate the complexities of VAT calculations and filings efficiently.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ⑥ How is VAT charged when digital services are sold through a third-party platform?

Posted on by KAZUHISA MOCHIZUKI

For foreign businesses providing digital services toward Japanese consumers, the following platform taxation will be taking effect on and after April 1 2025. When digital services are sold to consumers in Japan through third-party platforms, the VAT obligations can vary depending on the platform’s role and the agreement with the service provider. Here are some key considerations:

  1. Platform Responsibility:
    In many cases, third-party platforms that facilitate sales of digital services are responsible for collecting and remitting VAT. This is particularly common when the platform controls the terms of sale, payment processing, and delivery of the service.
  2. Supplier Responsibility:
    If the platform only acts as a marketplace and does not control the payment or delivery of the service, the individual suppliers may still be responsible for charging and remitting VAT. In this scenario, suppliers must ensure they are registered for VAT in Japan if required.
  3. VAT Collection at Point of Sale:
    VAT must be included in the price paid by the consumer. The platform, if responsible, collects VAT at the point of sale and issues receipts that detail the VAT charged.
  4. Registration Requirements:
    Both platforms and individual suppliers must assess whether they need to register for VAT in Japan. Platforms often have mechanisms in place to manage VAT for all transactions that occur through their service, simplifying compliance for individual suppliers.
  5. Documentation and Reporting:
    The responsible party must maintain accurate records of all sales, VAT collected, and VAT remitted. Regular VAT filings are required to report these details to the Japanese tax authorities.
  6. Contractual Agreements:
    The agreement between the digital service provider and the platform should clearly state which party is responsible for VAT compliance. This helps prevent any misunderstandings or non-compliance issues.
  7. B2B Transactions:
    For sales to businesses, the reverse charge mechanism may apply. Platforms typically have systems to identify whether a purchaser is a business and apply the reverse charge accordingly.

Businesses selling digital services through third-party platforms should ensure clarity on VAT handling as part of their agreement with the platform. Consulting with a tax advisor can provide insights into the specifics of VAT compliance for digital sales in Japan, ensuring that both platform and suppliers fulfill their tax obligations accurately.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information.

5. VAT for Digital Goods and Service ⑤ Is there a difference between VAT on digital goods and physical goods?

Posted on by KAZUHISA MOCHIZUKI

In Japan, the VAT treatment of digital goods and physical goods is largely similar in terms of the VAT rate applied; however, there are differences in the administration and specific rules regarding the place of supply, registration requirements, and collection methods.

  1. VAT Rates:
    Both digital and physical goods are subject to the same standard VAT rate of 10% in Japan. A reduced rate of 8% may apply to specific physical goods, such as certain food products, which does not typically apply to digital goods.
  2. Place of Supply Rules:
    For physical goods, VAT is generally applied based on the location where the goods are delivered. For digital goods, VAT is applied based on the location of the consumer. This distinction is crucial for determining VAT obligations, especially for foreign businesses.
  3. Registration Requirements:
    Foreign businesses selling physical goods in Japan may need to register for VAT if they have a sufficient nexus or physical presence. In contrast, foreign sellers of digital goods must register for VAT regardless of physical presence, as selling to Japanese consumers triggers VAT liability.
  4. Collection and Remittance:
    VAT on physical goods is typically collected at the point of sale and may involve customs when goods are imported. For digital goods, VAT must be collected by the service provider at the point of transaction and remitted directly to the Japanese tax authorities.
  5. Compliance and Reporting:
    Compliance for digital goods often involves understanding and managing digital sales platforms and ensuring that VAT is correctly charged based on the consumer’s location. Compliance for physical goods may involve managing inventory, shipping logistics, and import/export regulations.
  6. B2B Transactions:
    In B2B sales, the reverse charge mechanism applies to digital services from foreign businesses, where the responsibility for VAT shifts to the purchaser if they are a business. However, the application and compliance processes can differ based on the nature of the digital services.

Understanding these nuances can help ensure proper VAT handling for both digital and physical goods. Businesses, especially those engaged in cross-border sales, should consider consulting with a Japanese tax professional to navigate these complexities effectively and ensure compliance.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ④ Are there different VAT rules for different types of digital goods (software vs. streaming)?

Posted on by KAZUHISA MOCHIZUKI

In Japan, the VAT rules for digital goods like software and streaming services are generally consistent in terms of how VAT is applied, but there are nuances in how these rules might be interpreted or implemented depending on the type of service:

  1. Uniform VAT Rate:
    Both software and streaming services are subject to the standard VAT rate of 10% when sold to consumers in Japan. This applies regardless of whether the service is provided by a domestic or foreign company.
  2. Registration Requirements:
    Foreign providers of both software and streaming services need to register for VAT if they are selling these services to Japanese consumers. This applies even if the provider does not have a physical presence in Japan.
  3. Digital Services Definition:
    Japan defines digital services broadly to include not only software and streaming of audio and video but also ebooks, online games, and other digital content. The VAT treatment is similar across all these categories.
  4. B2B vs. B2C Transactions:
    For business-to-business (B2B) transactions, the reverse charge mechanism typically applies, where the responsibility for reporting and paying VAT shifts to the Japanese business purchaser. This is the same whether the purchase involves software or streaming services.
    For business-to-consumer (B2C) transactions, the foreign service provider must collect and remit VAT.
  5. Place of Supply Rules:
    The place of supply for VAT purposes is considered to be Japan if the consumer is located in Japan, which is determined by factors like the address of the customer or the location of the bank used for payment.

While the fundamental VAT rules for software and streaming services are the same, differences may arise in specific scenarios, particularly in how VAT obligations are communicated and managed. Foreign companies providing digital goods to Japanese consumers should consider consulting with a Japanese tax professional to ensure they understand and comply with all applicable VAT regulations.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ③ Do foreign e-commerce companies selling digital goods need to register for VAT in Japan?

Posted on by KAZUHISA MOCHIZUKI

Yes, foreign e-commerce companies that sell digital goods to consumers in Japan are generally required to register for VAT. Here’s how this process typically unfolds:

  1. Mandatory Registration:
    Foreign companies providing digital goods and services (such as software, streaming services, ebooks, and online games) directly to Japanese consumers must register for VAT in Japan, regardless of where the company is based.
  2. No Threshold:
    Even though foreign companies with sales not exceeding the specified threshold (typically 10 million yen in the base period) are exempt from VAT obligations, if they need to meet the requirements from their consumers to issue the qualified VAT invoices, they must register and comply with VAT obligations.
  3. Collection of VAT:
    Once registered, these companies are required to collect VAT at the standard rate of 10% on all sales to Japanese consumers. The VAT must be included in the price advertised and charged to the consumer.
  4. Filing VAT Returns:
    Registered foreign e-commerce companies must file VAT returns and remit the collected VAT to the Japanese tax authorities. This is typically done quarterly.
  5. Compliance Considerations:
    It’s important for foreign e-commerce businesses to ensure compliance with Japanese VAT laws, including accurate pricing, VAT collection, and regular filings. Mistakes or non-compliance can lead to penalties and fines.

Foreign e-commerce companies should consider seeking advice from tax professionals who specialize in Japanese VAT to navigate the registration process and ongoing compliance requirements effectively. This ensures that all legal obligations are met and that the business operates smoothly within the Japanese market.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information. 

5. VAT for Digital Goods and Service ② Does VAT apply to digital goods and services sold to Japanese businesses?

Posted on by KAZUHISA MOCHIZUKI

Yes, VAT applies to digital goods and services sold to Japanese businesses, but the mechanism for collection can differ from direct consumer sales:

  1. Reverse Charge Mechanism:
    For digital services provided by foreign companies to Japanese businesses, the reverse charge mechanism often applies. Under this system, the responsibility for calculating, reporting, and paying VAT shifts from the foreign supplier to the Japanese business recipient.
  2. Supplier’s Role:
    The foreign supplier does not charge VAT directly. Instead, the Japanese business that purchases these digital services must self-assess and pay the VAT due to the Japanese tax authorities.
  3. Compliance by Japanese Businesses:
    The Japanese business must report the VAT due on these transactions as part of their regular VAT filings. This includes declaring both the input VAT (which they can generally reclaim if the purchase relates to taxable business activities) and the output VAT due on the purchase.
  4. Documentation:
    It is crucial for both the foreign supplier and the Japanese business to keep detailed records of the transaction to support VAT reporting and compliance.
  5. VAT Registration for Foreign Suppliers:
    Even though the reverse charge applies, foreign suppliers of digital goods and services might still need to register for VAT in Japan if they also conduct transactions directly with Japanese consumers or if they meet certain criteria that require them to register.
  6. Clarifying VAT Obligations:
    Foreign suppliers should clearly communicate to Japanese business customers that the VAT will be handled through the reverse charge mechanism, ensuring that there is no confusion about the pricing and VAT responsibilities.

For businesses involved in these transactions, understanding and correctly applying the reverse charge mechanism is crucial for VAT compliance. Consulting with a Japanese tax professional can help clarify obligations and ensure that all VAT requirements are met efficiently.
The information provided here is based on legislation as it stands on the date of publication and may not reflect subsequent changes. We advise clients to seek tailored professional advice before making any decisions based on this information.