New Invoice System in Japan

What is the new invoice system and why is it important?

In the digital era, the continuous search for efficiency-driving solutions remains paramount for businesses. The recent rollout of the new invoice system in Japan represents a significant leap in streamlining invoice processing for companies nationwide. Yet, this change hasn’t been met with universal acclaim, particularly within the small business sector. Sole proprietors will gradually have to return the sales tax collected back to the government. Previously, they had been able to collect and keep the sales tax collected for their personal income while their corporate clients have been able to write off the sales taxes paid to them.

This change will impact both sole proprietors and the companies that deal with them. This article will explain the basics of the new Japanese invoice system, detailing its features and potential benefits for companies operating in Japan. To ensure a thorough understanding, we’ve enlisted the expertise of Shinpei Wakana, a certified public accountant specializing in tax audits for small to medium-sized enterprises.

About Shinpei Wakana

Shinpei Wakana, a Certified Public Accountant and Keio University alumnus, has a decade of experience specializing in Corporate and Sales Tax, particularly tax audits for small and medium-sized businesses. Fluent in English, he ensures smooth and effective communication with international clients, offering personalized and accessible support tailored to their individual needs.

Leveraging modern digital tools such as Slack, Chatwork, Xero, and QuickBooks, Wakana combines convenience with professional expertise. This digital fluency, coupled with his in-depth knowledge of tax regulations, positions him as a leading authority in financial consulting. See Match.Points Accounting and check out Q&A with a Japanese Tax Account follow-up to learn more about Wakana’s dedication to helping businesses navigate their financial and tax needs.

About Scaling Your Company

Scaling Your Company helps businesses achieve sustainable growth and scalability. With a team of experienced professionals, we provide tailored strategic consulting services to address the unique needs of each client. From optimizing operations to accessing new markets, our expertise covers various areas crucial to successful scaling. Additionally, our website serves as a valuable resource hub, offering articles, case studies, and educational programs that empower entrepreneurs with the knowledge needed for effective expansion. By organizing workshops and seminars, Scaling Your Company fosters a community of industry experts who share insights and best practices, enabling businesses to navigate the complexities of scaling with confidence.
 If you aim to break into the Japanese market, our video series Japan Business Seminars provides invaluable insights featuring industry experts. For a detailed look into taxes, watch Japanese Taxes Q&A with a Japanese Tax Accountant. You can also check out Japanese Labor Law Q&A with a Japanese Sharoushi and Renting An Office In Japan Seminar with Corey Nedz of Jump Start Abroad. For exclusive updates and more, subscribe to our newsletter at Scaling Your Company.

Further Reading: For those considering hiring an accountant in Japan or looking to understand more about the financial landscape here, you won’t want to miss this comprehensive guide: The Ultimate Guide to an Accountant in Japan.

What is consumption tax?

The consumption tax, or the sales tax, is levied on business enterprises when they transfer goods, provide services, or import goods into Japan. It’s important to note that the qualified invoice system specifically pertains to consumption tax and is not associated with individual income tax, corporate tax, or inhabitant tax. Therefore, let’s focus on comprehending the fundamental aspects of this tax law before delving into the intricacies of the new invoice system. 

What is the current system?

The introduction of the new invoice system in Japan has profound implications for consumption tax rates and exemptions. To fully grasp the significance of these changes, it is essential to first gain a comprehensive understanding of the current system. By examining the existing framework, we can better appreciate the impact and benefits of the upcoming modifications.

What are the different consumption tax rates in Japan?

Under the consumption tax system in Japan, there are different tax rates for certain goods and specified transactions. The standard tax rate is 10%, which applies to most goods and services. However, there is a reduced tax rate of 8% that applies to specific items such as food, non-alcoholic beverages, newspapers, and certain pharmaceutical products. These goods fall under the category of essential items and are subject to a lower tax rate.

In addition to different tax rates for goods, there are specified transactions that are exempt from consumption tax. For instance, as of June 2023, the sales or lease of land, sales of securities, and certain public services provided by the government are not subject to consumption tax. These exemptions are based on the nature of the transactions and are specified within the tax regulations.

Let us help you 2x-5x your business in Japan

Scale your business in Japan and beyond. Discover our capabilities – dive into our case studies and see the difference we can make!

SEE OUR CASE STUDIES

What companies are exempted from doing a consumption tax filing?

For a business, whatever sales tax you collect from customers, you have to pay it back to the government in the following fiscal year. Let’s say you sold 10,000,000 yen in products and collected 1,000,000 yen in sales tax. You have to give that money to the government, and the sales tax collected is not yours to keep.

However, there is an exemption from having to return that sales tax back to the government for certain enterprises.

Under this provision, businesses whose taxable sales were 10 million yen or less two years ago are exempt from filing and liability for consumption tax. This exemption is particularly relevant when considering implementing a new invoice system.

For instance, if a business surpasses the threshold of taxable sales exceeding 10 million yen in 2023, its consumption tax liability would commence from the 2025 fiscal year (two fiscal year leeway). This exemption ensures that smaller enterprises are not burdened with immediate filing and tax obligations, allowing them to focus on their operations and foster growth. However, it’s crucial to note that once the taxable sales threshold is exceeded, the business becomes liable for consumption tax payments in subsequent fiscal years – in this case for 2025 for exceeding 10 million yen in 2023.

How does the deduction of consumption tax on purchases affect businesses?

Any incorporated business and sole proprietors earning over 10,000,000 yen do not have that exemption. However, they have the option to deduct the consumption tax they have to pay the government based on how much consumption tax they have already paid that year.

The deduction of consumption tax on purchases plays a significant role in determining the overall tax liability for businesses, particularly in the context of the implementation of a new invoice system. This deduction affects businesses by allowing them to offset the consumption tax paid on purchases against the consumption tax collected on taxable sales.

To calculate the amount of consumption tax to be paid, businesses deduct the consumption tax on taxable purchases from the consumption tax on taxable sales. The resulting figure represents the actual sales tax payment owed to the government. This mechanism ensures that businesses are not double-taxed on their inputs and only pay tax on the value they add through their sales.

For example, a company generated a total of 55,000,000 yen in sales. Out of this amount, 5,000,000 yen is the sales tax. However, the sales tax is not the company’s money to keep since they must pay it back to the government. So, when we talk about the company’s revenue, which is the money they actually get to keep, we exclude the sales tax amount. Therefore, the company’s revenue, after excluding the sales tax, is only 50,000,000 yen.

Here is a visual representation of this example under the current system:

It’s worth noting that starting from October 1st, taxable purchases made by non-business enterprises or those without qualified invoices will no longer be eligible for the full deduction. Therefore, businesses must ensure that they obtain qualified invoices and maintain proper documentation to support their deduction claims.

What is the new invoice system?

Introducing the new invoice system in Japan brings along some transitional measures for the deductible consumption tax on purchases. These measures aim to make things easier for businesses and smooth out any potential difficulties during the initial implementation stages. The goal is to ensure a seamless transition, so businesses can adapt without too much trouble and take full advantage of the benefits provided by the new invoice system.

What are the transitional measures for deductible consumption tax on purchases?

Under the transitional measures, business partners can deduct a certain percentage of the consumption tax they have paid to non-registered entities. This deduction allows them to reduce their tax burden and maintain financial stability during the transition period. Initially, business partners can deduct 80% of the consumption tax paid to non-registered entities for the first three years. Following this period, the deduction percentage decreases to 50% for the subsequent three years.

From October 2023 – | 80% deduction system

This table shows the differences between the two systems. In the old system, the client could use the entire sales tax amount to reduce their tax bill. However, under the new system, the client can only use 80% of the sales tax to reduce their tax bill and thus needs to pay an extra 1,000,000 yen to the government. 

※ This is a simplified example and assumes that all your clients are non-qualified businesses. In reality, most of your clients would be qualified businesses.

These transitional measures offer relief for both registered and non-registered entities. Business partners who are unable to fully deduct the sales tax paid to non-registered entities can benefit from this deduction, ensuring their tax payments remain reasonable. The measures provide a gradual adjustment period for non-registered entities, allowing them time to evaluate the necessity of registration without immediate tax implications.

It’s important to note that the transitional measures are in place for a limited duration and apply specifically to the deduction of consumption tax on purchases. As such, businesses should carefully consider their registration status, potential tax liabilities, and the benefits provided by the transitional measures in the context of the new invoice system. 

To learn more about Japanese tax reduction strategies and gain valuable insights, visit our blog section which includes informative articles related to this.

What is the purpose and outline of the qualified invoice system?

The qualified invoice system is a method that enables buyers to receive a tax deduction for consumption tax on purchases. Under this system, the retention of a qualified invoice issued by the business enterprise is required for the buyer to claim the tax deduction. On the other hand, for the seller to issue a qualified invoice, they must be registered as a business enterprise qualified for invoicing by the tax office.

The purpose of the qualified invoice system within the context of the new invoice system, is to facilitate tax deductions for consumption tax on purchases. It aims to streamline the process and ensure accuracy in claiming tax deductions, benefiting both buyers and sellers. Understanding the purpose and outline of the qualified invoice system is crucial for businesses and individuals operating under the new invoice system.

The outline of the qualified invoice system can be summarized as follows:

Retention of Qualified Invoices:

• Buyers must retain qualified invoices issued by business enterprises as proof of their purchases.
• Qualified invoices serve as essential evidence for claiming tax deductions.

Qualified Invoice Issuance:

• Business enterprises eligible to issue qualified invoices must register as qualified invoice system entities.
• Registered entities are responsible for providing accurate and valid invoices to their customers.

Tax Deduction for Buyers:

• Buyers can deduct the consumption tax paid on their purchases from their overall tax liability.
• Tax deductions reduce the tax burden for buyers and contribute to fair taxation.

By adhering to the qualified invoice system’s requirements, businesses and individuals can accurately claim tax deductions and ensure compliance with the new invoice system. The system aims to simplify the process, promote transparency, and facilitate proper utilization of tax deductions for both buyers and sellers.

How can the seller issue a qualified invoice?

To issue a qualified invoice under the new invoice system, sellers must follow specific procedures and meet certain criteria. Here’s an overview of how sellers can issue a qualified invoice within the context of the new invoice system:

1. Register as a Qualified Invoice System Entity: Sellers must register with the tax office as a qualified invoice system entity. This registration confirms their eligibility to issue qualified invoices.

2. Compliance with System Requirements: Sellers need to ensure they meet all the requirements set forth by the qualified invoice system. This includes adhering to invoicing standards, maintaining accurate records, and following the guidelines provided by the tax office.

3. Invoice Content: Qualified invoices should contain all the necessary information as specified by the system. This typically includes details such as the seller’s name, address, contact information, the buyer’s name, description of the goods or services provided, and the amount of consumption tax charged.

4. Issuing Valid Invoices: Sellers must issue valid qualified invoices for each transaction with a buyer who is eligible to claim tax deductions. It is important to provide these invoices promptly and accurately to ensure buyers have the necessary documentation for their tax deduction claims.

By registering as a qualified invoice system entity, complying with system requirements, and issuing valid invoices, sellers can effectively participate in the qualified invoice system. This enables them to provide their customers with the necessary documentation to claim tax deductions on their purchases. Understanding and following these procedures is vital for sellers operating under the new invoice system, ensuring compliance with tax regulations and facilitating smooth transactions.

How does it affect different types of businesses?

As the qualified invoice system will be launched on October 1st, 2023, it’s crucial to know how it could uniquely impact different types of businesses, especially in terms of taxable sales and business models. Here’s a closer look at the scenarios that lay out the specific timings and impacts of this system:

Case A: Taxable Sales Over 10 Million

If a business had taxable sales exceeding 10 million yen two years ago, they are already a taxable person and must register under the qualified invoice system. Registration becomes mandatory in this case. 

Businesses falling into this category must register under the qualified invoice system. It becomes mandatory for them to issue qualified invoices and adhere to the system’s requirements. They need to accurately document and retain qualified invoices for their transactions. 

As the qualified invoice system affects them immediately, they must register and start issuing qualified invoices for their transactions from October 1st, 2023.

Case B: B2B Businesses with Taxable Sales under 10 Million Yen

B2B businesses with taxable sales below 10 million yen two years ago are currently non-taxable persons. Whether they should register or not depends on their relationship with their business clients. It is recommended to consider registration if requested by clients or if there are potential benefits. However, there are exceptions where even if registered, the consumption tax liability might not be significant.

In this case, businesses have the option to register based on their relationship with their clients. If requested by clients or if potential benefits arise, registration is recommended. However, businesses must evaluate the implications and consider factors such as their clients’ preferences and the impact on their operations.

In this case, the qualified invoice system affects businesses when they decide to register. If they choose to register, they should start issuing qualified invoices from the date of registration.

Case C: B2C Businesses with Taxable Sales under 10 Million Yen

B2C businesses, including convenience stores, taxis, or language schools, fall under this category. If their taxable sales two years prior were under 10 million yen, there’s no obligation to register under the new invoice system, given their customer base primarily comprises non-taxable individuals, i.e., consumers.

Such B2C businesses, predominantly catering to non-taxable individuals, are exempted from registration requirements. They can continue to operate seamlessly without needing to implement the new invoice system, ensuring it won’t affect them from October 1st, 2023.

What do you have to do in advance?

What documents need to be submitted for registration?

When registering under the new invoice system, businesses need to submit specific documents. While the official document is available in Japanese, the submission process is relatively straightforward. Here are the documents typically required for registration:

1. Application Form: Fill out the application form provided by the tax agency. This form includes information such as the company’s name, address, and the name of the representative.

2. Additional Documentation: Depending on the specific requirements of the tax agency, additional documents may be necessary. These can include identification documents, proof of address, or any other supporting paperwork as deemed necessary.

It’s advisable to consult with an accountant or tax professional to ensure a smooth registration process and accurate submission of the required documents.

How can businesses obtain their corporate number?

Businesses can obtain their corporate number, which serves as a unique identifier, through a simple registration process. Here’s how to obtain the corporate number:

1. Submission of Registration Documents: Fill in the name of the corporation, address, and name of the representative on the application form provided by the tax office. Submit the completed form along with any required supporting documents.

2. Receiving the Corporate Number: Once the registration documents are submitted, businesses will receive their corporate number from the tax office. This number is assigned to all registered companies and serves as their unique identification.

3. Accessing the Corporate Number: For corporations, the rules dictate a T+12 digits corporate number, which can be looked up in advance. The corporate number is publicly available and can be accessed through the “Corporate Number Publication Site” by searching in English. By entering the prefecture and company name, businesses can find their respective corporate numbers.

4. Sole Proprietors: Sole proprietors will not see their corporate number until they receive a notice from the tax office. Once the registration is complete, they can confirm their name and registration number as registered invoice issuers through the website of the National Tax Agency.

It is important to note that to become a registered invoice issuer starting from October 1st, the application must be submitted on or before September 30th.

By following the registration process and obtaining the corporate number, businesses can fulfill their obligations under the new invoice system and ensure compliance with tax regulations.

What changes do you need to make under the new invoice system?

To comply with the requirements of the new invoice system, certain changes need to be made to your invoices. Here’s an overview of the modifications:

1. Addition of Registration Number: The key change is to include an additional registration number on the invoice. This can be done by adding a sixth item to the existing five items. The registration number serves as an important identifier and distinguishes registered entities. It is crucial to have this number on the invoice to indicate compliance with the new invoice system.

2. Required Information: The following information must be included on the invoice:

•    Invoice issuer name and registration number.
•    Transaction date.
•    Transaction details.
•    Total price separated by the tax rate.
•    Total consumption tax amount separated by the tax rate.
•    Client’s name.

3. Invoice Template: To assist businesses in adapting to the new requirements, a helpful resource is the Japan Invoice Template provided by Free Invoice Builder. This template follows the standard invoice format but includes a notable addition. In the upper right corner of the template, you can find the VAT Registration Number, which signifies compliance with the new invoice system.

It’s important to note that having the registration number on the invoice is a critical indicator of whether the issuer is registered under the new invoice system. When receiving invoices, businesses can easily identify whether the invoice comes from a registered entity by checking for the presence of the registration number.

How does this affect the invoicing software?

The implementation of the new invoice system may have an impact on invoicing software. Invoicing software providers will need to update their systems to accommodate the changes required by the new system. This includes incorporating fields for the additional information such as the registration number, transaction details, tax rates, and client’s name. The software may also need to adjust calculations for total price and consumption tax to ensure accurate and compliant invoicing. Businesses using invoicing software should check with their software providers to ensure that their software is updated and compatible with the new invoice system. By utilizing updated invoicing software, businesses can streamline the invoicing process and ensure compliance with the new regulations.

Will there be any changes if you create your invoices through documents/spreadsheets?

If you create invoices through documents or spreadsheets, there will be changes to meet the requirements of the new invoice system. You will need to update your invoice templates to include the additional information such as the registration number, transaction details, tax rates, and client’s name. It is essential to modify the design and layout of your invoices to accommodate the new fields while ensuring clarity and organization. Additionally, you may need to adjust formulas and calculations in your spreadsheets to accurately separate the total price and consumption tax by the appropriate tax rates.

Will there be more changes in the new invoice system in 2023 and 2024?

Apart from the invoice modifications, there are other changes to be aware of. Two notable points are the Simplified Qualified Invoice and the 20% Rule. By proactively addressing these requirements and adjustments, businesses can smoothly transition to the new invoice system while ensuring compliance and minimizing potential tax-related complications.

What is the simplified qualified invoice and when is it applicable?

For businesses dealing with numerous customers (e.g., retailers, restaurants, taxis), a Simplified Qualified Invoice can be issued. Unlike regular invoices, it does not require the recipient’s name to be stated, resembling a typical receipt. This provision aims to simplify the invoicing process in situations where specifying individual customer names would be impractical.

What is the 20% rule and how does it impact small businesses?

The new invoicing rule will impact small businesses. While they may have been exempt from filing a consumption tax return due to their annual sales, the new rule may require some of them to file after October 2023. To mitigate this additional cost, a new rule known as the 20% Rule comes into play. Under this rule, if a non-taxable person becomes taxable due to registration, their consumption tax payment can be calculated as 20% of their annual sales tax. This rule applies from October 2023 to September 2026, providing relief for businesses and clients, even if registration is delayed.

Why use Match.Points?

When it comes to handling your accounting needs, Match.Points stands out as a top choice. Here’s why you should consider their services:

1. Foreigner-Friendly Expertise: With over 10 years of experience, they understand the challenges that foreigners face when dealing with accounting in another language. Their team is well-equipped to handle your accounting needs, providing clear communication and support in your preferred language.

2. Certified Public Accountants: Their team consists of certified public accountants who possess in-depth knowledge and expertise in accounting practices. They stay updated with the latest regulations and tax laws, ensuring accurate and compliant financial management for your business.

3. Corporate & Sales Tax Experts: Dealing with corporate and sales tax can be complex, but they have the expertise to navigate through it effortlessly. they are well-versed in the intricacies of corporate and sales tax regulations, allowing them to optimize your tax strategy and minimize tax liabilities.

4. Upfront Pricing: Transparency is important to them. They believe in providing upfront pricing, ensuring that you know the cost of our services from the start. With Match.Points, you can expect fair and competitive pricing without any hidden surprises.

5. Nationwide Remote Support: Regardless of your location within Japan, their remote support services enable us to assist you efficiently and effectively. You can rely on their dedicated team to provide prompt and reliable support, ensuring that your accounting needs are met, no matter where you are.

Receive one-month free access to their mentoring program when you mention the name “Scaling Your Company” to let them know that you heard about this offer from us.

Final Thoughts

The implementation of the new invoice system in Japan brings significant changes to taxation and accounting practices. Businesses need to adapt and ensure compliance with the new regulations. With our expertise and resources, we are here to provide comprehensive guidance and support during this transition period.

Whether you create invoices through documents, spreadsheets, or invoicing software, adjustments will be necessary to comply with the new invoice system. The key change is the inclusion of an additional registration number on invoices. This involves adding six specific items to your invoices, such as the invoice issuer name and registration number, transaction details, and client’s name.

Together with our partner accountants such as Shinpei Wakana, we at Scaling Your Company understand the challenges businesses face in navigating the complexities of the new invoice system. Our team of experts can assist you in making the necessary changes to your invoices, ensuring compliance, and streamlining your accounting operations.

Connect with us through our contact form to access personalized advice and recommendations. Streamlining your invoice process starts with the right support – let us assist you in making a seamless switch.

2X-5X YOUR BUSINESS IN JAPAN

Subscribe to our bi-monthly newsletter to stay updated on the latest podcast episodes, and get notified on our free monthly seminar featuring experienced entrepreneurs and experts.

!

SUBMIT

Something went wrong. Please check your entries and try again.