If you’re a provider of digital services to customers in Japan, please be aware that the changes being introduced on 1st October 2015 may affect you.
Under the Consumption Tax Act (Act No. 108 of 1988), a service rendered in Japan is subject to Consumption Tax which is equivalent to VAT (i.e. Value Added Tax).
The criteria for determining whether a service is rendered inside or outside Japan varies depending on the nature of the service.
Under the current rules (i.e. pre October 2015), the tax treatment relating to the provision of e-commerce services, such as e-books, online games, internet delivery of music, etc. is determined by the location of the service provider.
Therefore, such e-commerce services provided by offshore service providers (e.g. companies located in Ireland) to Japanese customers are not subject to Japanese Consumption Tax under the current legislation.
From 1st October 2015 there will be new rules. These will be different for (a) Business to Business services and (b) Business to Consumers services.
If, for example, an Irish company is providing digital services directly to Japanese consumers then the Irish company will be obliged to collect Consumption Tax from its customers in Japan and pay this collected Consumption Tax to the NTA or National Tax Agency.
As a result of this amendment, foreign or offshore companies/businesses providing digital services to Japanese customers will be required to file consumption tax returns. If this applies to you, it would be advisable to nominate a Tax Agent (i.e. an agent in Japan who will handle all the tax procedures necessary for foreign companies/sole traders/individuals).
For business to business transactions, a reverse-charge mechanism will be introduced. This requires the recipient of the service in Japan to declare both (a) the taxable sales and (b) the related tax due in its Consumption Tax Return. There will be no obligation for the foreign or offshore company to file tax returns in Japan under these circumstances.
In summary, under the Reverse Charge mechanism, the fees collected from the cross border e-commerce services are subject to Consumption Tax but it is the Japanese purchaser who will be required to pay the Consumption Tax to the NTA.
What should you do?
1. Identify the type of services you provide i.e. is it Business to Business or Business to Consumer services?
2. If it’s Business to Consumer service then you should contact the NTA’s website and register as a Foreign Supplier as soon as possible or alternatively contact a qualified and professional Tax Agent to handle your tax affairs.
3. You should review your terms and conditions to ensure that these changes are reflected.
4. You should review your processing procedures to ensure the mechanisms are in place for the correct collection of consumption tax.
What to keep an eye out for
You should keep an eye out for similar type emails from your Agents stating the following:
“A recent change to Japan Consumption Tax (JCT) regulations will impact your account.
Beginning on 1st October 2015, you will be responsible for determining and charging JCT for sales to customers in Japan.
The current JCT rate is 8%.
You will also be responsible for remitting and reporting on any JCT amount to the NTA (Japanese National Tax Agency)
This applies to all digital products sold to customers in Japan, even if your business is not located there.”
For more information, connect with Claire McNamara.
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