As already anticipated in our previous blog posts here and here the Japanese Diet passed the legislation which requires non-resident electronic service providers to register for Japanese consumption tax (JCT) as of 1 October 2015.
The definition of electronic services (defined as “Provision of Telecommunication Online Services”) includes the following, according to the seminar at Japan Tax Association held on 20 April 2015:
- Distribution of e-books, e-newspapers, music, image, software (including various applications such as games, etc.)
- Service to make a software or database, etc. available on the cloud
- Distribution and posting of advertisement via Internet, etc.
- Service to make a shopping site or auction site available on the Internet
- Service to make a website for sale of game software, etc. available on the Internet
- Reservation of accommodation or restaurant at website via the Internet (those who receive insertion fee from enterprise running a lodging facility or restaurant, etc.)
- English conversation class via the Internet
As of 1 October 2015 the place of supply of digital services is deemed to be the place where the recipient is located, i.e. in Japan.
Therefore, if you are providing B2C Telecommunication Online Services to Japanese consumers, you are required to register and appoint a local tax agent (representative) to account for JCT in the case where annual taxable sales in the base period (e.g. in the fiscal year that is two fiscal years prior to the fiscal year concerned) exceeded 10 million yen (approx. USD 83,000 at today’s rates) threshold. However, if it is difficult to establish the annual taxable sales in such base period, this can be calculated as four times the value of taxable sales from 1 April 2015 to 30 June 2015.
The input tax credit on a taxable purchase of B2C Telecommunication Online Services from an Offshore Business Person is not allowed, even though it was actually provided to a business person. However, in case that is from a “Registered Offshore Business Person” (defined as a taxable enterprise who submits an application on or after 1 July 2015 and obtains the registration number from the NTA Commissioner), the input tax credit is allowed if the incoming invoice (including the registration number) is retained.
(For the sake of completeness, in B2B relations the reverse-charge mechanism will apply and the Japanese business customer is required to account for consumption tax for the purchase of digital services from foreign digital service providers. However, in this respect the service provider is required to notify its Japanese customer in advance that the transaction is subject to reverse charge. In practice, whether such notification was made, does not affect the reverse charge mechanism.)
What does it mean for you?
You need to have an action plan to be compliant with the new Japanese requirements and get registered by 1 October 2015. As a non-established B2C service provider you would also need to appoint a fiscal representative to account for JCT and to meet your compliance filing obligations. The currently applicable JCT rate is 8% (to be increased to 10% from 1 April 2017), so you may also want to check if your pricing is right.