Japan – Legislation proposed for new Japanese consumption tax (JCT) on cross-border service transactions

Current Rules

Japan’s current JCT regime was established in 1989 – before the rise of the digital economy. Accordingly, the taxation of B2C supply of eservices by non-established companies to Japanese customers was not considered and currently these are not subject to JCT.

This provides an unfair advantage to non-established eservice providers compared to Japanese businesses in this field, which has become more apparent since the JCT rate increased form 5% to 8%, with another increase to 10% estimated from 1 October 2015.

Reforming the rules

The Japanese government took the discussion further in its fifth meeting of the International Taxation Group (ITG) on 26 June 2014. It focused on refining the determination of the place of supply of services and the mechanism to tax and collect JCT on cross-border service transactions.

It is proposed to clarify that the provision of digital contents are treated as a supply of services, for which the destination principle is to be applied. Meaning that in such cases the place of supply is deemed to be where the recipient is resident.

In 2012, a Japanese major bookstore filed a complaint with the Fair Trade Commission as it feels the current JCT treatment is unfair and results in a competitive disadvantage to domestic suppliers.

The Cabinet Office website replied in this regard “Confirmation of Japanese residency by the customer’s credit card number and the invoice’s addressee will be respected”. This shows that the discussion on how to recognize Japanese residence is well under way. Additionally, the pressure on the government to find solutions to reduce the disadvantage of resident businesses is growing.

In regard to B2C transaction, the scope may be limited mainly to digital services provided via the internet. However for B2B transactions, the envisaged scope is broader and may include online advertising distribution and legal advisory services by non-resident suppliers.

The system of how to assess and collect JCT is still subject to further analysis and discussion, yet the ITG announced very different mechanisms to collect and remit JCT in the B2B and the B2C models.

What does it mean for you?

Companies who sell digital services via the internet to consumers in Japan need to watch closely as this development unfolds. The change may create registration issues and administrative burdens, especially two-fold if the services are sold to both B2B AND B2C.

In particular companies will need to prepare new systems to maintain such private and confidential information to recognise Japanese residency of each customer.

Should you want more information on this issue and prepare your company for the changes ahead, please contact Kotaku Kimu (kotaku.kimu@jp.pwc.com, +81 3 5251 2713).