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Investing in Japan

How to Set Up Business in Japan
Laws & Regulations on Setting Up Business in Japan

Section 3. Taxes in Japan

3.6 Overview of consumption tax

The following domestic and import transactions, except for certain transactions deemed non-taxable, are subject to consumption tax. The consumption tax rate is 5% (national consumption tax rate of 4% and local consumption tax rate of 1%).

  1. Domestic transactions: the transfer/loan of assets or the provision of services as a business in Japan by a company for consideration.
  2. Import transactions: cargo retrieved from a bonded zone.

Financial transactions, capital transactions, and certain transactions in the areas of medical care, welfare and education are deemed non-taxable. Export transactions and export-like transactions such as international communications and international transport are exempt from consumption tax.

3.6.1 Self-assessment and payment
Companies engaged in domestic transactions and parties engaged in import transactions must file and pay taxes on their respective set tax bases. To ensure that double taxation does not occur at the production and distribution stages, a scheme has been adopted allowing the deduction of consumption tax on purchasing from consumption tax on sales.

3.6.2 Deduction of purchase tax
Consumption tax on purchasing (receipt of the transfer/loan of assets or the provision of services from another party) may be deducted from consumption tax on the taxable base when calculating the amount of consumption tax to be paid. The amount of this deduction is limited, however, depending on the percentage of taxable sales. If taxable sales 1) during the base period 2) amounted to 50 million yen or less, the product of consumption tax on the taxable base multiplied by a given percentage determined by industry may be considered the consumption tax on purchasing for the current taxable year and allowed as a deduction if the prescribed notification is submitted to the director of the tax office.

3.6.3 Tax exempt enterprises
Corporations whose taxable sales 1) are 10 million yen or less for the base period 2), can elect to forego tax liability exemption to qualify, as taxpayers, for deduction or refund of the amount paid as consumption tax on their purchases. However, a company that has no base period, such as a newly established company, whose capital at the start of the taxable year is 10 million yen or more cannot be a tax-exempt enterprise in that taxable year.

*1. In case where a corporation's base period is not one year, the taxable sales during the base period are the amount obtained by prorating the balance during the above-mentioned base period. The prorating is made by first dividing the above balance by the total number of months in the accounting period included in the base period and multiplying the result by 12.
*2. Base period: The base period is the full accounting period two years prior to current accounting year. A corporation may not have a full base period if it was a) newly established or b) changed its accounting period during the two-year prior period. The base period for such corporation is found by combining all accounting periods that commenced during this two-year prior period.

(Reference)

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