I’m writing this because it can make a potentially significant difference to your company’s finances. There are two calculation methods for Consumption Tax: the Standard Method, which is the default, and the Simplified Method, which is optional.
If your sales two years ago were ¥50 million or less, you can choose between the Standard (actual) tax method and the Simplified tax method. You must make this choice before the start of the fiscal year — once it has begun, you can no longer switch. However, if you decide in advance, you can choose whichever method is more advantageous.
The amount of consumption tax you owe at year-end can differ significantly — easily by hundreds of thousands or even millions of yen — so this is not a decision to take lightly.
The typical decision criteria are as follows:
- Main revenue comes from exports → Standard (actual) tax method, since you will be entitled to a refund.
- High labor costs → Simplified tax method, since it allows you to claim a higher deemed input consumption tax rate (e.g., 90%, 80%, 70%, 60%, or 50%).
- Planning to purchase fixed assets such as buildings → Standard (actual) tax method, since you will likely receive a refund of the consumption tax charged on the construction cost.
The Standard Method simply compares Input Consumption Tax (課税仕入れに係る消費税) and Output Consumption Tax (課税売上に係る消費税). The difference is the amount you will owe to the government.
The Simplified Method allows only a certain percentage of your taxable sales to be counted as deductible input tax. As a result, only a fixed percentage of your sales will determine the consumption tax to be paid.
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