Category: column

Consumption Tax Filer banner

 

Individuals or small capital companies (with paid-in capitals under 10 million yen) can elect the tax filer status or non-filer status of Consumption Tax during the first 2 years from the inception of the business or its incorporation. The default status is the non-filer, so unless you elect otherwise, you will automatically be a non-filer of Japanese Consumption tax.

 

If you expect sales in the first 2 years, your choice should be the non-filer status because you can pocket the consumption tax on sales (minus the consumption tax on expenses).

 

But there are a few situations where you will benefit from choosing the consumption tax filer status.

1) If your business requires a large amount of initial investment such as restaurants or accommodations, your choice should probably be the tax filer status.

2) If your sales are expected to come from overseas. You should definitely elect the consumption tax filer status. You will always get a consumption tax refund.

 

Here are the reasons why:

1) The consumption tax is payable between what you receive on sales and what you pay on expenses. If you are planning to start a restaurant and will heavily invest in kitchen equipment and interior decorations, whose investments will only be recovered after 3 years of business, you should apply for the consumption tax filer status and get a refund of 10% of the investment.

2) Consumption tax liability is the difference between what you receive and what you pay. You will not receive Japanese consumption tax on revenue from overseas, so if you do not receive any consumption tax from domestic sales and pay consumption tax on your domestic expenses for day-to-day operations, the balance will be negative. A negative balance means you will be refunded for it. Remember that the consumption tax is for consumers, not businesses.

 

Please note that it does not matter whether your sales are services (e.g. consultation) or things (e.g. export of Japanese Sake for example).

 

The downside is that once you elect to be a consumption tax filer, you will have to stay as one for at least the next 2 years. However, if you purchase a fixed asset such as machines or software that costs more than 1 million yen, it will be 3 years. So, you have to weigh which status is more beneficial in cash flow over the course of 2 or 3 years.

Gift tax is very expensive in Japan. You can see the tax rates as follows. It can even be prohibitive.

Net taxable gift after base deduction Under 2M JPY Under 3M JPY Under 4M JPY Under 6M JPY Under 10M JPY Under 15M JPY Under 30M JPY Over 30M JPY
Tax Rates 10% 15% 20% 30% 40% 45% 50% 55%
Deduction -0.1M -0.25M/td> -0.65M -1.25M -1.75M -2.5M 1.0M

Your parents may want to give their estate before they pass away and when you are still young to spend on something (e.g. children’s education, business investment, etc). But the gift tax is so expensive. What to do?

One solution is Early Inheritance (相続時精算課税).

You can choose to file your gift tax in future as Early Inheritance. The tax is free upto the first 25MM yen. Any gift after 25MM yen will be subject to 20% advance tax. If the total money you have received as an early inheritance is 50MM yen, the advance tax will be 5MM yen ((50M-25M) * 20%). Then, you will calculate your inheritance by the normal method and pay the difference if the actual tax is higher than the advance tax or you will receive a refund if the advance tax is higher.

  1. Ex-Works and Ex-Factory

 

When a company engages in business with a customer located overseas, it’s easy to assume that because the transaction is considered an export, it is exempt from taxation. It is also often presumed that consumption tax for any accompanying domestic expenses is eligible for refund.

 

You may already be familiar with the term tax-free export, but it’s important to be aware of the pitfalls.  

 

In some instances, even tax-free exports are not tax-exempt. A lot of businesses find navigating the specifics surrounding consumption tax to be challenging. Even tax accountants find it difficult – me included! If you get a call from the taxation office, don’t give up right away. It’s worth being persistent, as the final decision boils down to the facts.

 

There are various types of export transactions, the most well-known being Cost, Insurance, and Freight (CIF) and Free on Board (FOB).

 

Transactions that start with the letters C, D, and F are safe, but be careful with those that start with the letter E, such as Ex-Works and Ex-Factory.

 

According to Incoterms, under CIF, the seller is responsible for all costs, insurance and freight until the international vessel reaches the destination. Once the goods reach the destination, risk is transferred to the buyer as they bear all responsibility and liability thereafter. This transaction is considered an export.

http://ja.wikipedia.org/wiki/インコタームズ

 

The FOB rule states that the seller assumes payment of all costs until the goods reach the departing port and are loaded onto the vessel, at which point risk is transferred to the buyer, as they assume responsibility and liability thereafter. Because the cargo is loaded onto an international vessel (or airplane), this transaction is also considered an export.

 

Ex-Works and Ex-Factory are the terms that we need to watch out for. According to Incoterms, under Ex-Works and Ex-Factory, the transfer of risk occurs as soon as the goods are produced and packaged. The buyer is responsible for loading the goods for transport, and must pay all freight, insurance, and bear all other risks. In other words, in these cases a foreign buyer travels all the way to the factory in Japan just to pick up their goods.

 

When a customer travels all the way to a factory in Japan to collect goods, this becomes a domestic transaction. The consumption tax on these goods do not quality for exemption, and tax payment is due at the end of the term.

 

  1. A simple misprint on the export permit may have significant consequences.

 

An export permit must be obtained from the taxation office when exporting goods. Be sure to enter the correct information. For example, if you label an FOB transaction as Ex-works, the taxation office will take note, thus complicating the transaction.

 

A contract should clearly state the terms of sales, i.e., “CIF: risk is transferred at the destination,” to avoid confusion. However, if this information is omitted for some reason, you will have a challenging time proving the previously agreed upon terms of sale.  

 

For these reasons, it is very important to pay close attention to the details when obtaining an export permit.

 

  1. Precedents

Below is an example of a case brought before the National Tax Agency.

In this case, the taxation office’s decision to deny export tax exemption on a used vehicle shipped from Niigata to Russia was successfully overturned.