Starting on October 1, 2023, Japan introduced a new invoicing system for consumption tax purposes, known as the “Qualified Invoice System”. For foreign companies looking to establish a presence in Japan, understanding this new regulation is essential. Gaining a solid understanding of the system will help ensure tax compliance, align with local practices, and maintain a competitive edge in the market.
In this article, we summarize the key aspects of the new system and offer insights on how best to navigate these changes.
What is Consumption Tax in Japan?
Japan’s consumption tax applies to goods and services purchased by end consumers. Businesses collect consumption tax from their customers at the point of sale and then remit it to the government. The standard consumption tax rate is 10%, while a reduced rate of 8% applies to specific items, including food and beverages (excluding restaurant dining and alcoholic beverages) as well as certain newspaper subscriptions.
Businesses also pay consumption tax on their own purchases – such as raw materials or office supplies – and may claim tax credits to offset the consumption tax they collect from customers.
Before this new system took effect, businesses in Japan were not required to list tax rates and amounts on invoices. Instead, the tax payments and credit were based on bookkeeping records, supported by standard invoices.
Overview of the Qualified Invoice System
Under the Qualified Invoice System, any business issuing a sales invoice must issue a “qualified invoice” and keep a copy. Each qualified invoice needs to include: 1. Name or title of the qualified invoice issuer and registration number
2. Transaction date
3. Transaction details (Items subject to the reduced 8% rate must be indicated separately)
4. Summation of the sales amounts subject to each tax rates (8% and 10%)
5. Consumption tax amounts for each tax rates (8% and 10%) – For a *qualified simplified invoice, it is sufficient to indicate only the applicable consumption tax rate.
6. Name or title of the business operator to whom the invoice is issued – For a qualified simplified invoice, this detail may be omitted.
*Note:
In sectors such as retail, restaurant, or taxi business, where sales are made to an unspecified number of customers, a “qualified simplified invoice” with fewer details may be issued.
In addition, the seller must be registered as a “business issuer of qualified invoice” with the tax office. Upon registration, the business operator’s details are be published on the National Tax Agency Invoice System Eligible Invoice Issuer Public Website. Even if your taxable sales in the base period — typically the two-year period used to determine eligibility for consumption tax — are below ¥10,000,000, you are still required to file consumption tax once registered.
This new system enhances the transparency and traceability of consumption tax transactions. It helps reduce errors in tax reporting, fosters compliance, and minimize the risk of penalties for non-compliance. Moreover, by requiring detailed information in invoices, the system makes more difficult to engage in fraudulent transactions or tax evasion.
For more detailed instructions, please refer to the Japan Invoice System Instructions provided by the National Tax Agency.
Importance of Qualified Invoices
Generally, if invoice do not met "Qualified Invoices" standards, any consumption tax paid on these purchases cannot be claimed as tax credit.
If your business cannot provide a qualified invoice, customers may choose competitors who can, because without a qualified invoice, they would be unable to reclaim their consumption tax. Under the new system, only qualified invoices support tax credit claims.
Issuing qualified invoices also demonstrates your adherence to local tax regulations and positions your business as a professional and reliable player in the Japanese market.
Impact on Businesses
All businesses in Japan that are registered for consumption tax must issue qualified invoices at the point of sale and keep copies. This often requires adjustments to current billing processes and systems. You may need to update invoicing software to display information such as the issuer’s registration number, tax rate breakdowns, and separate calculations for each tax rate. These changes may require system modifications and staff training.
In addition, companies must maintain records of all qualified invoices for potential audits.
Transition Period
Understanding the transition period is crucial. Until September 30, 2026, 80% of non-qualified invoices are still deductible. This percentage decreases to 50% until September 30, 2029, after which no deductions will be allowed. To claim these partial deductions, the non-qualified invoices and corresponding accounting ledgers must be retained.
Furthermore, for small-scale enterprises, purchases under ¥10,000 can be deducted without a qualified invoice until September 30, 2029.
During this transition, it is essential to update invoicing systems and train your staff. Keep track of any additional announcements from the National Tax Agency related to the Qualified Invoice System.
Consequences of Non-compliance
Failure to comply with the new regulations may result in fines or penalties from the tax authorities if errors or omissions are detected during audits or reviews. In addition, non-compliance can lead customers to choose competitors who can adhere to the new system.
Supporting Your Subsidiary
Understanding: Grasp the changes and their effects to ensure headquarters’ decisions align with the practical realities in Japan.
Resources and Training: Provide the necessary resources and training for any system upgrades required by the Japanese subsidiary.
Regular Check-ins: Maintain ongoing communication with the subsidiary to address concerns and ensure continued compliance.
Additional Resources
For further understanding, refer to the following web pages from Japan’s National Tax Agency:
Outline leaflet (in English)
Invoice System Special Site (in Japanese)
Our Role
The new Qualified Invoice System marks a major regulatory change in Japan, and we are dedicated to guiding you through each step. From clarifying the nuances to helping you keep your billing system compliant and navigating the transition period, our team at Quantum Accounting is here to support you. Feel free to contact us with any questions or concerns.
If you are considering expanding your business to Japan, please contact Quantum Accounting Inc. for a free consultation during the planning phase or general consultation (available in both English and Japanese). Quantum Accounting's professionals are experts in accounting, tax, legal, and labor issues. Our goal is to provide you with a one-stop professional firm for all the services you need to expand your business into Japan. We are confident that we can help you.