Since October 1, 2023, Japan has implemented a significant change in the handling of consumption tax, introducing the "Invoice System." This crucial development impacts how foreign-based headquarters interact with their Japanese subsidiaries. This article summarizes the essential aspects of the new system, providing insights into how best to navigate these changes.
Overview of the Invoice System
The Invoice System enhances the transparency and traceability of consumption tax transactions.
Example: A qualified invoice must include details like the supplier's registered ID, which aids in tracking tax liabilities.
Importance of Qualified Invoices
Only invoices meeting specific criteria are recognized as "Qualified Invoices," pivotal for consumption tax deductions. Non-compliance with these standards can lead to the denial of deductions.
Example: An invoice without the necessary tax ID affects the subsidiary's ability to claim tax deductions.
Impact on Businesses
All consumption tax-registered businesses in Japan must issue and retain these Qualified Invoices. This might necessitate revising current billing processes and systems.
Transition Period
Understanding the transition period is crucial. Until September 30, 2026, 80% of non-qualified invoices are deductible; this reduces to 50% until September 30, 2029 (with no deductions allowed thereafter). Additionally, for small-scale enterprises, purchases under ¥10,000 can be deducted without a qualified invoice until September 30, 2029.
Companies should focus on updating invoicing systems and training staff for compliance during this period. Staying informed about any future adjustments to the system is also critical.
Consequences of Non-compliance
Failing to comply with these regulations can result in penalties and lost tax deductions. Compliance is essential for legal and financial reasons.
Supporting the Subsidiary
Understanding: Comprehending the changes and their implications is the first step, ensuring alignment between headquarters decisions and the realities in Japan.
Resources and Training: Provide necessary resources and training for system upgrades needed by the Japanese subsidiary.
Regular Check-ins: Maintain communication with the subsidiary to alleviate concerns and ensure compliance.
Additional Resources
For further understanding, refer to Outline leaflet from Japan's National Tax Agency in English and Japan's National Tax Agency's official guide in Japanese
Our Role
Japan's Invoice System represents a significant regulatory change. We're committed to supporting you at every stage – from understanding the new system's nuances to ensuring your billing system's compliance and navigating the transition period. Please contact us with any queries.
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.