Guide to Japan Consumption Tax
By Kawai Porter | June 10, 2021
Have you heard in the news or your friends recently complaining about the rise in the consumption tax but you are too nervous to ask what a consumption tax is? Well, this guide is here for you to explain to you what a consumption tax is, how you pay it, and how it affects you and your businesses.
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What is the Japan Consumption Tax?
The Japanese consumption tax refers to the tax that is levied on all “taxable sales” in Japan. This essentially means that any sale for any reason is subject to the compensation tax. Now, of course, there are exemptions to the compensation tax but these are the general rules if you are buying something you have to pay the consumption tax for it. In other countries consumption taxes are mostly levied to deter certain behaviors such as a consumption tax on tobacco to lower smoking or a consumption tax of gasoline to encourage walking to work but in Japan, there is a consumption tax on practically every good and service in the country. In essence, you can think of a consumption tax like a sales tax but it can be placed on any good or service at different rates.
You may be asking yourself what a “taxable sale” is in Japan and how this affects you. A taxable sale in Japan is a transfer of assets by one business operator to another business operator within Japan. A taxable sale can also be in reference to the transfer or importing of foreign goods into the country of Japan. For a sale to be taxable it must comply with all four of the following categories. The business transaction happened entirely within the borders of Japan, the transaction was made by a business entity to support its operations, the transaction was made for the purpose of compensation such as a salary for a consulting service and, the business transaction involves the transfer of assets or the use of services. This means if you are buying a coffee at Starbucks or if you are buying a new television from Amazon you will pay the consumption tax on it.
There are five main taxes in Japan that the average person may encounter: Income Tax, Enterprise Tax, Property Tax, Vehicle tax, and Consumption tax. Income taxes are paid annually by individuals on their net income, enterprise taxes are paid annually by self-employed individuals on their net income, property taxes are paid annually on property owned by individuals, vehicle taxes are paid annually but consumption taxes are not paid annually by individuals. This is the key difference between the consumption tax and other taxes in Japan. The consumption tax is paid by consumers whether they are individuals or corporations and they are generally paid at the time of consumption if you are an individual.
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Taxable People for Japan Consumption Tax
If you have ever read a tax document you may have noticed that they have a lot of weird words that may not be easily understood. One of these terms is “taxable person” and this word keeps appearing in anything to do with the consumption tax so you may be wondering - what is it exactly? Well, this section of the article will answer this question and many more you might have.
What is a Taxable Person?
The term taxable person is tricky because, in all honesty, it does not refer to an individual at all. It instead refers to businesses that are required to fill consumption tax returns. A business is required to fill out the consumption tax returns for the following reasons. The first reason is that if the business reported more than 10 million JPY (91,340 USD) during the base period. The second reason is that if a business does not meet the 10 million JPY thresholds but did submit the Report on the Selection of Taxable Proprietor Status for Consumption Tax. The third reason is if a business whose sales for six months before the tax period is more than 10 million JPY this is known as the specified category.
Who pays the Consumption Tax?
The consumption tax itself is paid by businesses that are considered taxable persons. However, the consumption tax is often passed on to the consumer. For this reason, individuals will often be charged the consumption tax along with the price of the product or service they purchase.
Do only business entities pay consumption taxes?
Yes and no. Only businesses need to file consumption tax paperwork but the consumption tax is almost always passed on to the consumer. So in essence the consumer pays the tax but the business files the tax paperwork. However, some certain products and services are exempt from the Japanese consumption tax.
Are foreign transactions affected by the consumption tax in Japan?
Yes! Foreign transactions in Japan must still have the consumption tax paid. The way a foreign transaction is categorized is a business transaction made in a foreign currency in Japan or for use in Japan by a Japanese company or a foreign business. For example, a rental fee for construction equipment made in Euros but for use in Japan would still be subject to the Japanese consumption tax. The way this tax would be paid is at the date of the transaction the market standard currency exchange rate would be used to convert the foreign currency to JPY.
Are foreign residents of Japan subject to the Japan consumption tax?
Yes, everyone who consumes services or goods in Japan is subject to the Japanese consumption tax. This includes foreign residents, Japanese residents, and even short-term residents and tourists. The Japanese consumption tax is only not applied for very specific situations and on very specific goods and services.
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Japan Consumption Tax Rates
The Japanese consumption tax is a complicated tax with different rates for different goods and it has also changed recently. This section of the guide is to help you navigate the complicated differences between the consumption tax rates in Japan.
What is the consumption tax rate in Japan?
The Japanese consumption tax is currently at 10% for most goods and 8% for items with a reduced tax rate. This is the effective tax rate and includes both local consumption tax rates and the national consumption tax. The consumption tax rates are different for alcohol, tobacco, and gasoline. The rates for alcohol, tobacco, and gasoline vary by prefecture.
How has the consumption tax rate changed over time?
The effective national consumption tax rate was raised in October of 2019. On October 1st, 2019 the national consumption tax rate was increased from 8% to 10% with exceptions for certain products. Effective tax rate refers to the amount the consumer pays not the specific amount the government receives.
How is the consumption tax broken up between local and national taxes?
The consumption tax rate is broken up after October 1st, 2019 in the following way. The national tax rate is 7.8% and the local consumption tax rate is 2.2%. The rate for reduced goods is 6.24% for national consumption tax and the local consumption tax rate for reduced goods is 1.76%.
What is exempted from the Japan consumption tax?
There are three main exemptions from the national consumption tax. The first one is medical insurance and medical care. The second one is education fees for testing and tuition. The third is leasing land or housing units. While these are the exemptions there are also goods and services that have a reduced rate for the Japanese consumption tax.
What are the goods that have a reduced consumption tax rate?
Goods that have a reduced rate are food and drink and newspaper subscriptions. Alcohol and dining out are not given reduced rates for the consumption tax though. This leads to certain situations where institutions such as movie theaters serve their concessions as take-out food so they are subject to the reduced consumption tax rates. If you are asked if you are eating inside or taking it to go be sure to say おもちかえり ( o mochi kaeri) to get the 8% tax rate instead of the 10%. If you want to learn other useful Japanese words, consider reading How to Learn Japanese.
Foreigners and Japan Consumption Tax
If you are a foreigner in Japan you may be confused about which taxes you need to pay and which ones you do not. This section of the guide will help you answer questions you have as a foreigner in Japan having to do with the consumption tax.
Are foreign businesses affected by Japan's consumption tax?
Yes, foreign businesses in Japan are subject to the consumption tax. Consumption tax for foreign businesses will be paid at a tax office. Continue reading this guide for more information on how to pay the Japanese consumption tax.
What qualifies as a Foreign Business in regards to the Consumption Tax?
According to the Japanese Consumption tax document, a foreign business is any non-resident in Japan or any foreign corporation. A non-resident as defined by the Income Tax act is an individual who is not a resident. A resident is defined as any individual who has a residence in Japan. A foreign corporation is any corporation that's head office is not located in Japan. A foreign business can also be a sole proprietor of a foreigner operating in Japan. So yes it is a little confusing but a foreign business can be both an individual or a corporation regarding Japanese tax law. This is a good lesson on why it is always best to be extra careful when reading tax documents.
Are foreign residents affected by the consumption tax in Japan?
Yes, residents of Japan are all subject to the consumption tax being levied on their purchases of goods and services for eligible purchases. A foreign resident is not considered a foreign business under the consumption tax even if they are not a Japanese citizen. As long as they live in Japan they are not considered foreign businesses.
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Paying The Japan Consumption Tax
Taxes, no matter where you are, are confusing to pay. Luckily the Japanese consumption tax is easy to pay. Most people will just pay their consumption tax whenever they shop. If you are a business owner this section of the article will help you understand how you pay your Japanese consumption tax.
How do I pay the Japan consumption tax?
The way you pay the Japanese consumption tax is by hiring a tax agency or tax proxy accountant depending on your situation. It is very critical for your success as a business person in Japan to pay your consumption taxes properly and to file the tax return paperwork properly.
When you pay the Japanese consumption tax is almost as important as how you pay it. For sole proprietors, you pay the consumption tax over a taxable period between January 1st and December 31st. For corporations, a taxable period is the same as its fiscal year.
Do I need to hire a tax agent to pay the Japanese consumption tax?
A tax agent is somebody who is an entity's representative in Japan and will be responsible for submitting the consumption tax paperwork and consumption tax returns. You will need to appoint or hire a tax agent if you are a business or a sole proprietor who does not have a residence or domicile in Japan apart from a branch office. To nominate a tax agent the taxpayer will need to submit a Notification of Tax Agent form to the district director of the local tax office wherever the business is located.
Do I need to hire a Certified Public Tax Accountant to pay the Japan consumption tax?
You do not need to hire a certified public tax accountant but many businesses do. A certified public tax accountant is somebody who will help with filing taxes and this includes the consumption tax. A certified public tax accountant can perform the following duties on behalf of a taxpayer. Act as a tax proxy, prepare tax documentation, and act as a consultant for taxes in Japan.
A tax proxy is to act as a tax agent or tax representative during the tax process with the local tax office. This will oftentimes include tax returns and applications with the tax office for various things. Tax documentation preparation is the process of preparing documents for submission to the local tax office. Tax consultation services are a service provided that is the process of helping people or corporations know the process of paying taxes in Japan.
Where can I pay the Japan consumption tax for businesses?
Paying the consumption tax in Japan for businesses can be a difficult process and it is best to first utilize a certified public tax accountant’s consultation services to be sure you are paying them and filing tax paperwork in the right place. But if you do not want to ask a certified public tax accountant first then the paperwork for the consumption tax should be submitted to the District Director of the Tax Office that has jurisdiction over the company’s place for tax payment.
For businesses that are foreign businesses as defined by the national tax act’s place of payment is different if you are a foreign-owned sole proprietor or a foreign corporation. For foreign sole proprietors, your place of payment is the following locations. If you have an office wherever your office is. If you have no physical address in Japan it can be paid at your relative's location if you have any relatives in Japan. If you have no relatives it can be paid at the location of your primary asset. if you have no primary asset it can be paid at the place where you have most recently paid taxes in Japan. If you have never paid taxes in Japan it can be paid where you are paying your other taxes in Japan. If none of these apply to you, you can pay your consumption tax at the Kojimachi tax office.
For foreign corporations, you will pay your consumption tax at the following places. If you have an office location you pay at the location of your office.. If you do not have an office in Japan you pay at the location of your primary asset. If you do not have a primary asset you pay at the location of your most recent tax payment in Japan. If you have never foiled taxes in Japan you will pay the consumption tax at the office where you are paying your other Japanese taxes for this cycle. If you do not qualify for any of the previously mentioned locations you will pay at the Kojimachi tax office.
Where can I pay the Japan consumption tax for individuals?
Individuals can pay the consumption tax much easier than corporations or sole proprietors. Lucky for you it is compulsory for the consumption tax to be included in the price tag for all purchases in Japan. Even for products that have extra consumption taxes levied on them including alcohol, tobacco, and gasoline, it is standard for the tax to be included in the price tag.
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Effects Of The Raised Japan Consumption Tax
It is never fun when you find out taxes are being raised but many people wonder why are they being raised? Well, this section of the article will dissect the reasons behind the rise in the consumption tax and discuss the effect it has on Japanese Society.
Why did the consumption tax increase?
The consumption tax increased so the government could raise more funds. For a few years, the Japanese government has been low on funds to pay for government projects. Some projects that the government wanted to secure according to this article funding included free education for disadvantaged students, free preschool for all, and secure funds for welfare for the aging Japanese population. These are the reasons why the consumption tax rate was increased by 2% but did they work and what does the increase mean for you?
Working in Japan: What does the increase mean for me?
If you are living and working in Japan and have been around for a few years in 2019 you might have noticed things got more expensive. Your favorite restaurant might be slightly more expensive or that brand new television will cost a bit more. While goods and services cost a bit more for you the government has promised for these new social programs to be funded.
How will the consumption tax increase affect my company?
The consumption tax increase for companies is the same as it is for individuals, an increase of 2%. This will cause the same effect for companies. They will have to spend about 2% more on all taxable transactions.
What effect did the consumption tax rate increase have on Japanese society?
It seems the increase in prices due to the increase in the consumption tax has made the Japanese public less likely to spend money. The price tags make people not want to spend money. This reduction in willingness to pay the more expensive prices for larger purchases such as air conditioning units leads experts to believe it may cause a recession in Japan. In thelast3 months of 2019, there was a 6.3% economic downturn, it is unclear though if the tax increase is responsible for this economic downturn though.
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Conclusion
The Japanese consumption tax is a tax on all business transactions in Japan. If you are an average guy buying a coffee at Starbucks or a multi-trillion yen corporation building a new office you are subject to the consumption tax in Japan. Paying it for individuals is easy, it is included in your price tag, for companies it is probably best to hire a professional. The tax rate was also increased recently to pay for new government projects; it is unclear if this increase will have positive effects on society though. If you are worried about paying the consumption tax now that it is increased, maybe consider reading the guide to the Highest Paying Jobs in Tokyo.
