Japan Consumption Tax Guide for Non-Resident Digital Service Providers

The obligation to charge, collect, and remit consumption tax in Japan for non-resident suppliers of digital services is not new. In 2015, the Japanese government amended the place-of-supply rule for cross-border digital services, and suppliers have been required to register for consumption tax purposes in Japan ever since.

However, due to the changes in the digital economy and following the expert report posted by the Japanese Ministry of Finance in November 2023, the 2024 tax reform package bill was proposed and adopted, further developing and regulating this area.

This article will cover the basic requirements that foreign vendors must comply with, such as when to register for consumption tax, the scope of liability, the frequency of consumption tax return filing, payment due dates, and penalties for non-compliance.

Consumption Tax Registration Threshold

Non-resident suppliers of digital services must register for a consumption tax in Japan if their taxable sales exceed the JPY 10 million (around USD 65,000) consumption tax registration threshold. However, two different periods are defined for exceeding the threshold: the base and specific periods.

The base period differs for sole proprietors and companies. For sole proprietors, the base period is the second year before the current taxable year, whereas for companies, the base period is the second business year before the current tax year. For example, the base period for 2024 is 2022.

The specific period is specified as the first six months of the previous calendar year for sole proprietors or the first six months of the previous business year for companies.

Foreign service providers must either have a local office or appoint a tax representative to register for a consumption tax in Japan.

Once registered for consumption, non-resident digital services providers must apply a general consumption tax rate of 10%.

Digital Platform Taxation Regime

Under the tax reform package adopted in 2024, starting from April 1, 2025, non-resident digital platform operators who facilitate the sale of digital services to Japanese consumers will have to register for consumption tax purposes in Japan once the total amount of such services facilitated exceeds JPY 5 billion (around USD 32.5 million).

Once the threshold is exceeded, digital platform operators must notify the Japanese National Tax Agency (NTA) until the final tax return filing deadline has passed. After informing the NTA, the designation will become effective within six months of the due date. The NTA announced a list of platforms that submitted and completed their registration, including Apple Store, Apple Books, Apple Podcast, AWS Marketplace, Google Play, and Nintendo eShop.

Digital Services Subject to Consumption Tax

According to the tax guide published by the NTA, digital services are supplied through telecommunication lines, such as the Internet. They include e-books, digital newspapers, music, videos, and software, including various applications such as games.

Services that allow customers to use software and databases in the cloud, provisions of cloud-based storage space, and distribution of online advertisements also fall under the scope of digital services.

Furthermore, services that allow customers to access online shopping and auction sites, such as marketplaces, and place their apps or games for sale, like online app stores, are also considered digital services.

Websites and platforms that enable online booking and reservation of accommodation and restaurants are considered digital services. Interestingly, the legislation also defines online English lessons as a digital service. Many Japanese families hire foreign English teachers to teach English to family members, mainly children. 

Taxability Rules For B2B and B2C Transactions

Both business-to-business (B2B) and business-to-consumer (B2C) transactions are taxable. However, the tax treatment of these transactions differs. For B2B transactions, the reverse charge mechanism applies. In contrast, for B2C transactions, under the destination principle, non-resident vendors must charge, collect, and pay Japanese consumption tax and file appropriate tax returns once the conditions are met.

Japan Consumption Tax Return and Payments

Non-resident vendors registered for consumption tax must file monthly, quarterly, or annual tax returns. As a general rule, annual tax returns are submitted. Monthly and quarterly returns are allowed, but vendors must apply for them and receive approval.

The annual tax return is the final tax return and must be filed and paid within two months of the end of the taxable period. For individuals, the taxable period is the calendar year, and for companies, it is the fiscal year.

Vendors who do not submit quarterly or monthly returns may be required to make interim payments based on the consumption tax amount payable for the previous taxable period. The payments must be made within two months after each interim period ends.

Monthly interim payments are required when the consumption tax amount payable for the previous taxable period is over JPY 61,538,400. Quarterly payments are due when the amount is between JPY 5,128,200 and 61,538,400, and semi-annual payments are due when the amount is between JPY 615,300 and JPY 5,128,200.

Penalties For Non-Compliance

Taxable persons who do not submit tax returns on time may face a 15% to 20% penalty of the due tax amount. A reduction of 5% is possible if the tax return is filed voluntarily after the deadline but before NTA issues a notice.

If taxable persons underpay the tax, a 10% to 15% penalty may be added to the tax-due amount. However, this penalty may be avoidable if the additional tax payment is completed before NTA issues a notice.

In addition, an annual interest of 2.4% to 8.7% for all late payments may be imposed.

Conclusion

As one of the biggest highly service-dominated economies, Japan is an attractive market for many non-resident digital services providers. With the regulations in place since 2015 for foreign digital services suppliers, and now, with the latest reform introducing deemed supplier rules for digital platform operators, Japan continues its development toward a tax system that may answer to challenges in the digital economy.

Anyhow, all non-resident taxable persons should allocate resources, hire necessary personnel, and, if necessary, consult tax and VAT consultants to understand better their obligation under the Consumption Tax Act regarding the provision of digital services.

Source: National Tax Agency - Consumption Tax, National Tax Agency - Platform Taxation of Consumption Tax, National Tax Agency - Revision of Consumption Taxation on Cross-border Supplies of Services, National Tax Agency - Outline of Consumption Taxation on Cross-border Supplies of Services, National Tax Agency - Specified Platform Business Lists, National Tax Agency - Overview of delinquent tax and additional tax, VATabout