Japan: New Japanese Consumption Tax Treatment On Cross-Border Digital Services

Last Updated: 17 February 2016
Article by Takeo Mizutani and Chizuko Tomita

By virtue of the 2015 tax reform, new consumption tax rules will be applicable to cross-border digital services provided on or after October 1, 2015.

Before the 2015 tax reform, the place of taxation for cross-border digital services such as provision of e books, digital newspapers, music, videos or distribution of advertisements via the internet had been determined based on the place of the supplier for Japanese consumption tax purposes. Thus, digital services provided by foreign suppliers had not been subject to consumption tax (on the other hand, digital services provided by domestic suppliers had been subject to consumption tax) and as a result there was difference in tax burden depending on the place of the suppliers and distortion in the competitive conditions between foreign and domestic suppliers.

Main points of the new rules

  1. Place of taxation for ‘digital services’

    The place of taxation for ‘digital services’ will be determined based on the place of service recipient.
     
  2. Introduction of a reverse charge mechanism

    Under Japanese consumption tax law, when a business provides services, the business is responsible for filing and paying tax on the transaction. However, regarding provision of B2B digital services, a reverse charge mechanism has been introduced, where a Japanese business files and pays tax who receives digital services from a foreign business.

    For the time being, if a business receiving digital services has a taxable sales ratio of 95% or more, it is not required to report reverse charge consumption tax in the tax returns.
     
  3. Limitation on input tax credit associated with B2C digital services provided by foreign businesses

    Regarding provision of B2C (business-to-consumer) digital services, a service provider is responsible for filing and paying tax. However, when a Japanese business receives the B2C digital services provided by foreign businesses, the Japanese business will not, for the time being, be eligible for input tax credit associated with the services provided, unless the services are provided by a ‘registered foreign business’.
     
  4. Establishment of foreign business registration system

    A foreign business who is a consumption taxpayer can become a ‘registered foreign business’ by submitting an application form to the NTA through the relevant tax office. Foreign businesses can submit an application for registration on or after July 1, 2015. For registration, the following conditions must be met:

    • The foreign business has an office in Japan through which B2C digital services are provided.
    • If the foreign business does not have an office in Japan, it has nominated a tax representative.
    • If the foreign business does not have an office in Japan, it has designated a tax agent for consumption tax.
    • There is no delinquency in tax payments.

Definition

  1. Digital services

    A ‘Digital service’ is defined as the provision of copyrighted articles (including licensing of the copyrighted articles) and other services via telecommunication lines.

    The following are examples of digital services:

    • Provision of e-books, digital newspapers, music, videos, and software (including various applications such as games) via the internet
    • Services that allow customers to use software and databases in the cloud
    • Services that provide customers with storage space to save their electronic data in the cloud
    • Distribution of advertisements via the internetServices that allow customers to access shopping and auction sites on the internet (e.g., charges on posting goods for sale etc.)
    • Services that allow customers to access the place to sell game software and other products on the internet
    • Provision via an internet reservation website for accommodation and restaurants (those who charge on posting for the website from the businesses that operate accommodation and restaurants)
    • English lessons provided via the internet

    The following are examples of services not treated as ‘digital services’:

    • Services that merely mediate information transmission among subscribers, such as telephone, FAX, telegraph, data transmission, and access to the internet
    • Software development, etc.
    • Administrating and managing assets outside Japan (including internet banking services)
    • Requesting foreign businesses to collect and analyse information, etc.
    • Foreign legal professionals pursuing litigation outside Japan
  1. B2B Digital Services

    B2B digital services are defined as ‘the provision of digital services that normally are limited to businesses, considering the nature of the services, or the terms and conditions relating to the provision of the services’.

    The following are the examples of B2B digital services:

    • Distribution of advertisements via the internet
    • Services that allow customers to access the place to sell game software and other products on the internet

    The foreign business which provides B2B digital services is required to inform the domestic business that the reverse charge system is applicable to the B2B digital services.
  1. B2C Digital Services

    B2C digital services are defined as digital services other than B2B digital services.

    The following are examples of B2C digital services:

    • Distribution of e books, digital newspapers, music, videos, and software to consumers
    • Internet shopping and auction site

Transitional measures

The old tax treatment will be applicable to digital services provided continuously before and after October 1, 2015 by foreign suppliers based on contracts concluded before April 1, 2015.

However, if the services fees are amended on or after April 1, 2015, the transitional measures will not be applicable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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