New scheme for the Consumption tax coming to Japan in 16 months:

(From my Linkedin post in May 2022)

On October 1, 2023, Japan will introduce a new VAT (Value Added Tax) system called “Qualified invoice retention system”. This change is expected to impact on almost all the B2B business, so in this article I would like to write for the finance practitioners about possible impact and necessary preparations.

Outline of the change

In Japan’s VAT scheme, when you buy a taxable commodity, the vendor charges you 10% (8% for food and newspaper) of VAT in addition to the commodity price. You can deduct paid VAT when you calculate your annual VAT liability to file tax return. The higher the deduction amount is, the less your tax liability will be.

In the new scheme, a “qualified invoice” is required for the paid VAT to be deductible. A qualified invoice can only be issued by a "qualified invoice issuer". To become a qualified issuer, you must register to NTA (National Tax Agency).

When you sell your commodity to your business client, most likely you are asked to issue a qualified invoice. Therefore, even though the registration is said to be voluntary, it is practically mandatory and all the B2B businesses will have to consider registration.

On the other hand, if you are a buyer, when you pay VAT, you should make sure to receive a qualified invoice. If not, the paid VAT will become non-eligible for deduction.

Specific issues for the seller:

1.     NTA registration and receiving invoice number

Once you register to NTA, you will receive an ID number called invoice number (a12-digit random number) and your name and invoice number will be put into the list of qualified invoice issuers published on NTA homepage.

Registration application is accepted since last October. If you want to complete registration before the start of new scheme, you must complete your application by March 31, 2023. You can apply later and still can be registered but your registration may delay for the new scheme, and you may not be able to issue qualified invoices even after the new scheme is already began, causing a trouble to you clients.

So, it is highly recommended to plan ahead of time.

2.     VAT calculation logic specified

The new rule requires that VAT amount should be shown on each invoice, and it clearly defines how VAT should be calculated. If your sales system's VAT calculation does not comply with the prescribed calculation logic, you will need to consider system amendment.

*As for the specific requirement, please refer to “Note: Rounding rule of the tax amount decimals” at the end of the article.

Specific issues for the buyer:

1.     Receiving the right invoice from the right vendor

When you buy a taxable commodity, the vendor charges you 10% (8%) VAT in addition to the commodity price. Then you deduct this paid VAT in your annual VAT liability calculation.

In the new scheme, however, the rule is stricter and VAT you paid is only deductible if you have received a qualified invoice and retain it for 7 years.

An invoice is qualified if (a) required information is fully furnished, and (b) issued by a registered vendor.

(a) Required information of a qualified invoice

A qualified invoice should have 9 mandatory items of information on it. If missing, it will be “unqualified” and cannot endorse VAT deductibility.

Therefore, if you find an invoice has an error in its mandatory information, you must ask the vendor to re-issue a correct one. In this respect, a check process should be introduced in your procurement operation.

(b) Invoice must be issued by registered vendor (qualified invoice issuer)

As NTA publishes the list of qualified invoice issuer on its homepage, you can check the invoice number and assure the vendor is a qualified invoice issuer.

When capturing new vendor information in your vendor master, the vendor’s invoice number should be verified with NTA up-to-date information. Also, periodic stock-take of invoice number in the vendor master is recommended.

Once registered, it is unlikely that vendors cancel their registration and real-time check for invoice number is unnecessary.

2.     Contract amendment

For some type of procurement contracts, such as office rent or parking fee, a monthly payment amount is specified in the contract and paid via direct debit of bank account without issuing an invoice. In such cases, it is required that the invoice number should be mentioned in the contract, thus, contract amendment will be necessary.

In practice, instead of renewing full contract, you can meet the requirement just by adding an attachment (addendum) with the vendor’s invoice number on it. If you have a lot of such contracts, it will take time to collect such addendum to all the contracts, so you should coordinate with the vendors timely amendment.

In case you are SELLING such services, you will be required to do the same to your clients.

In both cases, you should plan ahead of time.

3.     Treatment of VAT from non-registered vendors

In the new scheme, the rule is simply no VAT deduction if no qualified invoice is issued. If you deal with non-registered vendor (i.e., non-qualified vendor), you need not pay VAT, as it would be non-deductible in you tax liability calculation.

However, the matter is not so simple, as in the new scheme there is a transitional measure for the VAT from non-registered vendors, which allows 80% - 50% of the VAT paid still deductible for upcoming 6 years.

This measure is intended to mitigate the new scheme impact on SMEs (Small and Medium Enterprises), but it will also affect other group of purchasing, namely oversees purchase of services. It is unlikely that overseas vendors register to NTA, and most likely they will remain non-registered vendor. If you have your supply-chain globally, you are certainly buying a lot from overseas vendors and will be affected by this transitional measure.

As said in this transitional measure, paid VAT will still partially (80-50%) be deductible and you may want to take advantage of it. This measure does not require qualified invoices for deductibility, but just by booking them as VAT-included transactions in your accounting ledger you can deduct the portion booked as VAT.

This will be a new booking method and may take IT change. If you consider this option, you also should check expected tax saving opportunity and necessary IT resources together. As this is a “nice to have” function it there are other IT-related mandatory issues the priority should be lower than them.

Some 16 months remain until implementation of the new scheme, however, as VAT rule change will affect almost all the business activities, in terms of regulatory compliance, documentation, internal process, or system change, so timely and in advance planning and actions will be quite important.

Note: Rounding rule of the tax amount decimals

In the new rule, all the types of rounding (round-up, round-down or round-up for the fraction of 5 or above) can be chosen at the issuer’s discretion, but the rounding frequency per invoice is restricted to once at the invoice sum (if you have different tax rate transactions in one invoice, once at each sum of different rate transactions).

Suppose you sell 100 items of a commodity at unit price 9-yen, 10% VAT is 0.9 yen. If you put 100 lines separately in the invoice and round-down at each invoice line of commodity (not at invoice sum), you can round-down 100 times and make VAT amount zero. That is why rounding methods other than rounding at invoice sum is ruled out.