Summary of the changes
Under the existing JCT system, a JCT taxpayer can claim an input JCT credit or refund even if its vendors are not JCT taxpayers (input JCT availability is based on the books and records which describe the details of the transactions, as opposed to the invoices). In these circumstances, vendors who are non-JCT taxpayers can retain the JCT collected, which has historically resulted in an economic benefit for such vendors. The legislative purpose of the qualified invoice system is to remedy this outcome regarding the non-JCT taxpayers. The amendment is also made in the context of Japan being the only OECD country that does not have such an invoice system for VAT.
Under the new system, qualified invoices are required in order to claim input JCT credits and receive JCT refunds (where creditable input JCT exceeds output JCT for the year). In order to issue qualified invoices, taxpayers are required to register and become "qualified invoice issuers." This differs from the current system, where there is no such registration requirement and JCT taxpayers can also recognize JCT input credits for transactions with suppliers that are JCT exempt (i.e., a qualified invoice issuer must be a JCT taxpayer). After 1 October 2023, a JCT taxpayer will be unable to recognize an input tax credit for transactions with non-registered invoice issuers, as a rule. As a temporary transitional measure, a partial JCT credit may be available over a six-year transition period (from 1 October 2023 to 30 September 2026, 80% of the input credit amount will be available, and from 1 October 2026 to 30 September 2029, 50% of the input credit amount will be available).
The new rules specify the information that must be stated in a qualified invoice. This includes the supplier name, the qualified invoice registration number, a description of the goods or services, the invoice amount (as well as the exact JCT amount denominated in JPY) and the customer name. For businesses that provide JCT taxable transactions to numerous counterparties (e.g., retail businesses, restaurants, etc.), simplified qualified invoices which do not include the customer names are allowed.
Registration as a qualified invoice issuer
The application process for registration as a qualified invoice issuer began on 1 October 2021 and applications must be submitted by 31 March 2023 for applicants to be qualified invoice issuers on the day that the new rules become effective. If a non-JCT taxpayer registers as a qualified invoice issuer, non-JCT taxpayer status is forfeited, and the taxpayer becomes a JCT taxpayer. After registration, the name of the qualified invoice issuer and their qualified invoice registration number can be confirmed through Japan's National Tax Agency (NTA) website.
While Japanese law contains a strictly enforced due date to become a voluntary JCT taxpayer, there is an exception for non-JCT taxpayers who register as qualified invoice issuers during their fiscal year in which the 1 October 2023 effective date falls. This exception allows these taxpayers to become voluntary JCT taxpayers from the date of registration as a qualified invoice issuer.
In addition to the invoice itself, the introduction of the qualified invoice system has implications for accounting, tax and IT/ERP systems and broader business, including management and price negotiations between registered and unregistered suppliers, document retention policies for tax audit preparation, accounting entries and JCT classification codes, calculation of input and output JCT during the transition period and compliance with the JCT law in contracts.
Impact on taxpayers
The updated rules are expected to have varying impacts on different business models. For example, for intermediary transactions, such as consignment sales, if both the consignor and the consignee are registered invoice issuers, the consignee can issue qualified invoices to the counterparty to the transaction (such as the customer) subject to certain conditions (e.g., retention requirements regarding copies of the qualified invoices for both the consignor and the consignee, etc.)
For platform operators, the impact of the qualified invoice rules is potentially complex and will depend on the type of transactions the platform conducts with customers in Japan. If the platform transacts directly with, and charges service fees directly to, customers, the impact may be fairly straightforward, and the platform operator should decide whether to register as a qualified invoice issuer under the new regime and ensure it complies with the necessary invoicing requirements. However, for platforms that simply collect payments from Japanese customers for transactions with sellers, the rules are more complex, and the platform may be able to issue qualified invoices on behalf of the sellers as an agent/intermediary if certain requirements are met (e.g., sellers are registered as qualified invoice issuers, etc.).
In relation to the digital service JCT system, currently offshore service providers may register with the Japanese tax authorities in order for their "B2C4B" customers to enjoy an input JCT credit for the digital service payments to the registered offshore service providers. This registration system for digital service providers will be abolished effective 1 October 2023, and offshore service providers registered as of 1 September 2023 will automatically be deemed to be qualified invoice issuers effective from 1 October 2023.
Related to this issue, the Japanese government is currently contemplating the introduction of a so-called "deemed reseller" (referred to as a "platformer") taxation system. Under such a system, a platformer of digital services would be responsible for handling digital service JCT imposed on digital transactions from each digital service provider operating on the platform, although no details have been disclosed at this stage. The 2023 Japanese Tax Legislation Proposal (by the ruling parties) briefly mentions a "platformer taxation" system as one item to be considered for tax reform in subsequent years. We speculate that it may take time to introduce such a "deemed reseller" concept in the JCT system, as it would require substantial changes to the systems for offshore platformers (and we also expect that some grace period would be allowed).
As a broad comment, despite Japan having a somewhat unique JCT system for many years (first introduced in 1989 originally as a simplified VAT system with a single flat 3% rate, but without an invoice method as mentioned above), we expect that amendments will continue to be made going forward in an effort to create a more sophisticated JCT system that ultimately may be harmonized with an EU-style VAT.