114 ASIA-PACIFIC TAX BULLETIN
JAPAN
Consumption Tax Planning for Electronic Commerce
Edwin T. Whatley
Edwin T. Whatley received an AB in History and East Asian
Studies from Harvard University in 1981. He had several
Japan-related positions, including work on a Tokyo magazine
and research positions with the Harvard Program on
US–Japan relations and the Japan Research Institute in
Tokyo, before attending law school at Stanford University,
from which he received a JD in 1990. He has been with
Baker & McKenzie since 1990, working first in San Francisco
and now in the Tokyo office, specializing in international
taxation and international transactions with a Japan focus.
I. OVERVIEW OF JAPAN’S CONSUMPTION TAX
Japan’s VAT-type tax is generally referred to as consump-
tion tax, the literal translation of shohizei. Generally, con-
sumption tax applies to domestic transfers of assets;
domestic leases, rentals, licences and similar transactions;
and domestic provision of services, as well as to import
transactions, subject to the exclusion of some categories of
transactions as described below. Input consumption tax
paid on taxable purchases during a reporting period is off-
set against output consumption tax liability on taxable
sales during the reporting period, and a refund may be
claimed where input credits exceed output liability. Con-
sumption tax is calculated based on taxpayer’s records and
there is no invoicing system as is used in many VAT sys-
tems.
The introduction of consumption tax in Japan on 1 April
1989 reflected a decision by the Finance Ministry to intro-
duce an indirect tax on consumption to permit a reduction
in the very high progressive rates of direct income taxes.
Consumption tax was initially levied at 3% at the national
level. As of 1 April 1997, the national rate was raised to
4% and a 1% regional consumption tax levy was intro-
duced, raising the consumption tax to the current 5% level.
The consumption tax, and the rate of consumption tax,
remain highly contentious political issues in Japan. How-
ever, in view of revenue shortfalls and pressure to reduce
direct taxes, an increase in the rate in the future is prob-
able.
A. Registration
The taxpayer for consumption tax purposes is any enter-
prise, including both sole proprietorships and corporations
and including non-resident individuals and foreign corpo-
rations that conduct business in Japan, that engages in tax-
able transactions.
Exporters to Japan should bear in mind that liability for
consumption tax is broader than liability for corporate
© 2001 International Bureau of Fiscal Documentation
Exported / Printed on 17 Oct. 2022 by WU (Wirtschaftsuniversität Wien).
MAY/JUNE 2001
income tax and that, depending upon the selling arrange-
ment, the exporter to Japan may have to handle payment of
import consumption tax and charge output consumption
tax on onward sales to Japanese customers. This is nor-
mally done through a customs broker, Japanese affiliate
company, or professional firm as an agent or administrator
for consumption tax purposes. While registration as a tax-
payer for consumption tax purposes through such an agent
should not, in and of itself, give rise to a PE, any transac-
tion which involves a foreign exporter acting as importer
of record for consumption tax purposes should be care-
fully evaluated to confirm that the selling arrangement
does not present PE risk.
There is a “small business” exception for enterprises that
do not have taxable transactions with a value exceeding
¥ 30 million in their “base period”. The base period is the
enterprise’s business year two years prior to the current
business year. Under this system, a newly organized enter-
prise is not required to pay consumption tax during the
first two years after the establishment, because for such
two years, the enterprise does not have any base period.
However, the small business exception does not apply to
companies with a capital of ¥ 10 million or more. There-
fore, a corporation established with capital of ¥ 10 million
or more must register immediately. Since the minimum
capital for a Japanese joint-stock corporation (kabushiki
kaisha or KK), the normal form of subsidiary for foreign
investors, is ¥ 10 million, the effective initial two-year
exemption from consumption tax registration require-
ments for small business will not be relevant for foreign
investors who establish a Japanese subsidiary organized as
a KK.
In the case of the branch of a foreign corporation, for pur-
poses of the small business exception, the branch’s capital
is determined by converting the head office’s capital to
yen.
While a registration obligation will normally apply as
described above, where immediate registration is not
required, a newly established enterprise may voluntarily
register as a consumption taxpayer. This can be advant-
ageous in order to claim consumption tax refunds where
input consumption tax associated with start-up spending
exceeds output consumption tax liability.
B. Consumption tax rates and exceptions
Consumption tax is imposed at a uniform 5% rate. There
are no reduced rates for specific transactions, e.g. purchase
of food, as under some VAT systems. As discussed below,
certain transactions are not treated as taxable transactions
and in that sense are exempt transactions.
MAY/JUNE 2001 ASIA-PACIFIC TAX BULLETIN
C. Reporting requirements and deadlines
The basic consumption tax reporting period is the enter-
prise’s business year. However, a consumption taxpayer
may elect quarterly reporting periods. Quarterly reporting
is typical for larger business enterprises. In particular,
electing a shorter reporting period can be advantageous for
taxpayers which have substantial exports and thus are con-
tinuously in a consumption tax refund position.
Consumption tax returns must be filed within two months
from the day following the end of the taxable period and
any net output consumption tax liability must be paid at
that time.
Consumption tax is generally calculated for a period as:
– total prices charged in taxable transactions (before addi-
tion of consumption tax) x 5%
– minus total prices paid on taxable domestic transactions
(including input consumption tax) x 5/105
– minus consumption tax paid on imports
– minus interim consumption tax paid
– = net consumption tax liability or credit
In general, input consumption tax for a reporting period
may be credited or refunded in full if taxable transactions
account for at least 95% of total sales ( the 95% threshold
test) . If the 95% threshold test is not met, the amount of
creditable/refundable input consumption tax must be
determined using either a tracking method or a propor-
tional method. Detailed rules beyond the scope of this out-
line govern whether a consumption taxpayer is required to
file interim consumption tax returns and make interim
consumption tax payments. In general terms, taxpayers
with substantial liability are required to make such interim
returns and payments.
D. Penalties and sanctions
A tax equivalent to an interest charge (entaizei) is payable
with respect to outstanding delinquent consumption tax
liability at a rate of 7.3%. This rises to 14.6% on amounts
outstanding more than two months after the date for pay-
ment established in a notice of deficiency.
The penalty for underpayments is generally 10% of the
additional consumption tax liability payable. However, if
the additional consumption tax liability to be assessed
exceeds the larger of the tax liability reported in the con-
sumption tax return for the period or ¥ 500,000, the under-
payment penalty is assessed at 15% on the excess of addi-
tional consumption tax liability over the threshold amount.
The penalty for late filing or failure to file is 15%. A 35%
heavy penalty tax applies in cases of fraud.
E. Exemptions
1. Domestic transactions
As noted above, domestic transfers of property; provision
of services; and lease, rental, licence and similar transac-
tions are taxable transactions for consumption tax pur-
poses. A number of domestic transactions are defined as
non-taxable transactions. A comprehensive list of non-tax-
© 2001 International Bureau of Fiscal Documentation
Exported / Printed on 17 Oct. 2022 by WU (Wirtschaftsuniversität Wien).
115
able transactions is beyond the scope of this outline, but
the following is a list of the major types of transactions
classed as non-taxable:
– sales and leases of land (however, transfers or rentals
of structures are taxable with the exception of residen-
tial structures);
– transfers of securities;
– transfers of various payment instruments such as bills
of exchange, cheques, letters of credit, promissory
notes, etc.;
– payments of interest, guarantee fees, insurance premi-
ums, etc.;
– payments for various government services;
– payments for various medical services;
– transactions by various businesses regulated under the
Social Welfare Services Law such as nursing homes,
rehabilitation facilities, orphanages, and various social
service type organizations;
– various products and services for disabled persons;
– school tuition, entrance fees and textbooks;
– mortuary services; and
– postal services and stamps.
2. Export exemption
Consumption tax is imposed on imports and domestic
transactions. Export transactions are exempt from con-
sumption tax. In addition to the exemption of product
exports, service exports, in the form of services provided
to non-residents, are also exempt from consumption tax as
are various products and services related to international
transportation. Products sold in authorized “duty-free”
export shops are exempt from consumption tax.
3. Tax-exempt enterprises
In contrast to some VAT systems, in principle, no enter-
prise is exempt from paying consumption tax. Thus, not
only domestic companies and sole proprietorships and
permanent establishments of foreign persons, but also
charities and similar non-profit organizations, public
enterprises and foreign enterprises without a Japanese PE
are liable for consumption tax if they conduct taxable
transactions within Japan. The only exception is the small
business exception discussed above.
F. Planning opportunities
Since the burden of consumption tax, as an economic mat-
ter, falls on the final consumer, most planning focuses on
ensuring that all input consumption tax will be creditable
or refundable. Since prevailing interest rates in Japan are
very low, there seems to be little planning to exploit timing
differences or to defer liability to obtain a float. As dis-
cussed above, one planning opportunity upon establish-
ment of a new business is to be sure to register, even if not
required to do so, in order to obtain a refund of input con-
sumption tax associated with start-up purchases. Similarly,
an exporting enterprise may wish to voluntarily elect short
reporting periods in order to accelerate refunds.
116 ASIA-PACIFIC TAX BULLETIN
G. Specific concerns and pitfalls
1. Covered transactions
One area for caution is to confirm whether a particular
transaction is a taxable transaction for consumption tax
purposes. As discussed above, there is a detailed and com-
plicated listing in the regulations of covered and non-cov-
ered transactions which may not be obvious to those unfa-
miliar with the system. For example, transactions such as
domestic IP licences, land trusts, and certain in-kind cap-
ital contributions may be taxable, as is the transfer of cer-
tain types of assets in the acquisition of a business by pur-
chase of assets. One particular problem with a business
transfer by sale of assets may be application of the 95%
rule.
2. Consumption tax aspects of corporate acquisitions
Care should be taken to evaluate any proposed M&A
activity for consumption tax consequences. In particular,
when an acquisition or corporate division will involve the
transfer of a business by the sale of its assets, consumption
tax may be payable and the transaction should be reviewed
to confirm that the consumption tax will be creditable or
refundable. Though usually treated as an afterthought,
consumption tax liability can represent a real economic
cost that cannot be recovered if a transaction is not prop-
erly structured.
II. SPECIFIC CONSUMPTION TAX/CUSTOMS
ISSUES FOR E-COMMERCE
A. Classification issues
In Japan, there is virtually no authority in the form of tax
regulations, circulars, etc. regarding income classification
of online e-commerce transactions such as database ser-
vices, software downloads, electronic delivery of music,
etc., and there is very little unofficial guidance, such as
informal commentaries, on the attitude of the tax author-
ities. This may partly reflect the fact that, at least as con-
cerns domestic transactions, income classification is of lit-
tle practical significance since consumption tax will
generally apply to an e-commerce transaction whether
characterized as the domestic performance of services, a
domestic licence generating royalties, or the domestic sale
of a product.
The undeveloped state of the law in this area creates great
uncertainty as regards income classification (and taxation
generally) of cross-border e-commerce transactions. The
development of the law in this area may ultimately be
driven more by withholding and corporate tax considera-
tions than consumption tax considerations. From the with-
holding standpoint, it is advantageous for the authorities to
treat e-commerce transactions as licences generating roy-
alties since these will be subject to withholding. In parti-
cular, the current position of the authorities, at least in the
withholding tax area, is that any transaction that involves
electronic delivery of digital goods constitutes a licence on
the theory that downloading of software, etc. involves an
act of reproduction in copyright law terms such that roy-
© 2001 International Bureau of Fiscal Documentation
Exported / Printed on 17 Oct. 2022 by WU (Wirtschaftsuniversität Wien).
MAY/JUNE 2001
alty characterization will apply to the payment. However,
a cross-border licence payment would not attract con-
sumption tax since, for consumption tax purposes, the
situs of a transfer of intangibles under a licence is, for
copyright, the domicile of the licensor and, for patents,
trademarks and other registered intangibles, the jurisdic-
tion of registration or, if rights for multiple jurisdictions
are licensed, the domicile of the licensor.
From the consumption tax standpoint, it would probably
be most advantageous for the authorities to treat electronic
delivery e-commerce transactions as the delivery of goods
in Japan since this would be an import transaction trigger-
ing import consumption tax liability. In this connection,
the Ministry of Finance has floated the idea of requiring
foreign online retailers to register as taxpayers for con-
sumption tax and charge and collect consumption tax on
their sales into Japan. We will have to await the further
developments in this area.
From the taxpayer standpoint, probably the most advant-
ageous characterization of e-commerce online transac-
tions would be as the performance of services outside
Japan since these should attract neither withholding tax
nor consumption tax. There may be some uncertainty as to
what the relevant service is and where it is performed. For
example, with database services, if the service is establish-
ing and maintaining a database outside Japan, consump-
tion tax should not apply but, if the transaction is charac-
terized as providing information online within Japan,
consumption tax could theoretically apply.
B. Where is the supply taxed?
As discussed above in I., consumption tax liability is trig-
gered by a domestic transfer of property, domestic rental
of property or domestic provision of services and also by
the importation of tangible property. The cross-border
licensing of intellectual property and the performance of
services outside Japan, two possible characterizations for
e-commerce transactions, are not subject to consumption
tax.
Under the Japanese tax system, any person whether res-
ident or non-resident that engages in taxable transactions
in Japan is required to register as a taxpayer for consump-
tion tax purposes and collect and pay consumption tax. In
contrast to some other VAT systems, the registration
requirement is not tied to the concept of place of business
or fixed establishment though such concept is, of course,
relevant for income tax purposes. As a general matter, re-
gistering as a taxpayer for consumption tax purposes
should not, in and of itself, create a PE for income tax pur-
poses.
C. From whom is consumption tax collected?
As discussed above, in the context of domestic transac-
tions, the purchasing party in any transaction subject to
consumption tax is required to pay 5% consumption tax.
Since consumption tax is a VAT, where such purchaser is
engaged in business, it will be required to charge con-
sumption tax on its onward taxable transactions and, when
filing its consumption tax return can net out its input con-
MAY/JUNE 2001 ASIA-PACIFIC TAX BULLETIN
sumption tax liability against its output liability. As also
noted above, e-commerce transactions performed do-
mestically will normally be subject to consumption tax
regardless of whether characterized as sale of goods, per-
formance of services or licence of intellectual property so
consumption tax would be uniformly charged on such
transactions.
As noted above, consumption tax is payable on imports.
For imports, the person who owns the goods and passes
the goods through the customs barrier must file an import
return and pay consumption tax, together with any
required customs duty or applicable excise tax. In an
export sale from a foreign jurisdiction, the importer will be
the Japan-based customer.
Japan provides small package relief by exempting postal
and other shipments with a value of ¥ 10,000 (approx.
USD 92 at ¥ 108/USD 1) or less from consumption tax and
customs duty, though not from other applicable taxes
(such as liquor excise tax).
SINGAPORE
GST Planning for Electronic Commerce
Kenny Foo
Kenny Foo graduated from the National University of
Singapore in 1998 with a Bachelor of Laws degree and was
cited on the Dean’s List for outstanding performance. He was
also awarded the LCB Gower Prize for Company Law in
1997. In 1998, Mr Foo led the Singapore team in the Philip
C. Jessup International Law Moot Court Competition held in
Washington DC, where they finished among the top four
teams in the world.
He joined Wong & Leow (the Singapore law firm associated
with Baker & McKenzie) in 1998, and was admitted to the
Singapore Bar in 1999. His practice covers income tax,
goods and services tax, stamp duty and other taxes. He has
broad experience in advising multinationals on the tax
structuring of their investments, operations and transactions
in the region, and assisting them in negotiations with
government agencies for tax incentives or the settlement of
tax disputes. E-mail: <Kenny.Foo@BAKERNET.com>.
I. INTRODUCTION
A. The GST system
Goods and Services Tax (GST) is a broad-based tax on
domestic consumption. It is a multi-stage tax which is col-
lected at every stage of the production and distribution
chain. The tax is passed on to the final consumer. The
© 2001 International Bureau of Fiscal Documentation
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117
Japan does not have a reverse charge mechanism that is
applicable to imports of services.
As discussed above, a non-resident is required to register
as a taxpayer for consumption tax purposes if it engages in
taxable transactions in Japan, unless it qualifies for the
small business exemption. As also discussed above, even
if registration is not mandatory, it may be advisable if there
will be excess input consumption tax credits that can be
refunded.
D. Customs and other import duties
Customs has not been a major issue with e-commerce
transactions since the most prevalent products, e.g. soft-
ware, enter Japan free of duty. Tangible products ordered
online and imported in Japan will be subject to duty, if
applicable, in the same manner as the same products
ordered in any other manner.
standard rate of GST is 3%. However, some goods and ser-
vices are zero-rated or exempt from GST.
The GST system requires a registered business to charge
GST on its “outputs” and pay GST on its “inputs”. “Out-
puts” are supplies made by the business to its customers,
while “inputs” are the supplies others make to the busi-
ness. The difference between the output tax and input tax
for each accounting period is the amount of GST which
the business must pay to the IRAS.
The system of netting-off the output tax collected against
the input tax incurred by the registered business gives rise
to two distinct features of the tax:
– the value added at each stage of the value chain is only
taxed once, thereby avoiding a cumulative or cascad-
ing effect;
– as long as the GST incurred by the registered business
is fully deductible, the registered business effectively
suffers no GST and the burden of the GST is passed on
to the consumer.
B. What is GST chargeable on?
Sections 7 and 8 of the Goods and Services Tax Act
(GSTA) provide that GST shall be charged on:
– the supply of goods or services, where the supply is:
– a taxable supply;
– made in Singapore;