Invoice System will Begin in Japan in Fall 2023.
What Should Entrepreneurs Be Aware of?
From October 2023, a new “Invoice System” will begin in Japan. Many people may not understand what the new system means just from the name. So let’s break it down.
First of all, it is said that the new invoice system will bring hardship particularly on small business owners and freelancers. And more and more people may be forced out of business as a result of the introduction of this system.
What exactly is the Invoice System and what is the problem?
The new Invoice System is closely related to the consumption tax. The consumption tax rate in Japan is 10%, which is added to the price of goods and services purchased by consumers, but only business owners pay consumption tax to the tax office. So, this is one kind of of indirect tax.
This consumption tax was originally exempted from being paid by certain small business owners, specifically, business owners with annual sales of 30 million yen or less were exempted from paying consumption tax. In other words, such business owners are legally allowed to receive consumption tax on top of the price of their goods and services.
The portion of consumption tax exempted from payment is called “profit tax”. Since the consumption tax can be added to sales and retained as profit, small business owners have, in effect, been given preferential treatment by the government.
However, since April 2004, the scope of those who are eligible to benefit from the “profit tax” has been reduced to business owners with annual sales of 10 million yen or less. In the meantime, the consumption tax rate was raised from 5% to 10%, which weighed heavily on consumers, but for business owner who are exempted from the payment of consumption tax, benefited from the doubling of the amount of profit tax.
If you want to learn more about Consumption Tax in Japan, we recommend the following article.
Is it unfair to receive the profit tax?
There has been a sentiment that it is unfair to receive the profit tax just because their sales are small. However, in a Japanese society where the economy has been sluggish and in recession for more than 20 years, the profit tax is one of the few ways to help and support small businesses. Being able to keep the consumption tax amount in cash on top of net sales is a great advantage.
However, it is believed that the introduction of the Invoice System will effectively eliminate this profit tax. If this profit tax is eliminated, an average of 154,000 yen per small business owner will be newly taxed as consumption tax. The Ministry of Finance estimates tax revenue will increase by approximately 250 billion yen.
For small business owners, it must be a big blow to lose 10% of profit.
Why the invoice system will eliminate the profit tax?
For example, currently when a taxable business provider (a business with 10 million or more sales) hires some service or purchases goods from others, they usually request the service provider or the seller to issue an invoice.
Then the taxable business providers can deduct the amount of consumption tax on the invoice as a purchase tax credit from the consumption tax received. Therefore, Invoices issued by counterparty are important documentary evidence to show the amount of purchase tax credit to the tax office.
However, after October 2023, taxable business providers will no longer be allowed to deduct the amount of purchase tax credit unless the invoice is a “Qualified Invoice”. In other words, the “invoice” in the Invoice System is not just an invoice, but what is called a “Qualified Invoice”.
The Qualified Invoice issuer must be registered with the tax office as a Qualified Invoice Issuing Business, and the registration number issued must be written on the invoice. However, once registered as a Qualified Invoice Issuing Business, the company switches to taxable business providers, even if their sales are less than 10 million yen.
Of course, unregistered small businesses owners cannot issue Qualified Invoices. Since taxable business providers will no longer be able to use the invoice which is not Qualified Invoice to deduct purchase tax credit from consumption tax to be paid to tax office, they may terminate the transactions with small business owners who are not registered as Qualified Invoice Issuing Business after fall in 2023.
Even if transactions continue, taxable business providers may demand a discount of service fee to such small business owners as compensation for their loss due to non-registration. Therefore, whether registered or unregistered, small business owners may lose the profit tax as a result of introduction of Invoice System.
We addressed this concern in another article below.
Note: As a transitional measure to ease the drastic change, a certain percentage of the amount equivalent to purchase tax credit to be deducted for purchases from unregistered businesses during six years from the implementation of the invoice system.
80% can be deductible for the period from October 1, 2023 to September 30, 2026 and 50 % can be deductible for the period from October 2026 to September 30, 2029.
How to overcome the Invoice System?
First of all, one way is to give up the profit tax and become a taxable business providers by registration as Qualified Invoice Issuing Business and pay consumption tax to tax office. If the size of your business is growing, sooner or later your sales will exceed 10 million yen and you’ll need to pay consumption tax to tax office whether or not registered as Qualified Invoice Issuing Business.
About the notification related to consumption tax, you may be interested in the following article too.
Another way is to switch to a policy of doing business with individuals, because they often do not care about the Qualified Invoices. If you actively use online platforms such as social networking sites and skill markets to attract customers and focus on transactions with individuals, you will be largely unaffected by the Invoice System.
The third way is to develop a unique value that will make you the partner of choice for transactions even if you are not Qualified Invoice Issuing Business. In most case, there are many other competitors who can provide similar type of services. Taxable business providers will compare those competitors with you and may choose based on capability for issuing Qualified Invoices. But, if your service is unique and has special value, you will can be chosen by many people, regardless of whether you are Qualified Invoice Issuing Business. If you reach that stage, the Invoice System will be irrelevant.
In any case, it is not an easy road. As long as you continue to run your business in Japan, you should be prepared for the new Invoice System being implemented from October 2023.
For more information about the invoice system, please refer to the website of national tax agency.