Case 6
<Question>
Some people mention that a Consumption tax is imposed immediately when a new corporation is established, on the other hand other people mention that the Consumption tax is not imposed for a while. Could you explain points to consider regarding the Consumption tax when a new corporation is established.
<Answer>
What is Consumption tax
Japanese Consumption tax (JCT) is a national tax and indirect regional tax which applies to the transfer and lease of assets and provision of services. Most domestic transactions and imported foreign goods are subject to taxation at the rate of %5 (4% national, 1% regional).
Tax payer
The system is designed so that the ultimate consumer of the goods or services bears the cost of the JCT. Although JCT is charged at each stage of manufacture or distribution, the amount paid is credited against the JCT collected on taxable sales.
Where the amount of taxable sales of an enterprise in its base period is JPY 10 million or less, the enterprise will be exempted from remitting JCT collected by the tax authorities during the taxable period unless it voluntarily elects to pay the JCT (*1). The “Base period” is defined as two business years prior to the tax year.
When an enterprise has been established with a stated capital of JPY 10 million, it is not exempt from tax during its first and second business years. In the case of a branch office located in Japan, the stated capital of the entire foreign invested company is used. A company that is exempt from JCT is, in principle, still required to collect JCT on taxable transactions, but can retain the JCT without remitting it to the tax authorities. Such an amount is taxable as income in Japan. If the JCT paid is expected to exceed the JCT received, the enterprise can claim voluntary taxpayer status.
An enterprise can elect to become a voluntary JCT taxpayer in order to claim a refund on the JCT by filing an application for such. Once voluntary JCT registration is elected, it cannot be withdrawn for two years, meaning the enterprise is required to file a JCT return for the next year, even if the status of that enterprise has changed.
Points to consider
Regarding businesses started by corporations, the amount of capital should be under JPY 10 million, otherwise the JCT would be imposed from the first period. On the other hand, if the JCT paid is expected to exceed the JCT received, the enterprise had better elect voluntary taxpayer status. For example, in the case of purchasing an office, it is expected that a relatively high JCT would be levied. In such a case, electing voluntary taxpayer status might be preferable.
*1 Due to the tax reform in 2011, additional rules and requirements were added, though we skipped them to simplify the explanation.
Referenc
Starting a business in Japan – Business operation 25/10/2012
Starting a business in Japan – Blue tax return for Income tax 11/10/2012
Starting a business in Japan – Opening bank accounts and borrowing money 28/09/2012
Starting a business in Japan – Tax merit (a corporate or an individually owned business?) 10/09/2012
Starting a business in Japan 18/08/2012
By Certified Public Accountant (CPA) & Tax Accountant, Koji Takahashi
Tokyo & Yokohama
