Invoice System In Japan

The start of the invoice system in Japan

What is purchase tax deduction for consumption tax (shiire zeigaku kojo)?

Should you register for the Japanese invoice system or not?

Invoice registration and Special provisions for consumption tax

If you are running a business in Japan, you may have heard of the word invoice system（インボイス制度）, which will start from October 1, 2023.

This system is a system that almost all people, whether they are self-employed or company managers, need to know.

Unfortunately, Japan does not change its policy of raising taxes. Even if ordinary people are suffering from a heavy burden of national taxes, politicians may be working for the benefit of some vested interests.

To use the “purchase tax deduction for consumption tax”(消費税の仕入税額控除), you (Business operator) need to receive an invoice that meets the requirements of the Invoice System from the seller.

(Purchase tax deduction is a system that allows you to deduct the consumption tax you paid to your suppliers from the consumption tax you collected from your customers. I will write an easy explanation later.)

You will also need to issue an invoice that meets the requirements of the Invoice System to your customers.

You need to know and respond to this invoice even if you have not paid consumption tax so far.

I will try to explain it as clearly as possible, so please read it.

What is the Invoice System in Japan?

The official name of the Invoice System is “qualified invoice preservation method（適格請求書等保存方式）”, but the official name does not matter.

I will use an example to explain it in an easy way.

You are doing business as a software engineer in Japan. You have not paid consumption tax so far. In other words, you are a non-taxable business operator for consumption tax.

This is because your annual business sales are less than 10 million yen and your capital is less than 10 million yen even if you are a company.
(It does not matter whether you are doing business as an individual or as a company for this Invoice System.)

You are making games for smartphones by request from a company (XYZ Co., Ltd.) or a general consumer (Mr. Yamada). XYZ Co., Ltd. and Mr. Yamada are your only customers.

When you complete your work, you issue an invoice to your customer. Your fee is 110 yen per case, of which 10 yen is consumption tax.

Then, XYZ Co., Ltd. sells the game you made to general users for 220 yen.

In the Invoice System that starts from October 1, 2023, the invoice you issue must meet the requirements of the Invoice System.

If you do not do so, XYZ Co., Ltd. will not be able to use the purchase tax deduction and will have to pay extra consumption tax. You will cause XYZ Co., Ltd. to pay extra consumption tax because you do not issue an invoice that meets the requirements of the Invoice System.

Then XYZ Co., Ltd., which has a strong position, may stop doing business with you.

If you are going to continue your business only with general consumers like Mr. Yamada in the future, you may be able to ignore the invoice system.

However, if the work from XYZ Co., Ltd. is important to you, you will need to register as a business operator subject to the invoice system with the tax office. This registration is called invoice registration(インボイス登録).

You will submit some documents to the tax office and receive invoice registration. Then you will be able to get an invoice number（インボイス番号）. This invoice number is proof that you have registered for invoices system.

And the information(name for individuals, address and company name for corporations) of the people who have registered for invoices will be made public. Therefore, if someone who has been hiding and doing a side job under their personal name registers for invoices system, they may be known to others.

You may have already been asked by your customer company “Have you registered for invoices system?”

What is purchase tax deduction for consumption tax (shiire zeigaku kojo)?

Assumed that XYZ Co., Ltd. paid 10 yen of consumption tax when they paid you a fee. And XYZ Co., Ltd. received 20 yen of consumption tax from their customers. In this case, XYZ Co., Ltd. only has to pay 10 yen (20 yen – 10 yen) of consumption tax to the tax office until now.

XYZ Co., Ltd. can deduct the 10 yen of consumption tax they paid to you. This is called purchase tax deduction(仕入税額控除＝shiire zeigaku kojo).

And if you do not register for the invoice system by October 1, 2023, XYZ Co., Ltd. will not be able to use the purchase tax deduction after October 1, 2023.

That means XYZ Co., Ltd. cannot deduct the consumption tax they paid to you. Then XYZ Co., Ltd. will have to pay 20 yen of consumption tax.
(20 yen – 0 yen= 20 yen)

If that happens, XYZ Co., Ltd. will be angry. “It’s your fault!”

If you register for the invoice system, you can use the invoice you have been using as long as it is within a reasonable range.
The invoice you are using now has the name of the customer (XYZ Co., Ltd. or Mr. Yamada), your address and name, the applicable consumption tax rate and amount.

So, you just need to write the invoice registration number that you will be notified by the tax office when you register for the invoice system on that invoice.

So, you don’t have to buy new software.

Should you register for the Japanese invoice system or not?

The following text is for when you were not a taxable business operator for consumption tax until now.

If XYZ Co., Ltd. and Mr. Yamada are not taxable business operators for consumption tax, you may not need to register for the invoice system. This is because even if you do not register for the invoice system, XYZ Co., Ltd. and Mr. Yamada will not have any trouble.

However, in the future, your customers may increase and taxable business operators for consumption tax (business operators who pay consumption tax to the tax office) may become your customers. Then, you will consider registering for the invoice system.

If you register for the invoice system, you will become a taxable business operator for consumption tax. You cannot register for the invoice system unless you become a taxable business operator for consumption tax.

Then you will have to pay consumption tax to the tax office for the consumption tax (10 yen + 10 yen) that you received from XYZ Co., Ltd. and Mr. Yamada.

Let’s say you bought a computer (11 yen, of which 1 yen is consumption tax) when you made software.

Then, you will have to pay 19 yen (10 yen + 10 yen – 1 yen) of consumption tax to the tax office.

You did not have to pay consumption tax until now. But if you register with the invoice system of Japan, you have to pay 19 yen because of the invoice system. That is a big impact on you.

On the other hand, XYZ Co., Ltd. may get angry if you do not register for the invoice system. So, you may reduce your billing amount to XYZ Co., Ltd. to 100 yen. Then, there is no loss for XYZ Co., Ltd.

However, it is troublesome for XYZ Co., Ltd. to have both registered and unregistered suppliers for invoices.

Therefore, XYZ Co., Ltd. may stop doing business with you.

This is how the invoice system is troublesome.

Invoice registration and Special provisions for consumption tax

If you become a business operator who pays consumption tax to (a taxable business operator for consumption tax) and also register for the invoice system, there is a special measure to reduce the consumption tax you have to pay.

This is because the government is promoting the registration for the invoice system.

I will write an article about this later.