Japan has become renowned for its lucrative business landscape, compelling many foreign companies to travel to Japan for business purposes or one-off events. Although this doesn’t necessarily involve making sales, it still includes a plethora of business-related expenses. Where does VAT come into the picture? Well, before we get started, we need to switch up the language. In Japan, the equivalent of VAT (value-added tax) or GST (goods and services tax) is called Japanese Consumption Tax (JCT).
JCT is a tax levied on most goods and services in Japan, generally at a rate of 10%. How is this relevant to your business? In Japan, non-resident businesses may be able to recover JCT from the Japan Tax Office on expenses incurred in Japan for business purposes. However, unlike the foreign VAT refund processes available in the the European Union, a simple JCT registration is required in order for a non-resident company to be able to recover JCT spent.
In this piece, we’re exploring the JCT registration process, how your business can benefit from the Japanese reclaim opportunity, and everything you need to know about staying compliant with the latest Japanese regulations while maximizing your reclaim yield.
The Japanese reclaim opportunity is available to a large scope of different industries, granted that they are a non-resident company that: has expenses in Japan, does not provide taxable supplies with a place of supply in Japan or have a fixed establishment in Japan. This means that if a company frequently sends staff to Japan or visits Japan for business purposes (without making sales), it can reclaim the JCT portion incurred on a variety of expenses such as:
As mentioned, the above expenses offer a significant savings opportunity to foreign businesses and can inject savings into the business that would have previously been left on the table. However, it should be noted that (as with all things in the VAT world) the registration process isn’t as straightforward as it seems.
As of 1 October 2023, the new JCT invoicing system will become mandatory in Japan. The new system requires suppliers to register for JCT purposes as well. From a claimant perspective, this means that all non-resident businesses are required to register and comply with the updated invoicing instructions and ensure that all purchases are made from registered JCT suppliers in order to be eligible to claim input JCT credit.
In addition, claimants must ensure that they maintain the approved invoices. From a record keeping perspective, it’s important to keep in mind that although our Japanese agent accepts photocopy invoices to file JCT returns, it’s imperative that businesses keep the original invoices.
Naturally, navigating the Japanese tax landscape as a foreign business can prove challenging without the necessary input and know-how of the local regulations. Therefore, for a foreign business to register for JCT in Japan, it must appoint a Japanese resident tax agent. However, non-resident businesses rarely have established relationships with tax agents in Japan, creating a considerable roadblock, as these agents handle registrations, returns, and all output risks associated with each client before registration. Not only do foreign businesses find it challenging to find the right Japanese tax agent for their specific industry, but continuing the relationship can be challenging due to time constraints, a lack of knowledge, and significant language barriers.
Another common challenge when successfully reclaiming JCT on Japanese business expenses is compliance and the eligibility of your expenses. Without the necessary knowledge and expertise on expenses and their relevant VAT rate, companies run the risk of overclaiming JCT. Even with a firm grasp of what you can rightfully claim, JCT rates and eligibility requirements can differ depending on your business. Not only can overclaiming lead to rejected claims, but the Tax Office can charge penalties and interest on any fraudulent or over-claimed JCT. Due to this, it’s imperative that experts in the field of niche JCT recovery processes per industry standards and local regulations back your claims.
Due to the various challenges and complexities of foreign registration and local Japanese regulations, many non-resident companies don’t leverage the reclaim opportunity. This is often because the process requires in-depth knowledge of niche tax laws, deadlines, reporting requirements, and legislation. With finance teams already stretched with day-to-day responsibilities and the process of administering their input VAT compliance and claims, foreign VAT processes and opportunities are often left on the back burner.
Fortunately, your business doesn’t have to settle for leaving significant savings in Japan.
At VAT IT, our experts leverage a combination of state-of-the-art technology, Japanese tax experts, and local relationships with Japanese tax authorities to streamline the JCT registration process for non-resident companies while maximizing the reclaim potential. Our VAT IT registrations team does the heavy lifting for you and captures, reviews, and submits all claims to your local agent on your behalf. Our technical knowledge, language skills, and established relationships with Japanese resident tax agents allow non-resident companies to bypass the administrative burden of registering for JCT and leverage smooth, confident, and compliant recovery.
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