Good news from the Japan Revenue Service (JRS) is that the "20% Special Exception" and the "Lesser Exception" have been introduced to accommodate the smooth construction of the tax reform environment.
The so-called "20% exception" refers to the reduction of the burden on tax-exempt businesses that voluntarily choose to become compliant invoice issuers.
The "de minimis exception" refers to measures to reduce the burden of operators below a certain size.
The Japan Tax Reform Outline 2023 states that the following new tax measures will be adopted for a smooth transition system.
I. Reducing the burden of tax-exempted operators as compliant invoice-issuing operators
The three-year relief measure seeks to mitigate the drastic change in the amount of tax paid by tax-exempt corporations that become invoice-issuing corporations by reducing the amount of tax paid to 20% of the amount of tax paid on the sale of goods and services. This measure further reduces the tax burden compared to the application of the simplified tax system.
Measures to Reduce the Tax Burden of Small-Scale Enterprises
For small transactions with small-sized companies, taxable purchases of less than 10,000 yen will be subject to a six-year tax reduction policy, whereby the tax amount can be deducted by using bookkeeping alone, even if invoices are not kept.
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Measures to Reduce the Tax Burden of Small-scale Operators
In order to smooth the transition to the invoice system, a 10-year transition period has been established for the invoicing of taxable purchases by tax-exempt companies, consumers, etc. (except for companies that issue regular invoices):
1) For the first 4 years of the invoice system, i.e. October 1, 2019 - September 30, 2023, full JCT credit will be available for products purchased from tax-exempt businesses without a compliant JCT invoice;
2) Within 3 years after the implementation of the system, i.e., October 1, 2023 - September 30, 2026, purchases from tax-exempt companies (without a compliant JCT invoice) will be eligible for a credit of 80% of the JCT amount of the purchase invoice.
3) For a further three years, October 1, 2026 - September 31, 2029, purchases from a tax-exempt business (without a compliant JCT invoice) will only be eligible for a credit of 50% of the JCT amount of the purchase invoice.
4) After October 1, 2029, purchases from a tax-exempt business (without a compliant JCT invoice) are not eligible for credit for the amount of JCT purchased.
Measures to alleviate the burden of tax payment on small-scale enterprises
In order to alleviate the burden of tax-exempt enterprises voluntarily choosing to become compliant billers, regardless of what industry tax-exempt undertakings applying for JCT, as long as the sales income in the base period meets the requirements of the simplified reporting, you can not have to submit the application for the simplified reporting in advance, but also in the first three years starting October 1, 2023, according to the sales tax amount of 20% to pay taxes, that is, as a result of the cost of 80% credits.
Examples are as follows:
A small transportation and communications company has annual taxable sales of 7 million yen and an excise tax of 700,000 yen.
(1) In principle, if the cost of purchases (e.g., the value of imported products) for which a credit invoice is provided is 1.5 million yen, then the amount of tax to be claimed is 700 yen.10%-15010% = 550,000 yen;
(2) According to the simplified reporting, the transportation and communications industry enterprises do not need to provide credit invoices for the estimated cost of purchases for the sales of 50%, then the amount of tax returns for the 70010%-70050%10% = 350,000 yen; (3) In accordance with the measures to reduce the tax burden of small-scale enterprises, regardless of industry, the amount of tax returns for 20% of the sales tax to pay taxes, then the amount of tax returns for 70010%*20%=140,000 yen.
As a result, the reduction in tax liability based on the taxable amount of a small-scale enterprise has reduced the tax liability of this transportation and communications enterprise by 410,000 yen and 210,000 yen, respectively, compared with the tax liability based on the principle filing and the original simplified filing.
Example - Tax Relief Measures vs. Simplified Returns
For e-commerce enterprises such as Amazon in China, the recognized credit rate for simplified filing is 80%, i.e., the calculation of tax payment after the implementation of the (draft) relief measures for small-scale operators is the same as that for simplified filing, and the amount of tax to be paid is also the same.
The difference is this:
(1) A simplified return needs to be filed at least one day before the start of the accounting year, whereas the Tax Relief Measures do not need to be filed in advance, and you only need to sign the return and choose to apply.
(2) Enterprises accepting the simplified return must retain the use of the simplified return for two years before they can actively apply to revert to the standard return at least one day in advance of the start of the new tax period, unless they cease business, whereas there is no restriction on the use of the tax relief measures for two consecutive years.
(3) Simple declaration of business classification and recognition of the credit rate is linked to the different classifications, the credit rate is different, while the "tax relief measures" in the credit rate does not need to look at the classification of the industry, uniform 80%.
(4) The Tax Relief Measures are simpler to implement:
(1) Calculated from sales tax only;
(2) Purchase-related books of account or invoices do not need to be managed and maintained.
Who applies the "20% exception"?
1. Businesses with tax-exempt obligations that voluntarily apply as taxable entities before October 1, 2023, will become taxable businesses on October 1, 2023.
Example:
Businesses with annual sales of less than 10 million yen in 2021 and before will not yet have a tax obligation in 2023.
2. The "20% Special Exception" does not apply to businesses that will be taxable entities from January 1, 2023 onwards.
After the tax relief measures come into effect, you can choose a better tax option when filing your tax return.
When filing a tax return, it is not necessary to submit a Simplified Taxation Election Form in advance, and you can choose whether to file a tax return in accordance with the principle of taxation, a simplified tax return, or a "20% Special Exception" tax return with a lower tax liability by doing some calculations.
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Burden Relief Measures for Businesses below a Certain Size
Through the implementation of the tax reduction system, it has become necessary to keep invoices for even small transactions, as evidence such as receipts is required to determine the exact applicable tax rate.
Considering the need to reduce the administrative burden and allow for flexibility, within six years from the date of implementation of the invoice system, companies with taxable sales of 100 million yen or less in the base period (the previous year) will be able to deduct the amount of tax on purchases based on the books of account only, even if they do not keep an invoice for taxable purchases of less than 10,000 yen.
In addition, even if the taxable sales in the base period (the previous year) and before exceeded 100 million yen, if the taxable sales in the six-month period following the start date of the previous year or the previous business year were 5,000 yen or less, you are not required to keep invoices, and you may deduct the amount of the tax on purchases only from your books of account.
Due to space constraints, we will continue to introduce "Waiver of Small Value Order Refund Obligation" and "Flexibility on March 31, 2023 Deadline for Registration Application" in the next post.
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