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Japan: Increase of consumption tax rate

Thursday, 15 May 2014   (0 Comments)
Posted by: Author: Koichi Inoue
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Author: Koichi Inoue (Jones Day)

Effective as of April 1, the combined rate of national and local consumption taxes has increased from 5 percent to 8 percent (6.3 percent national tax and 1.7 percent local tax). The consumption tax rate is planned to further increase from 8 percent to 10 percent (7.8 percent national tax and 2.2 percent local tax) on October 1, 2015. Accordingly, subject to certain exceptions, consideration paid for the transfer or lease of assets or the provision of services for business purposes on or after April 1, is subject to the new 8 percent consumption tax rate. However, the consumption tax rate of 5 percent will apply to any transfer or lease of assets or provision of services for business purposes occurring prior to April 1, even if such consideration is actually paid on or after April 1.

The Japanese consumption tax is characterized as an indirect tax. Therefore, almost all domestic transactions and all transactions concerning the importation of foreign goods are subject to taxation. Under the Consumption Tax Law, taxable domestic transactions are defined as domestic transactions in which consideration is paid for the transfer or lease of assets or the provision of services for business purposes. Exceptions include transfers of accounts receivable, transactions involving securities and other financial or capital, and the provision of medical, welfare, educational, and other services, all of which are outside the scope of the Consumption Tax Law. The consumption tax is structured to ultimately be passed on to consumers by affixing it to the price of products and services provided by a taxable enterprise. In order to eliminate multiple taxation at each stage of manufacturing and distribution, crediting the consumption tax on purchases against the consumption tax on sales is allowed. The basic formula for calculating the consumption tax is: (total amount of consumption tax on sales) minus (total amount of consumption tax on purchases).

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