Are you familiar with reverse charge, which began with the October 1, 2015 amendment to the Consumption Tax Act?

This amendment was made to impose consumption tax even on transactions that had previously not been subject to it.

As its name suggests, consumption tax is a tax borne by those who consume, so the burden on consumers grows. I often read e-books, so it feels like a price increase (!?).

What is more, the work required of those of us who handle accounting also increases greatly!

Background to Reverse Charge

Previously, when a person in Japan received services provided by an overseas business operator, the transaction was outside the scope of consumption tax.

Have you heard of Kobo, Rakuten's e-book service?

The 2015 article explained the background to the system change as follows.

Although it is run by Japan's Rakuten, Kobo is in Canada and does business with Japanese consumers. Why Canada...? Because it was outside the scope of consumption tax. At the time, this was reported very sensationally and led to criticism of Rakuten.

You could buy the same e-book 8% cheaper from Amazon or Rakuten (because you did not bear consumption tax).

This was the situation. I have explained it through e-books, but it applies to all services that use the Internet.

Businesses that handle electronic content normally distinguish carefully between overseas and domestic transactions and, although it takes work, calculate consumption tax properly. That is because they understand the power of consumption tax.

A system that is welcome for individual consumers is, viewed as a whole, highly distorted.

Buying the same thing from within Japan costs more, while buying it from overseas costs less. Even though the same thing is being consumed, one side is taxed and the other is not.

Reverse charge was introduced on October 1, 2015 to do something about this.

Usually, systems are introduced from April 1, when the national fiscal year changes, but an October 1 introduction suggests that the government was in quite a hurry. For those of us who handle accounting, an introduction at the awkward time of October is quite a headache.

Overview of Reverse Charge

For services provided through the Internet and similar means, the criterion for determining whether they are subject to consumption tax was changed from the address of the person providing the service to the address of the person receiving the service. Therefore, if the person receiving the service is in Japan, the service is subject to consumption tax.

Also, consumption tax was originally designed so that the seller pays the tax. In principle, the overseas company providing the service would pay consumption tax, but for B2B (business-to-business transactions), where the service is a business-oriented electronic service whose nature, transaction terms, and so on mean that recipients are normally limited to business operators, the rule changed so that the purchasing company in Japan pays the tax. This is complicated too.

The 2015 article explained B2C as follows.

In B2C (transactions between businesses and consumers), the overseas company must pay the tax.

Examples

  • B2B

Online advertising distribution; app distribution

  • B2C

Distribution of e-books, music, videos, and so on

It is hard to understand, isn't it?

The 2015 article explained it as follows.

It may seem surprising, but app distribution is B2B.

It is probably B2B because the transaction is between the platform (Google Play or the App Store) and the company.

Why Reverse Charge Is a Headache: Journal Entry Examples

First, journal entries differ between B2B and B2C.

Closing treatment also differs depending on whether the taxable-sales ratio is at least 95% or less than 95%.

Suppose you spent ¥1 million on online advertising.

For the period through September 2015, before the system began, the journal entry required no thought: as it was outside the scope of tax,

Advertising Expense ¥1,000,000 / Cash and Deposits ¥1,000,000

was OK.

From October 2015 (when the standard rate was 8%), it became:

Advertising Expense ¥1,000,000 / Cash and Deposits ¥1,000,000

Input Consumption Tax (provisional) ¥80,000 / Output Consumption Tax (provisional) ¥80,000

The newly added journal entry is adjusted on the consumption tax return to determine the tax payable.

If the taxable-sales ratio is less than 95%—for example, 80%—the entry is:

Non-deductible Consumption Tax, etc. ¥16,000 / Consumption Tax Payable ¥16,000

You record this when closing the books at year-end.

Does that leave you thinking, “What is this?”

Good News: “For the Time Being,” It Is Treated as Though It Did Not Exist for General Taxation Periods with a Taxable-Sales Ratio of at Least 95%, and So On

For taxable periods under general taxation in which the taxable-sales ratio (please check with a tax accountant) is at least 95%, and taxable periods to which the simplified taxation system applies, specified taxable purchases are, for the time being, treated as though they did not exist.

However, under general taxation, the taxable-sales ratio may occasionally fall below 95% when you close the books. Those near 95% need to prepare for changes to journal-entry procedures and for tax payments.

So, what do you think?

The 2015 article concluded as follows.

It feels as though the international net is tightening. However, I also feel it may be a system that could lose its teeth depending on how legal components such as agency arrangements are used. Keep an eye on future developments in the industry.