Japan: new legislation to tax cross-border electronic services provided by non-established companies to come soon

Currently the B2C supply of services by a non-established company to Japanese customers is not subject to Japanese consumption tax (JCT). This provides competitive advantage to non-established service providers of electronic services compared to Japanese businesses. Since the JCT rate increased from 5% to 8%, with another increase to 10% estimated from 1 October 2015 this advantage is increasing further.

The Japanese government took the discussion further in its fifth meeting of the International Taxation Group (ITG) on 26 June 2014. It focused on refining the determination of the place of supply of services and the mechanism to tax and collect JCT on cross-border service transactions. It is proposed to clarify that the provision of digital contents are treated as a supply of services with place of supply where the recipient is resident. In 2012, a Japanese major bookstore filed a complaint with the Fair Trade Commission as it feels the current JCT treatment is unfair and results in a competitive disadvantage to domestic suppliers. The Cabinet Office website replied in this regard “Confirmation of Japanese residency by the customer’s credit card number and the invoice’s addressee will be respected”. This shows that the discussion on how to recognize Japanese residence is well under way. Additionally, the pressure on the government to find solutions to reduce the disadvantage of resident businesses is growing. In regard to B2C transaction, the scope may be limited mainly to digital services provided via the internet. However for B2B transactions, the envisaged scope is broader and may include online advertising distribution and legal advisory services by nonresident suppliers. The system of how to assess and collect JCT is still subject to further analysis and discussion, yet the ITC announced very different mechanisms to collect and remit JCT in the B2B and the B2C models.

Should you want more information on this issue and prepare your company for the changes ahead, please contact Kotaku Kimu (kotaku.kimu@jp.pwc.com, +81 3 5251 2713).

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