Japan: What is the Qualified Invoice System?
Japan is currently in the process of rolling out a new tax reform and a new invoicing system. It all started on the 1st of October 2019 with a new multiple rate system. What follows is the Qualified Invoice System, which will be implemented 4 years later, on the 1st of October 2023.
Why are all these changes taking place? The simple answer is that, similarly to other countries, Japan has been facing a major tax gap problem and this reform is an attempt to combat it.
Japan’s invoicing & tax system
The equivalent to VAT in Japan, or Japan’s indirect tax on all sales, is called the Japanese Consumption Tax. In 2019, the Japanese Consumption Tax (JCT) was increased from 8% to 10% on all goods and services. A reduced 8% was applied to certain transactions, however, as Japan introduced multiple tax rates.
Up until now, taxation was only based on evidence for all transactions, and on companies’ records; invoices didn’t include information on the tax rate that applies. This is the so-called ledger system and the government believes that it is the prime suspect for Japan’s tax leakage.
What is the Qualified Invoice System?
We can expect the new Qualified Invoice System on the 1st of October 2023. The new model will set out to include a detailed breakdown of all the applied taxes for each transaction, which means that tax information will be much more detailed, in comparison to Japanese invoices issued now.
Only taxpayers who have a JCT registration will be able to issue qualified invoices. Businesses who purchase supplies will only be able to claim a tax credit on qualified invoices, as well. This means that both sides will need to use the qualified invoice system, register with the tax office, and adapt their accounting processes accordingly.
How can I prepare for the Qualified Invoice System?
Currently, a transitional period applies. It has started from October 1, 2019 and will last until October 1, 2023, when the Qualified Invoice System will become mandatory for Japanese businesses.
To issue qualified invoices, Japanese businesses who are registered with the JCT system need to register with the NTA (National Tax Agency). Starting from October 1, 2021, you’ll be able to apply to enrol in the Qualified Invoice System. You must apply for it by March 31, 2023, or 6 months before the official implementation of the new system.
It’s important to note that with the new system you’ll be able to issue e-invoices if certain criteria are met.
Businesses must make sure they’re able to adapt to the new system, in order to guarantee business continuity. For this, they must register on time, and update all accounting processes and systems before October 2023.