Japan’s National Diet has passed an amendment to the Consumption Tax Act which includes several important changes that especially affect offshore providers of e-commerce services in Japan.

Change in cross-border e-commerce

Under the current Consumption Tax Act in Japan, almost every domestic transaction and every import of foreign goods is subject to taxation[1].  However, the performance of e-commerce services by service providers outside of Japan is generally not subject to consumption tax in Japan.  For some time, Japanese online service providers have claimed this divergence has made them less competitive than offshore providers that offer services in Japan. 

The amendment to impose consumption tax on e-commerce services provided in Japan by service providers outside of Japan is scheduled to come into force starting October 1, 2015. It affects an array of cross-border e-commerce services, including sales of digital books and music downloads and advertising a product via telecommunications.

The new rule is similar to the rule already introduced in the EU: there are two different ways to tax cross-border e-commerce services, depending on the nature of the services rendered (i.e., services for business to business only  −B2B Only − or services not limited to business to business − B2B&B2C). 

At this stage, “B2B Only” transactions are defined as transactions in which a Japanese purchaser is obviously a business operator, based on the nature and conditions of the service provided to the customer.  More clarity on what constitutes a “B2B Only” transaction may be provided through a cabinet order or an administrative circular notice from the National Tax Agency (NTA) after the amendment goes into effect.  “B2B&B2C” transactions are defined as all transactions other than B2B Only transactions.

For B2B Only transactions, an offshore e-commerce service provider will not be responsible for paying the consumption tax.  Instead, the Japanese business purchaser will be required to pay the consumption tax to the NTA, although the Japanese business purchaser can receive a tax credit for the tax amount paid. 

On the other hand, for B2B&B2C transactions, offshore e-commerce service providers will have an obligation to collect the consumption tax from Japan-based consumers and to pay the collected consumption tax to the NTA.  The Japan-based consumers can receive a tax credit for the paid tax amount only if the tax was paid to a Registered Foreign Service Provider − essentially, an offshore B2B&B2C e-commerce service provider that registers with the Japanese government.  If the B2B&B2C e-commerce service provider fails to register,  the Japan-based consumers would not be eligible for the tax credit for the amount they paid as a tax to such non-registered foreign e-commerce service provider.

Steps to take now

  • What kind of service provider are you?  Offshore e-commerce service providers should confirm whether their transactions are B2B Only or B2B&B2C in order to determine how the amendment will affect them.
  • B2B&B2C service providers should register.  Registrations of offshore service providers begin on July 1, 2015.  The names of Registered Foreign Suppliers will be announced on NTA’s website as soon as they are registered.
  • Implement appropriate processes to collect tax from applicable consumers.  Although there are several transitional measures with regard to the amendment, the new rule is planned to be applied totransactions made on or after October 1, 2015.  Offshore service providers should review their applicable terms of use and terms of service to make appropriate modifications, if necessary, to reflect the collection of the tax.  Providers should also review their order processing  procedures to ensure that they have the proper mechanisms in place to collect and pay the tax.      

Detailed regulations and guidelines are expected to be published before the implementation of the new rule.