Overview of Consumption Tax Rate Hike
The Japanese government is taking aggressive steps to reform both social security and the taxation system. The goal is to stabilise public finance and produce a sustainable system of social security.
There are plans to reform several taxes, but the first step is to revise consumption tax. It was chosen as the initial target of reform because it is not as greatly affected as other taxes by economic conditions and demographics.
The planned increase in consumption tax—which comprises national and local taxes—will be used to finance pensions, medical and nursing care, and measures to counter the country’s falling birth rate.
Local consumption taxes, however, will mainly focus on social security-related services.
The plan to increase the consumption tax from 5% to 8%, predicated on an improved economic environment, will be finalised in autumn this year.
Schedule of Consumption Tax Reforms
Currently, the 5% tax rate breaks down into national consumption tax (4%) and local consumption tax (1%).
From April 2014, the rate will be 8% (6.3% national consumption tax, 1.7% local consumption tax).
Further, from October 2015, the tax rate will be 10% (7.8% national consumption tax, 2.2% local consumption tax).
When transactions cross different consumption tax rate periods, transitional measures are in place to define which rates are to be applied.
For transactions subject to transitional measures, the applicable consumption tax rates should be specified on invoices issued to customers and business partners.
Below are some notable transitional measures to keep in mind.
Sales Refunds and Rebates
In principle, the effective tax rate at the point of sale will be applied. For refunds and rebates, however, special measures are considered when meeting certain conditions to reduce the administrative burden.
When payment has been made before the new tax rate takes effect, the previous tax rate will be applied to the advance sale of tickets for travel, the cinema and theatre, even when the tickets are used after the new tax rate takes effect.
However, please note that, because the money paid into IC cards is considered to be a deposit, items paid for using these cards will not be considered advance sales, and so will not fall into the transitional category.
Long-term service contracts, such as those in the areas of construction and manufacturing, and certain other service contracts will fall into the transitional category.
Contracts that have been agreed six months before the new tax rate comes into force will use the previous tax rate.
Examples of other service contracts are software development, surveys, planning, management and design.
However, in these cases, three conditions must be met: the service is to be provided only once; completion of the service is to be long term; and the completed deliverable is tailor-made for the customer.
Personal rendering services on a continuous basis and/or on a retainer basis are excluded from this transitional measure.
Since service contracts must be executed six months before the new tax rate comes into effect, the contract agreed to by both parties must be in place as proof.
Leasing of Assets
Contracts for certain equipment and fixtures provided by leasing firms and real estate rentals that are executed more than six months before the new tax rate goes into effect will apply the previous tax rate within the contract period.
Contracts for real estate are normally subject to automatic renewal every two to three years.
When automatic renewal comes into place six months in advance of the new tax rate, the previous tax rate will be applied within the extended period. If the new tax rate is applied to the invoice, transitional measures can’t be applied.
Please note that housing rent is not subject to consumption tax.
Act for Special Measures to Prevent and Correct Actions That Interfere with Shifting Consumption Taxes with Intent to Ensure the Smooth and Appropriate Price Pass-through
Consumption tax is a pass-through tax, with the consumer being ultimately responsible.
However, when the consumption tax was increased previously, from 3% to 5%, many small and medium-sized firms were pressured by bigger enterprises to absorb the increase in consumption tax.
To prevent a recurrence of this, special measures have been put in place.
• The government will monitor and investigate firms that are interfering in this way, and will publicly name them.
• Advertising promising rebates on sales and promoting the sale of items on which the increased consumption tax has been levied is prohibited.
• Eventually, price tags must display the gross price (including consumption tax).
Until consumption tax reform has been fully implemented, price tags must show an item’s original price and its consumption tax separately.
In addition to the consumption tax increase, the government is considering introducing multiple consumption tax rates and social security numbers.