Japan update on taxing foreign services

Mon 4th Aug 2014

Japan’s Ministry of Finance has added further commentary to the discussion proposals to levy Consumption Tax on services provide from abroad to Japan.

The new commentary is based on feedback from interested parties. Businesses in particular have requested a clear distinction in the taxability of services where the point of service is outside of Japan (e.g. foreign online portals for IT, B2B information services, legal advice and consultation) and those with Japanese-based service points (e.g. a Japanese-based web portal).

Also, the Ministry of Finance has rejected a submission that intra-group supplies of bought-in foreign services should be exempted from Consumption Tax changes. In particular where a central purchasing entity within a group of companies buys IT services/support for all global companies. The Ministry believes that this would be a taxable transaction in Japan if the facility and costs where passed down to a Japanese subsidiary.

The original proposal included 3 potential tax regimes:

  1. compulsory Consumption Tax registrations for foreign B2C and B2B services providers;
  2. compulsory registration for B2C supplies and the reverse charge for B2B supplies
  3. compulsory registration for services provided both to B2C and B2B, but use of the reverse charge fro B2B-only supplies.