An invoice is a business document created by the seller of goods or services for the purpose of requesting payment from the buyer. Although there is no legal requirement to issue invoices, in most cases they're issued to avoid disputes with business partners. Invoices should include basic details like the transaction amount and date. Displaying this information clearly for the buyer helps to ensure smooth transactions.

When creating invoices, it’s important to take care with how Japanese consumption tax (JCT) is handled. Many businesses struggle with how to properly record consumption tax on invoices, specifically whether the amounts should include or exclude tax. This article explains what Japanese businesses should know about recording consumption tax on invoices. It covers the Consumption Tax Act and the Invoice System, examples of tax-inclusive and tax-exclusive formats, and how to handle situations where consumption tax is not included.

What’s in this article?

• Basic information about consumption tax on invoices
  
• What is the Consumption Tax Act?
  
• Why it’s important to record consumption tax in accordance with the Invoice System
  
• Examples of how to indicate tax inclusion and exclusion on invoices
  
• What to do if you receive an invoice that does not include consumption tax
  
• Frequently asked questions about consumption tax on invoices
  
• How Stripe Tax can help
  

Basic information about consumption tax on invoices

The first thing to understand about recording consumption tax on invoices is that the contents of an invoice are subject to the Consumption Tax Act.

An invoice is an important document used to record a transaction and the amount being billed for it. In other words, an invoice is an indispensable document when requesting payment for goods or services sold.

Purchases of goods and services are generally subject to Japanese consumption tax (JCT). If this consumption tax is not correctly indicated on the invoice in accordance with the Consumption Tax Act, it can lead to problems in transactions between sellers and buyers. Therefore, it’s important to handle invoices with a clear understanding of how the Consumption Tax Act affects them.

For example, under the Consumption Tax Act, one of the obligations imposed on businesses is the issuing and retaining of invoices compliant with the Qualified Invoice System for the purpose of applying the purchase tax credit for consumption tax. The importance of consumption tax under the Invoice System will be explained later in this article, but the provisions of the Consumption Tax Act significantly influence how consumption tax is written on invoices.

What is the Consumption Tax Act?

As the name suggests, the Consumption Tax Act is a Japanese law governing consumption tax. The Consumption Tax Act establishes rules for all aspects of consumption tax, including methods for calculating consumption tax, what items are taxable, and who is obligated to pay tax, with the aim of ensuring proper fulfillment of tax obligations.

For example, the reduced 8% tax rate applied to specific items, which was introduced in October 2019 when the standard consumption tax rate increased to 10%, is also based on the Consumption Tax Act.

The consumption tax payment system

In general commercial transactions, consumption tax is a tax incurred when a customer purchases goods or services. When you go shopping, you know that you’ve paid consumption tax because you can see it listed on your receipt.

The consumption tax that a business collects from customers (buyers) must be paid to the government by the business itself. In other words, consumption tax is not paid directly to the government by customers. Instead, it’s an “indirect tax” system where the business receiving the tax bears the indirect tax liability. A business that is liable to pay tax in this way is referred to as a taxable business.

What to include and how to write an invoice based on the Consumption Tax Act

There are no specific legal requirements for the format or style of invoices, and both paper and paperless invoices are acceptable. However, the Consumption Tax Act does stipulate the following requirements for invoices:

• Invoice recipient name: Enter the company name or, for individuals, the person's full name. Since invoices are documents issued to business partners, use polite language such as “To the attention of [name],” “To [name] at [company name],” etc. When recording company names, make sure to use the full formal name, such as Kabushiki Kaisha (for a corporation) or Godo Kaisha (for a limited liability company), without abbreviations like “Co.” or “Ltd.”

• Transaction date: Enter the actual date the transaction took place. If multiple transactions that occurred within a specific period will be listed on one invoice, be sure to include the date of each transaction individually.

• Transaction details: List the names, unit prices, and quantities of the goods or services in as much detail as possible. For multiple transactions on the same invoice, be sure to link each transaction date with its corresponding details. Additionally, if any items are subject to the reduced tax rate, clearly indicate this.

• Transaction amount: Display the transaction amount prominently in a bold font, and record the total amount due. To make it easy to understand, include a breakdown of the costs that contributed to that total, including line items for the subtotal (before tax) and the consumption tax amount, followed by the grand total. Additionally, when items subject to the reduced tax rate are included, it’s important to list separately the total consumption tax for the 8% rate items and the 10% rate items and the total amount due (excluding or including tax) at each rate in separate sections.

• Issuer name: Enter the company name or personal name (trade name) of the seller issuing the invoice. Under the Consumption Tax Act, it’s sufficient to simply state the invoice issuer's name. However, it’s generally considered helpful to also include the address, telephone number, and email address. It is important to note that if an Invoice System-compliant invoice must be issued, an Invoice System registration number is also necessary.

Why it’s important to record consumption tax in accordance with the Invoice System

Next, we’ll explain why businesses need to be careful about how they record consumption tax under the Invoice System.

With the October 2023 implementation of the Invoice System, businesses in Japan now require a qualified invoice to claim input tax credits. In other words, qualified invoices directly determine the eligibility for deducting consumption tax on purchases. Consequently, whether the document issued by the seller is a qualified invoice or not significantly impacts the purchaser's profit and loss. For this reason, under the various requirements of the current Invoice System, it’s important for businesses that consumption tax be accurately reported.

How to calculate the amount of consumption tax payable

There are two consumption tax calculation methods used in the Invoice System: accumulation calculation and the deduction calculation.

• Accumulation calculation: The tax amount is determined by adding up the consumption tax incurred for each transaction.

• Deduction calculation: The consumption tax is calculated based on the total sales over the course of one year. In other words, the consumption tax is determined by subtracting the year’s total excluding tax from the year’s total including tax.

After calculating the consumption tax using one of the above methods, the following formula is used to determine the actual tax payable amount.

• Consumption Tax on Sales - Consumption Tax on Purchases = Tax Payable Amount
  

In other words, first calculate the consumption tax on sales and the consumption tax on purchases using either the accumulation method or the deduction method. Then, use the above formula to determine the tax payable amount.

To calculate consumption tax on sales, you can use either the accumulation calculation method or the deduction calculation method. If you choose to use the accumulation calculation method for consumption tax on sales, you must use this same method for consumption tax on purchases; you cannot choose the deduction calculation method. On the other hand, if you choose to use the deduction calculation method to calculate consumption tax on sales, you have the option of using either the accumulation calculation method or the deduction calculation method to calculate consumption tax on purchases.

Consumption tax calculation methods

Examples of how to indicate tax inclusion and exclusion on invoices

There are two ways to display consumption tax on an invoice: tax-inclusive and tax-exclusive. Simply put, tax-inclusive pricing shows the product price as an amount that includes consumption tax, while tax-exclusive pricing shows the product price without tax, and the consumption tax is added and displayed separately. Tax-exclusive pricing is sometimes called “excluding tax” or “tax separate.”

• Example of tax-inclusive price display: For a product with a tax-included price of ¥11,000, the price could be displayed in any of the following ways:

  • ¥11,000
    
  • ¥11,000 (tax included)
    
  • ¥11,000 (including ¥1,000 consumption tax)
    
  • ¥11,000 (¥10,000 base price, ¥1,000 consumption tax)
    

• Example of tax-exclusive price display: For a product with a tax-included price of ¥11,000, the price could be displayed in any of the following ways:

  • ¥10,000 (excluding tax)
    
  • ¥10,000 (¥1,000 consumption tax)
    
  • ¥10,000 + ¥1,000 consumption tax
    

The calculation methods for consumption tax differ between inclusive and exclusive pricing, and the choice of one or the other affects how consumption tax is displayed on invoices. Furthermore, in either case, when issuing a qualified invoice that is compliant with the Invoice System, it’s necessary to clearly state the applicable tax rate (8% or 10%) and separately itemize the consumption tax amount for each tax rate.

Tax-inclusive

Tax-inclusive pricing, meaning the price includes consumption tax, displays the total amount including tax at the item price and subtotal stages. However, displaying unit prices and subtotals with the tax included does not indicate the actual amount of consumption tax, which can lead to confusion. Therefore, invoices must include a space for consumption tax directly below the subtotal, stating “Consumption tax (% included): ¥____” as shown below.

• Subtotal: ¥11,000
  Consumption tax (10% included): ¥1,000
  Total: ¥11,000
  

To calculate the consumption tax amount for tax-inclusive pricing, first divide the tax-inclusive product price by (1 + the tax rate). This allows you to calculate the price without tax, which you then multiply by the applicable tax rate to find the consumption tax amount. Here’s the formula:

• [Price Including Tax ÷ (1 + Tax Rate)] x Tax Rate = Consumption Tax
  

Using the formula for a product with the standard 10% tax rate and tax-inclusive price of ¥11,000 would give you:

• [¥11,000 ÷ (1 + 0.10)] x 0.10 = ¥1,000
  

If the example above is a product with a tax-inclusive price of ¥10,800, and the tax rate is 8%, dividing by 1.08 gives the tax-exclusive price of ¥10,000. Multiplying this by 0.08 gives you a consumption tax of ¥800.

Tax-exclusive

For tax-exclusive pricing, all unit prices and subtotals for each item are displayed without tax. When creating an invoice using this method, list the subtotal excluding tax first, followed by the consumption tax amount, and then state the final total amount including tax.

• Subtotal: ¥10,000
  Consumption tax (10%): ¥1,000
  Total: ¥11,000
  

The tax-exclusive calculation method is extremely simple: for each subtotal separated by tax rate (8% and 10%), multiply the respective subtotal by its corresponding tax rate to calculate the consumption tax. For example, the consumption tax on a product priced at ¥10,000 before tax, subject to a 10% tax rate, is calculated as follows:

• ¥10,000 (Price Excluding Tax) x 0.10 (Tax Rate) = ¥1,000
  

If the above example is a product subject to an 8% tax rate, multiplying by 0.08 will calculate the consumption tax as ¥800.

Displaying the tax-inclusive total on invoices is standard

As shown in the examples above, when recording unit prices and subtotals on invoices, it’s acceptable to display consumption tax as either included in the price (tax-inclusive) or excluded from the price (tax-exclusive). However, the invoice total must clearly state how much the customer is required to pay. Therefore, it’s important to display the grand total inclusive of tax, rather than excluding tax, as this represents the final amount billed to the customer. If a customer receives an invoice showing a final total that excludes tax, they may request that it be reissued after it has been corrected to show the total amount including tax.

Creating invoices manually increases workload and can lead to errors such as missing or incorrect calculations of consumption tax. Therefore, businesses aiming for smooth invoice processing may want to consider implementing an automated invoice generation system equipped with an automatic consumption tax calculation function. Payment processing companies, or payment agents, typically offer systems and tools that are already compliant with the Invoice System. Many of these allow for the centralization of tasks from document creation and delivery to storage, which makes them a promising solution for improving back-office efficiency.

What to do if you receive an invoice that does not include consumption tax

Even if a consumption tax amount is not listed on an invoice, there are no legal penalties. However, for taxable businesses, if an invoice does not include Invoice System-compliant consumption tax information, the input tax credit cannot be claimed. Therefore, if you receive an invoice that does not include consumption tax, it’s important to deal with it promptly.

To do this, follow the steps shown below.

Contact the invoice issuer

First, contact the issuer and confirm the following:

• Whether the issuer is a qualified invoice issuer
  
• Whether the issuer has an Invoice System registration number; if one is present, verify that the number matches the issuer's or confirm via the National Tax Agency's official website)
  
• Whether the invoice amount is tax-exclusive or tax-inclusive
  
• The amount of consumption tax
  
• The total amount, including tax, that should be paid
  

Request reissue of the invoice

Once all of the items above have been verified, ask for the invoice to be reissued. At this time, it’s important to tell the issuer that the reason for your request is to claim input tax credit. As explained earlier, under the Consumption Tax Act, if a buyer requests a qualified invoice to claim input tax credit, and the seller is a qualified invoice issuer, the seller is obligated to issue the document. Therefore, it’s safe to assume that your reissue request will be honored.

Keep a record of the exchange

Even if these interactions take place over the phone, be sure to keep a record, such as an email stating something like: “I acknowledge that the payment amount is the total invoiced amount of ¥____, including tax.” This will provide proof of the correct payment amount and prevent future disputes between businesses.

Frequently asked questions about consumption tax on invoices

Here are some frequently asked questions regarding the inclusion of consumption tax on invoices.

Is it necessary to include consumption tax on invoices?

For businesses, understanding the amount of consumption tax incurred in transactions is a key aspect of business management. In particular, under the current Invoice System, a qualified invoice clearly stating the consumption tax, as required by the system, is an indispensable document for businesses to claim input tax credits.

Therefore, consumption tax needs to be stated on invoices so that you and your business partners can accurately track taxable sales and purchases, and successfully claim input tax credits.

Can a tax-exempt business charge consumption tax?

When doing business with individual business owners, including freelancers, have you ever wondered if you can charge consumption tax even if the other party is a tax-exempt business with annual sales of ¥10 million or less?

The answer is yes, it’s possible to charge consumption tax to tax-exempt businesses. However, transactions with tax-exempt businesses after the start of the Invoice System generally do not qualify for input tax credits. The credit applies only to purchases from taxable businesses that are qualified invoice issuers.

The Invoice System includes transitional measures for a specified period to address such cases, aiming to reduce the burden on taxable businesses and prevent operational disruptions for tax-exempt businesses.

• October 1, 2023–September 30, 2026 (3 years): 80% of the purchase tax amount is deductible for taxable purchases from tax-exempt businesses.
  
• October 1, 2026–September 30, 2029 (3 years): 50% of the purchase tax amount is deductible for taxable purchases from tax-exempt businesses.
  

Please note that while the application period for the transitional measures and the deduction rates are currently as stated above, the Japanese government may make changes in the future. Make sure to check with the National Tax Agency for the latest information on this.

How should consumption tax amounts be rounded?

Depending on the price of goods or services, or the applicable tax rate, the consumption tax amount may include a fraction of a yen. Rounding refers to the accounting procedure used when amounts that include a fraction of a yen arise during consumption tax calculations. Rounding can involve rounding up, rounding down, or rounding to the nearest whole number. Since there are no specific rules governing rounding, the decision on how to handle it is generally left to the discretion of the business operator.

However, for qualified invoices, rounding amounts for individual items is not permitted. Rounding is allowed only once per qualified invoice for each tax rate. Therefore, rather than calculating consumption tax individually for each product or service and then adding up the taxes, it’s best to first calculate the total consumption tax for each tax rate (8% and 10%) separately, and then round each of those amounts.

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