Two Years Until the Introduction of the Invoice System

Introduction

Applications for registration as invoice-issuing businesses have started as of October 1. Information about registered companies will be posted sequentially on the registration site for invoice issuers, on the National Tax Agency (NTA)’s home page. With the invoice system being implemented in two years, taxable enterprises will be required to apply for registration in order to issue invoices, which will be a major turning point concerning consumption tax in Japan.

Tax-Exempt Businesses Under Pressure to Make Decisions

The invoice system, which is to be introduced on October 1, 2023, is a new system that allows purchase tax credits only when invoices are retained.

An entity wishing to register as an invoice-issuing business must submit an application for registration as an invoice issuer to the director of the tax office which has jurisdiction over the place of tax payment; however, registration is limited to taxable businesses. Tax-exempt entities are not eligible for registration as invoice-issuing businesses.

In order to be eligible to issue invoices, a tax-exempt business must first submit a tax report for election of consumption taxpayer, and thus become a taxable enterprise for consumption tax. However, at the start of the invoice system, there is a transitional measure that allows tax-exempt businesses to become taxable businesses from the date of registration, if they are registered during the taxable period that includes October 1, 2023.

If your company goes with the transitional measure, you will become a taxable enterprise from the date of registration, and will not need to submit a tax report for election of consumption taxpayer.

This is just a procedure for cases in which tax-exempt business entities register in the taxable period which includes October 1, 2023. If your enterprise instead wants to be registered in the taxable period preceding or following that taxable period, then per the general rule, you will need to submit an application for registration after your business becomes a taxable enterprise by submitting a tax report for election of consumption taxpayer.

What You Need to Be Aware Of

If your company is registered as an invoice issuer under the transitional measure, it will become a taxable enterprise from the date of registration, and will be required to declare the consumption taxes for the period from the date of registration to the end of the taxable period, regardless of the taxable sales for the base period.

For example, if a corporation that is exempt from tax for the fiscal year ending December 2023 is registered as an invoice-issuing business from October 1, 2023, it will become a taxable business from October 1, 2023, the date of registration, and will need to declare the consumption taxes for transactions conducted during the period from October 1, 2023 to December 31, 2023.

On the other hand, if a company submits a tax report for election of consumption taxpayer. During 2022 to elect to be a taxable enterprise from the fiscal year ending December 2023, in principle, the registration date of the invoice-issuing business will be October 1, 2023, but the company will be required to declare consumption taxes for transactions conducted from January 1, 2023 to December 31, 2023.

In other words, the procedure used will determine whether or not your company would need to pay consumption tax for the period from January 1, 2023 - September 30, 2023. If your enterprise follows the latter procedure, your consumption tax payment could be larger by 9 months than the former one (on the other hand, it is theoretically possible that your consumption tax payment would be smaller). As you can see, a tax report for election of consumption taxpayer  or an application for registration as an invoice -issuing business operator is not something to be submitted casually. If you do not submit them after careful consideration, you might end up incurring an unexpected tax burden - which has happened in some cases.

When to Record Business Restructuring Subsidies as Revenue

Introduction

The business restructuring subsidies, which are provided in amounts up to 100 million yen and are designed to encourage small and medium-sized businesses to restructure their businesses amidst the ‘new corona’ crisis, are not exempt from tax. They are subject to corporate tax, so it is necessary to be careful about this.

Subsidies, etc. Are Recorded as Income When the Right to Receive is Determined.

As a general rule, the time for recording revenue from subsidies, etc. provided by the national or local government is "the fiscal year in which the right to receive the revenue is determined," - specifically, in principle , "the fiscal year in which the decision to provide the subsidy is made”.

In the case of business restructuring subsidies, although they have a feature of being used to cover expenses, the receipt of the subsidy equivalent to the necessary expenses is not at the time of the subsidy decision. It is only upon submission of the receipts for the expenses incurred for capital investment, etc. in a subsidy project performance report that the secretariat confirms the appropriateness of the payments, etc.; then, after the subsidy amount is determined, the subsidy payment and settlement are made.

Therefore, if there is a reporting period gap between the date of the subsidy grant decision and the date of the finalization of the subsidy amount, the revenue from the business restructuring subsidy will be recorded in the fiscal year when the subsidy amount is finalized. Please be aware that if expenses were paid in fiscal year X, and the subsidy grant amount is determined in fiscal year X+1, then the entire subsidy will be recorded as income and become taxable income for corporate tax purposes in fiscal year X+1.

Cases that Will be Taxed

For example, if your company spends 150 million yen on a subsidized project and receives 100 million yen in subsidy income, in the X fiscal year in which you spent the subsidized project expenses (and therefore have a deficit of 150 million yen {loss carry-forward}), even if your firm receives the 100 million yen in subsidy income in the X+1 fiscal year, by offsetting the deficit carried forward, you will not have to immediately pay tax on the subsidy.

On the other hand, there may very well be cases where only 10 million yen of deficit (loss carried forward) is generated in the X fiscal year when the subsidized project expenses are paid.

This is the situation when a fixed asset is acquired through a subsidized project. When acquiring fixed assets, the amount spent is amortized over the useful life of the asset through depreciation, so even if you spend 150 million yen to acquire 150 million yen in fixed assets, you may only be able to record 10 million yen as an expense (depreciation expense).

In this case, if the company receives 100 million yen in subsidy income in the X+1 fiscal year, it will have a taxable income of 90 million yen even if it uses the tax loss carry-forward from the X fiscal year.

Consideration of Reduction Entry

Even if your company is able to obtain 100 million yen in business restructuring subsidies, it would be a waste of money if 90 million yen immediately becomes taxable and the company has to pay corporate tax of 27 million yen (assuming 90 million yen x a corporate tax rate of 30%). In such a case, it is necessary to consider the application of a "reduction entry" as a countermeasure. We will not go into the details of reduction entries here, but by applying such an entry, you may be able to avoid being immediately taxed on the subsidy income. Please note, however, that even if you apply a reduction entry, your company will still be subject to corporate taxation in the medium- to long-term; the subsidy income will get taxed.

Compliance with the Revised Electronic Trading System

Introduction

Under the revised electronic trading system, which will start next January, paper output storage will be abolished for e-commerce transactions, and electronic data storage will be mandatory.

For instance, if a company receives an invoice in both electronic and written form, which one should it save? Does it have to retain both in their respective formats?

When Multiple Documents are Received as Electronic Data, All of Them Are to Be Stored Electronically.

The system of retaining electromagnetic records pertaining to transaction information for e-commerce transactions mandates the preservation of electromagnetic records (electronic data) of the transaction-related information for electronic transactions when a party who is obliged to preserve such information for tax return income tax and corporate tax purposes conducts "electronic transactions”.

For example, transactions in which PDF files of invoices, etc., are attached to e-mails are also considered e-commerce transactions, and so it is thought that many companies are already conducting such transactions.

Incidentally, it is important to note that if multiple types of documents such as quotations, purchase orders, and invoices are exchanged in a single transaction, all of the documents must be stored in electronic format if they have been exchanged in that format.

If a Document is Received as an Original, Electronic Storage is Not Required.

In many cases, invoices are first received as PDF files attached to e-mails, and later, paper invoices are received by mail.

In such situations, it has been clarified that if the original written invoice is received separately from the electronic data, the original written invoice, etc. should be preserved; the electronic data does not need to be retained.

However, please note that if the contents of the electronic data and the written document are different, both must be preserved.

What about Cases Where a Paper Document is Saved as a PDF File, and Sent Electronically?

In the case of electronic transactions, data storage of transaction information will become mandatory; not only the receiving party, but also the issuing party, will be obliged to store the electronic data.

As part of the work flow for those who issue invoices, etc., there may be times when an invoice created in Excel, Word, etc., is printed out, stamped, converted to PDF, etc., and sent to a business partner via e-mail. In this case, as long as the invoice and other "transaction information" is sent as PDF data via e-mail, it falls under the category of "electronic transactions”, and the data needs to be retained in a way that meets the storage requirements.

However, in this case, there is no obligation to preserve the original Excel or Word data, or the document (with a stamp) that was the source of the PDF data. Therefore, the original data and the document are not required to be preserved; only the PDF data needs to be preserved.

As in cases of receiving invoices, etc., if the same invoice, etc., is delivered in both written and electronic form, if the written form is the original, then a paper copy of the original written invoice, etc., must be preserved instead of the electronic data.

If the system becomes so complicated, it is likely that more and more companies will decide to return to postal mailing - even if they have made progress in digitization.