FAQ’s Regarding Invoice Burden Reduction Measures Released

Introduction

On January 20, "Frequently Asked Questions & Answers on the Initial Draft of Burden Reduction Measures for the Invoice System" was published. The 2023 tax reform will introduce three burden reduction measures for the consumption tax invoice system starting this October.

Transitional Measure for Small Businesses (Special 20% Tax Limit)

If a company has been a consumption tax-exempt business, but chooses to become a consumption tax-paying business in conjunction with the start of the invoice system, it will be able to use this 20% special exception limit until the end of September 2026.

The 20% special limit is intended to limit the tax payment burden for previously tax-exempt businesses that become taxable businesses, to 20% of the consumption tax on sales.

For example, if sales are 1,100 (including tax) and purchases are 330 (including tax):
The amount of sales tax paid is usually 70 (= 100 - 30 {the respective consumption tax amounts}).
With this special exception (limit), the amount of consumption tax paid would be
20 (= 100 X 20%), which significantly reduces the consumption tax payment burden.

However, businesses that were never exempt from consumption tax in the first place - such as those that are not registered as invoice-issuing businesses, or those whose taxable sales in the base period (two fiscal years before) exceeded 10 million yen - are not eligible for this special exception.

It should also be noted that this is a time-limited measure; this special exception will no longer be available after the end of September 2026.

Transactions Totaling Less than 10,000 Yen can be Carried out Invoice-Free (Special Exception for Small Amounts)

After October 1st 2023, in principle, an invoice will be required to deduct tax on purchases. However, some transactions involve small payments, such as bank transfer fees and ETC payments.

If invoices were required to be kept even for such small transactions, it would be a considerable administrative burden. Therefore, for taxable purchases where the consideration paid is less than 10,000 yen, the purchase tax credit can be applied even without an invoice, as long as the necessary information is recorded in the books of account. This is the special exception for small amounts.

This special exception applies for businesses with taxable sales of 100 million yen or less in the base period (i.e., two fiscal years prior), or taxable sales of 50 million yen or less in the designated period (the six-month period beginning from the first day of the preceding fiscal year).

For instance, if your company purchased a ¥6,000 item and a ¥5,000 item at the same time, the total transaction amount would exceed 10,000 yen, so please be aware that this would not qualify for the small-amount special exception.

Exemption from Obligation to Deliver Small-Amount Return Invoices

The exemption from the obligation to issue small-sum return invoices is available to all businesses, and since it is a permanent measure, there is no set time limit on its application.

The return of consideration for amounts totaling less than 10,000 yen (including tax), such as returns, discounts, and rebates on sales, is eligible for the exemption from the obligation to issue a return invoice. The amount equivalent to a transfer fee which is borne by the seller may be treated as a sales discount or as a payment fee; no return invoice is required.

Impact of the Start of the Invoice System

Introduction

In the invoice system, there are many issues that cannot be solved by the accounting department alone. It is important to sort out what problems exist, and how to solve them.

Review of Administrative Flow

First, there are two types of transactions: those with invoices, etc., and those without them. For transactions with invoices and/or other documents, payments proceed based on the invoices, etc.

On the other hand, for transactions without invoices, etc., there are those for which invoices are substituted for contracts and account debit histories, etc., as well as those for which there is no need to keep invoices in the first place, such as public transportation for less than 30,000 yen. The former (substitution) type is similar to transactions with invoices, etc. However, the latter type must be paid based on a proposal/application from the person in charge, and a statement must be made in the accounting books that the omission of the obligation to preserve invoices is applicable.

After the introduction of invoicing, it will also be necessary to determine whether invoices, etc. which are received indeed qualify as invoices if they do not say “Invoice" on them. For example, the following must be determined according to the company's system:

• The person who received the invoice, etc., or the person in charge of general affairs for the department
• Accountant maintaining the general ledger
• Everyone else

Invoices (Billings), etc. Received Which Do Not Correspond to “Invoices”

If the invoices, etc. received do not correspond to invoices, many businesses must enter a journal entry in their books to transfer 20% of the consumption tax deductible (prepaid consumption tax)* on the relevant transactions to “Taxes and Dues, etc.”, in order to be eligible for the transitional measures.

Even just the situation of receiving and paying invoices, etc., creates choices and associated paperwork. More burdensome than you might imagine are the bookkeeping requirements.

If the transitional measures are applied, it is required to state that those transitional measures are being applied, whereas if the omission of invoices, etc. is applied, it is required to state as such.

Since it is difficult to include comments for each one, it may be considered necessary to devise a way to register the comments - in the remarks column, for instance.

Invoice Verifications Also Required

It is also necessary to determine the extent to which invoices received should be verified. For example, there is a need to decide within the company to what extent the following items should be checked:

• If the registration number is mentioned on the document, it is assumed to be OK;
• Amount basis - e.g., invoices with consumption tax amounts of 10,000 yen or more;
  *The above will be reconciled against the National Tax Agency (NTA) database, but the database will not be checked for consumption tax amounts of less than 10,000 yen.
• For frequent customers, save the registration number, and if the number on the invoice matches that registration number, it is considered to be OK.
• Automatically reconciles everything with the National Tax Agency database.

How Many Banks Should Financing Be Received From?

Introduction

Your company should not concentrate on just one main bank for financing. Loans should be obtained from more than one bank, regardless of the size of the company.

Reasons Why You Shouldn't Focus on Only One Main Bank

There is no need to think that you can only get a loan from one bank because your company's sales are still small. You should obtain financing from more than one bank, and below are a couple reasons why.

To Increase Your Financing Options

One reason why a company should obtain financing from more than one bank is to increase its financing options. If a company only receives financing from its main bank, it will be difficult to obtain loans from other banks if it can no longer obtain financing from that main one.

Some business owners think that if they do not get a loan from their main bank, they can just apply to a new bank; however, in reality it is not that easy. Banks know from experience that when they lend to a new company, it is easy for the company to default on the loan because it becomes unable to repay the loan in the middle of the term.

When companies seek new financing, they usually think first of consulting their main bank. However, if the main bank does not provide a new loan, then the company has no choice but to apply for a loan elsewhere. The bank where the new loan is applied  for will assume that the reason the loan is being applied for with their bank is because the company’s main bank turned them down.

Then they would probably consider why the main bank turned down the new loan. For example, the borrower’s recent performance or financial condition has deteriorated, or there is some problem within the company. These factors will force them to be more cautious in granting a loan.

In this light, we hope you understand the risk of only taking out loans from your main bank. It is preferable to get loans from multiple banks on a regular basis, and build a track record of repayment at each bank.

As a result, the borrower would have the option of applying for loans from other banks even if their main bank refuses to extend them a loan.

In this case, government-affiliated financial institutions should be considered separately. Since government-affiliated institutions are positioned as complementary to private-sector financial institutions, they are not included.

As a rule of thumb, a company with total loans of more than 50 million yen should probably have loans from at least three financial institutions.

Another Reason

The second reason why loans should be obtained from more than one bank is to allow competition in lending terms among financial institutions. If loans are obtained from only one bank, there will be no competition among banks. By taking out loans from multiple banks and allowing them to compete with each other, you may be able to obtain loans with better terms in terms of interest rates, repayment terms, and collateral.

With general transactions, you most likely think of getting quotes from different companies to consider which to place an order with. In the finance field, as well, the presence of competitors can create a sense of tension by itself, so we can conclude that financing should be obtained from multiple sources.