Are you a taxable person?

First of all, you have to understand whether you are a taxable person or not. The taxable person has to file a consumption tax return every year and may have to pay the consumption tax. If you are not the taxable person, probably you are able to ignore Japan consumption tax and focus more on your business. However, the rule is not so simple. In particular, you need to be careful when you have just set up the corporation.

Please see all the rules below and if at least one of these applies to your corporation, you are a taxable person and have to file the tax return within two months after the fiscal year-end.

• Taxable sales during the ‘base period’ exceed JPY 10 million?

If yes, you are a taxable person. The ‘base period’ means the period two years prior to the current year. The reason why you look at the past period to see whether you are taxable in the current year is that you are able to be ready for the consumption tax return (e.g. record transactions with consideration for the consumption tax rules, etc) before the current year ends. See the below tables.

Table 1: If fiscal year-end is 31 December

The taxable sales (12 million) in the base period (Jan-Dec 2016) exceeds JPY 10 million. Thus your corporation is a taxable person in the current year (Jan-Dec 2018). You need to file the consumption return by the end of February 2019 (within two months after the year-end).

Table 2: If fiscal year-end is 31 March

The taxable sales (8 million) in the base period (Apr 2016 – Mar 2017) do not exceed JPY 10 million. Thus this rule does not apply to your corporation even though the taxable sales (12 million) in the current year exceed JPY 10 million.

Also, let’s see what happens when you have just set up the corporation.

Table 3: If you set up the corporation on 1st January 2018

The period ‘Jan-Dec 2016’ is not the base period of the current year because the corporation did not exist during that period. So this rule does not apply to the corporation. (This corporation will have the first base period in 2020.)

Even if this base period rule is not applied, you still need to check the other rules below to see if you are taxable.

• Both ‘taxable sales’ and ‘the total of salary, bonus, and other compensation’ during the period of the first six months of the previous year exceed JPY 10 million?

If yes, you are taxable. See the table.

Table 4: First six months of the previous year

The amount of sales from January  to June in 2017 was JPY 11 million, which exceeded JPY 10 million, but the total of salary, bonus, and other compensation paid during the same period did not. Therefore, this rule does not apply to your corporation.

• Your corporation has no ‘base period’, but the share capital is JPY 10 million or more.

If true, you become a taxable person. See the table below.

Table 5: Share capital (you set up the corporation on 1st January 2018)

• Your corporation has no ‘base period’ and the share capital is less than JPY 10 million. But the taxable sales of the ‘controlling shareholder (owns more than half of the share in your corporation)’ exceed JPY 500 million.

If true, you are a taxable person. By the way, what is the reasoning behind this rule? Well, some corporations might set up a subsidiary for the purpose of evading Japan consumption tax as a newly established corporation may not have to file the return (e.g. no ‘base period’). The rules relating taxable persons are basically made for the people who are relatively small and don’t have a capacity to do consumption tax. Therefore, the corporations which generate more than JPY 500 million in sales and the corporations controlled by them are taxable persons and do not need the rules.

• You submitted a ‘Report on the selection of taxable proprietor status for consumption tax’?

If yes, you are taxable. Some corporations submit this report when they think they can get a consumption tax refund. A non-taxable person does not get a refund as the tax return is not needed. And of course, taxable persons do not necessarily get a refund. Thus you need to estimate how much your tax refund (or tax payment) will be. If the amount of taxable purchases will be much bigger than that of taxable sales, maybe you can think about it.

We have explained various rules about taxable persons but actually there are more. For example, there are rules relating to corporate mergers, split-up of a corporation, etc. But these are not explained here as they do not happen frequently.