International Tax Alert (US): Offshore e-Commerce Service Providers: Changes to Japan’s Consumption Tax Act are Going into Effect

Offshore e-commerce service providers should make themselves aware of changes to Japanese law that affect their operations.

Pursuant to a recent amendment of the Consumption Tax Act, a new Registration of Foreign Business Operator system has been in effect since July 1, 2015. Many affected businesses have not yet registered under this new system.

Starting October 1, 2015, offshore e-commerce service providers providing both business-to-business and business-to-consumer (B2B&B2C) services will have to collect Japanese consumption tax from their Japanese customers and remit it to Japan’s National Tax Agency (NTA). Under the amended Act, offshore e-commerce service providers who satisfy the criteria set forth in this alert should register with the NTA.

Because the application review process is expected to be lengthy, the NTA is advising offshore e-commerce service providers to submit the application documents well in advance of October 1, 2015.

Who should register?

Service providers who fall under the categories of both “B2B&B2C e-commerce service provider” and “taxable business operator” should register.

B2B&B2C e-commerce service provider

“E-commerce services” are defined as services provided via telecommunications networks. Services merely mediating information transmission among subscribers or that only use telecommunication as a communication vehicle (e.g., software development or administration and management of assets outside Japan in which service providers and customers communicate by email) are excluded under the Consumption Tax Act.

“B2B&B2C e-commerce services” are defined as electronic services that include both business-to-business and business-to-consumer electronic services. Services such as distribution of advertisements via the Internet or operation of online stores for a third party’s downloadable games or software are considered B2B-only services.

The followings are examples of B2B&B2C e-commerce services:

• Distribution of e-books, digital newspapers, music, videos and software (including various applications such as games) on the Internet;
• Provision of software and databases using clouds;
• Provision of storage space of electronic data using clouds; and
• Auction or sale of goods and services on the Internet.

Taxable business operator

Any business with taxable sales exceeding1 JPY10 million in the base tax period2 is deemed a taxable business operator and is subject to consumption tax obligations under the Act.

Other requirements

A service provider without an office (or, if the service provider is an individual contractor, any address or domicile) in Japan is required to appoint a tax agent to handle tax returns and notification documents and to arrange for tax payments. The tax agent must be a certified public tax accountant (zeirishi) or a tax accountant corporation (zeirishi-houjin), because only they are permitted to engage in representing taxpayers and preparing tax-related documents under the Certified Public Tax Accountant Act.

In addition, only service providers who have substantial amounts of unpaid Japanese tax obligations may not be registered as foreign business operators.

Required documents

Among the documents required to accompany the registration form are the following:

• Documents that confirm the name, offshore address and business details of the service provider

*Acceptable documents include articles of incorporation, corporate registry, the service provider’s pamphlet and printout of the service provider’s webpage.

• Documents describing electronic services provided by the service provider in Japan

* Acceptable documents include the service provider’s pamphlet and printout of the service provider’s webpage.

• Proof of office address in Japan (if the service provider has an office in Japan that is providing B2B&B2C e-commerce services) or a certificate evidencing the authority of the tax accountant proxy (if the service provider does not have any office in Japan that is providing B2B&B2C e-commerce services)

 *Acceptable documents to prove the office address include the corporate registry and lease agreement.

There is an additional notification requirement for the appointment of a tax agent in Japan.

When business operators don’t comply

Presently, there are no penalties for any non-registered offshore B2B&B2C e-commerce service providers. However, registration of offshore B2B&B2C e-commerce service providers will affect certain tax incentives applicable to their Japanese business customers.

Under the purchase tax credit system, Japanese businesses can credit the input tax paid to other service providers when reporting their output tax liabilities. Usually, Japanese businesses can claim tax credits for the full amount of consumption tax they pay to their Japanese service providers. However, for Japanese businesses to claim any tax credits for the amount of consumption tax they pay to offshore B2B&B2C service providers, the offshore B2B&B2C e-commerce service providers must be registered with the NTA. Consequently, registration will help offshore B2B&B2C e-commerce service providers remain competitive against Japanese service providers in the market.

The names of registered offshore B2B&B2C e-commerce service providers are being disclosed to the public on the NTA’s website.

Find out more about these changes in Japanese law and their effect on your business by contacting the author.