If you're starting a business in Japan for the first time, one of the first taxes you'll run into is consumption tax （shohizei）. It shows up on almost every invoice and every receipt, and understanding it early will save you a lot of confusion later.

■　What is consumption tax?

■　How does it work for your business?

■　Do you have to pay it?

Consumption tax is Japan's version of a value-added tax (VAT) or goods and services tax (GST). It's a national tax charged on most sales of goods and services within Japan, and the current standard rate is 10%. A reduced rate of 8% applies to certain items, mainly food and non-alcoholic beverages (with some exceptions, like dining out, which is taxed at 10%).

The key thing to understand is that consumption tax is ultimately paid by the end consumer, not by businesses. Businesses simply collect it on the government's behalf. When you buy a coffee for 550 yen,

50 yen of that is consumption tax, which the cafe collects and eventually pays to the tax office.

This might sound simple, but for a business, it means every sale and every purchase has two amounts attached to it： the price of the goods or services, and the consumption tax on top. Getting used to thinking in these two layers is the first step to understanding Japanese business accounting.

As a business owner in Japan, you'll deal with consumption tax from two directions.

When you sell, you add consumption tax to your price and collect it from your customer.

When you buy, you pay consumption tax on top of the price to your own suppliers.

At the end of your fiscal year, if you are a taxable enterprise (more on that below), you calculate the difference between the two： the tax you collected from customers, minus the tax you paid to suppliers. 

That difference is what you pay to the tax office. This mechanism exists to prevent the same value from being taxed twice as it moves through the supply chain, and it's usually the first thing a Japanese accountant will explain to you when setting up your books.

For example, if you collected 1,000,000 yen in consumption tax from your customers over the year, and paid 400,000 yen in consumption tax to your own suppliers, you would pay the difference, 600,000 yen, to the tax office.

Not every business has to pay consumption tax right away. Japan's system includes an exemption for small and newly established businesses, based mainly on your revenue from two years earlier. In simple terms, if your taxable sales were 10 million yen or less two years ago, you are generally treated as a tax-exempt enterprise and don't need to file or pay consumption tax.

There's an important catch, though. A newly established company in Japan has no sales record at all in its first one or two years, since it didn't exist yet. Whether such a company is automatically tax-exempt or not depends on other factors, such as its capital amount and, in some cases, who its shareholders are. This is a common trap for foreign-affiliated subsidiaries, since a well-capitalized new company may become a taxable enterprise from day one, even with no sales history.

Also worth knowing : since October 2023, Japan has had a new invoice system in place, which affects whether your customers can claim a tax credit on what they buy from you. This has become a major decision point for small and newly founded businesses, even those that would otherwise qualify for the exemption.

We'll cover both the exemption rules for new companies and the new invoice system in more detail in future articles in this series.

This article is for general informational purposes only and does not constitute tax advice for any specific situation. If you're setting up a business in Japan, feel free to reach out to us about your particular circumstances.