1. Introduction
You might have an experience of purchasing e-books not only in private but on business via internet. At present, under the Japanese consumption tax law, online provision of e-books by foreign suppliers like Amazon is not taxed, while such provision by Japanese suppliers is taxed. In order to revise this unbalanced taxation under the same business situation, the provision of e-books and certain digital services from foreign suppliers are also subject to consumption tax under the 2015 Tax Reform, which will be applicable from October 1, 2015.

In today’s column, we will mention the revision of the consumption tax rules on cross-border digital services.

2. The basic concept and the reason for revision
Under the current Japanese consumption tax law, whether the provision of services is taken place in Japan, which is a criteria for taxation, is determined by the location of the office, etc. of the service providers.

For example, the online distribution of e-books is treated as the provision of services for Japanese consumption purposes, and so the consumption tax is imposed if the location of the service supplier is in Japan, and not imposed if the location of the service supplier is outside Japan. It causes an unequal competitive condition between domestic and foreign suppliers under the same business field.

Thus, under the 2015 Tax Reform, services provided via electronic and telecommunication networks (e.g., internet) such as provision of e-books, music, and advertisements are clearly defined as ‘provision of digital services’, and whether such services are taken place in Japan is determined by the location of the domicile, etc.of the service recipients, which will be applicable from October 1, 2015.

3. What is ‘provision of digital services’?
The following transactions are indicated as examples of ‘provisions of digital services’ by the National Tax Agency:

(1) Provision of e-books, digital newspapers, music, videos, and software (including various applications such as games) via internet
(2) Services that allow customers to use software and database in the cloud
(3) Services that provide customers with storage space to save their electronic data in the cloud
(4) Distribution of advertisements via internet
(5) Services that allow customers to access shopping and auction sites on the internet (e.g., charges on posting for sale, etc.)
(6) Services that allow access the place to sell game software and other products on the internet
(7) Provision via internet reservation website for accommodation and restaurants (those who change on posting for the website from the businesses that operate accommodation and restaurants)
(8) Provision of online English lessons
(9) Continual consultation via telephone or email

Digital services do not include mere communication networks such as telephone, FAX, and access to the internet. Digital services also exclude services coming along with the transfer of other assets incidentally. 

The National Tax Agency also shows the examples of services not falling under the ‘provision of digital services’ as follows:

(1) Services merely mediate information transmission among subscribers (so called telecommunication), such as telephone, FAX, telegraph, data transmission, and access to the internet
(2) Software development, etc.
(3) Administrating and managing assets outside Japan ( including Internet banking services)
(4) Requesting foreign businesses to collect and analyze information, etc.
(5) Foreign legal professionals pursing litigation outside Japan
(6) Transfer or lease of copyright

4. Revision of taxation method
Digital services provided by foreign suppliers are classified into two categories: ‘B2B digital services’ and ‘B2C digital services’. The taxation method differs as follows:

(1) B2B (business to business) digital services
Under the Japanese consumption tax law, in principle, the service supplier files and pays the consumption tax for its services.

However, in the case of ‘B2B digital services’ (Note 1), a Japanese business receiving services from a foreign business is liable to file and pay the consumption tax, which is called ‘reverse charge mechanism’ (Note 2).

Considering administrative burdens, for the time being, a Japanese businesses doing ‘B2B digital services’ whose rate of taxable sales to total sales(Note 3) is 95% or more, or who selects simplified tax system (Note 4) is exempt from tax filing. 

(2) B2C (business to consumer) digital services
In the case of ‘B2C digital services’, a foreign supplier providing services is liable to file and pay the consumption tax in Japan if it has taxable status for Japanese consumption tax purposes.

For the time being, the Japanese business receiving ‘B2C services’ will not be allowed to take purchase tax credit (Note 5) except for the case mentioned in 5.

Note 1:
‘B2B digital services’ are services that are normally provided only for business customers from the nature, term, or condition of the service (e.g. distribution of advertisement). ‘B2C digital services’ are services other than categorized into ‘B2B digital services’ (e.g., provision of digital books and music).

Note 2:
‘Reverse charge mechanism’ is a taxation method in which service recipients are required to file and pay tax; whereas service providers would normally be required to do so.
  
Note 3:

Note 4:
Simplified tax system is a taxation method of calculating consumption tax based on the amount of sales (only applied to businesses whose taxable sales for the base period are 50,000,000 yen or less).

Note 5:
Consumption tax payable is calculated as follows:
Consumption tax payable = Taxable sales (tax excluded) x 8/100 – Taxable purchases (tax included) x 8/108
 

Purchase tax credit means to deduct consumption tax on taxable purchases as
shown in the above formula.                                                                               

5. Registration for Foreign Suppliers
As mentioned in 4(2), a Japanese business receiving ‘B2C services’ is in principle not allowed for purchase tax credit. However, if a foreign supplier becomes a register foreign business by submitting an application to tax authorities in Japan, the Japanese recipient is eligible for purchase tax credit for the ‘B2C digital services’.

6. Conclusion 
We have explained new consumption tax rules of cross-border digital services.

Please note that this article is only prepared for the purpose of introducing general contents and no professional advice included. 
   

Therefore, please don’t make any judgment based on this article without an  advice from any professionals.

If you have any further questions, please feel free to contact us.

(Reference)

Ministry of Finance Japan, “FY2015 Tax Reform (Main Points)”
<http://www.mof.go.jp/english/tax_policy/tax_reform/fy2015/tax2015a.pdf>
Ministry of Finance Japan, “Revision of Consumption Taxation on Cross-Border Supplies of Services” <http://www.mof.go.jp/english/tax_policy/tax_reform/fy2015/tax2015ct.htm>
National Tax Agency, “Revision of Consumption Taxation on Cross-Border Supplies of Services”
<http://www.nta.go.jp/foreign_language/consumption_tax/cross-kokugai-en.pdf>