Consumption tax refund – be careful with ex-works or how you pay freight and insurance. You may not get it back.

Exporting used cars to Russia. Consumption tax refund rejected

There was a tax ruling in the past where a car exporter to Russia was rejected for a consumption tax refund. The company was buying used cars in Japan and exporting to Russia. Because all the purchases took place in Japan and cars were exported to overseas, we would think that consumption taxes paid on top of the price of used cars would surely be refunded.

Niigata tax office turned down the tax return they submitted for refund saying the cars were handed down to Russian importers in Niigata (Japan), meaning their transactions were not crossing the border, but were domestic transactions at all.

In real world tax audit, evidences to be used by the tax office are often “Export Permission Certificate”. Export Permission Certificate is a document provided by Customs before shipping things from Japan with information such as name of exporter, destination, price of goods, terms defined by incoterms etc. If the term mentioned in the certificate is EXW or EX-WORKS (or EX-FACTORY), transactions will be regarded as domestic.

EX-WORKS means the term where a seller provides goods to a buyer at their factory gate, meaning the place of delivery will take place at the place of seller in the origin country. Therefore, it is a domestic trade.

To prove that ownership of goods are transferred across the border, the term shown in its export permission certificate has to be “FOB” or “CIF”.

You also need to be careful that the transportation cost of the goods to airport or port has to be paid by you but not your purchaser. It will be regarded as a strong evidence that ownership or control of the goods are transferred only in Japan. The same for insurance on domestic transportation.

Sometime, you are a SME and your counter party buyer is a very large company and goods are so expensive that you may want your customer to take control here and pay all the cost of transportation, insurance, paperwork to ship. Those facts are all to be used as evidences against you.