Japanese Tax Blog in English

日本の税務情報を英語で書くブログ by みなと国際会計事務所

Typical (my) mistakes in the process of claiming Consumption Tax refund

time 2021/12/30

I once had a tax audit for one of our clients in the past. The client was about to be devastated because of the audit. I regret that I had taken his explanations that his export was to export goods and I did not check his export permission documents earlier.

The client was shipping very expensive second-handed semi-conductor testers. One machine would cost about 100 million JPY (approx. 1 million USD). Since the market for this industry is mature, its margin was usually very slim, say 1-3%. The client would purchase them in Japan and ship to US, China and other countries. By purchasing 5 machines and selling at 2% margin a year would leave him about 10 million yen in profit and that was good enough for his one-man operation.

One day, the tax office called and requested for a tax audit. We were nervous but also confident that the client had not done anything wrong and it would be completed without any major issues.

The tax auditor checked his export certificates and later came back and pointed out that they were export under “EX-WORKS” or “EX-FACTORY” condition by incoterms. Regretablly, I had not checked his export permission certificates in the past. I simply believed that it was just export of machines.

EX-WORKS is one of the international trade conditions where the ownership and its risk of goods are transferred in the origin country. Popoular incoterms are FOB or CIF where FOB stands for Free on Board where the owndership and risk are to be transferred at the port of origin country while CIF means by incoterms for Cost, Insurance and Freight where the ownership and the risk transfer at the port of destination country.

EX-WORKS means it is a domestic transaction that happens in Japan and therefore, it is subject to Japanese Consumption Tax.

The tax audit went ok at the end of the day. We explained that the insurance was arranged by the client and “substantially” the risk only transfers at the port but NOT in front of the door of the client warehouse.

I learned a hard lesson at that time. We should check Export Permission by our eyes.


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