Japanese Tax Blog in English

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Who will benefit by choosing a Consumption Tax filer status?

time 2022/03/16

In order to understand who will benefit by choosing a Consumption Tax filer status, I will explain how the consumption tax liability is calculated.  The basic rule is that Consumption Tax payable is the difference between what you receive on your revenue and what you pay on your cost. I show you a very simple example. Please see the calculation below.

In this example, your sales was 13MM yen and the total expenses were 10.9MM yen. The consumption tax you received was 1.3 MM yen. Since there is no consumption tax in salary, the consumption tax you paid was the total of those on Cost of goods sold, rent and travel & other expenses. As you can see, the consumption tax payable is 510,000 yen.

As you may now see it, those who benefit by choosing to become a C. Tax filer are those who have a business model whose tax payable at the bottom of the calculation turns negative. I will show you 2 typical situations.

1) Businesses that export goods or provide services to overseas:

The next table shows a case of export business. Since revenue from overseas by shipping goods are not taxable of consumption tax, you will only have expenses that comes with Japanese C. Tax. As a result, you receive no consumption tax on sales while you pay the tax on your expenses, thus the difference between the tax you pay and the tax you receive becomes negative. Since the tax you paid is bigger than what you received, you will get a refund of the Consumption Tax by filing your C. Tax return.

This rule of benefit applies to companies that have sales from overseas.  And it is not limited to businesses exporting goods but also providing services to clients overseas. Those companies that work as sales agents for parent companies with mark-up fees (e.g. 5% mark-up) will also benefit by choosing the C. Tax filer status.

2) Businesses with heavy investments at the beginning.

Businesses that requires material investments should consider choosing to become C. Tax filer status. For example, if you are planning to build a factory or an office building, your initial investment will be huge. And the consumption tax you are going to pay will also be huge compared to the tax you are going to receive on your income in the next few years. In this situation, of course, your choice will be to become a consumption tax filer.

Restriction

There are also negative sides by choosing a consumption tax filer while your default status is a non-filer. There will be a period when you will be restricted to go back to a tax filer status.

Once you choose to become a c.tax filer status, you will have to stay as a C. Tax filer for 2 years at least. To become a C. Tax filer in a year (say Year #2), you need to submit a certain application form by the end of the previous fiscal year (Year #1). In the below example, you opt to become a C. Tax filer in 2020 by submitting an application form in 2019. You will not be allowed to go back to the exempt status in 2021. You will have to stay non-exempt at least for 2 years. In order to go back to the exempt status, you need to submit another application form before the year that you would like to go back to exempt.

If you purchase something more than 1MM yen per item during the taxable period, you will have to stay as C. Tax filer for another 2 years (3 years in total).
Precisely speaking based on the tax law wordings, you will not be allowed to go back to exempt status or switch to Simplified Method until the end of the fiscal year that includes the day that is 3 years since the beginning of the fiscal year that you buy an asset more than 10MM yen.

Again, you need to submit another application form to go back to exempt status.


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