What is Japanese Consumption Tax (JCT) for SaaS?

Japanese Consumption Tax (JCT) is applied to goods and services consumed in Japan, and this includes digital services such as SaaS subscriptions. JCT, which functions in a way similar to value-added tax, relates to both domestic sellers and quialifying foreign sellers based on established criteria. For SaaS companies with customers in Japan, JCT outlines when tax needs to be collected, remitted, and documented.

Registration for JCT may apply to both businesses based in Japan and those located abroad, depending on certain criteria set by Japanese tax law. The way JCT is collected is determined by the type of transaction.

• B2C sales: For B2C sales in Japan where the threshold is exceeded, the foreign seller calculates the 10% JCT due at the time of sale.
• B2B electronic services: In the case of these sales, the reverse charge procedure is applied. For that matter, the foreign seller does not have to collect the JCT, while the buyer, which in this instance is a Japanese company, will be responsible for reporting the tax. As an additional practice, it is common to inform the client about the application of the reverse charge in advance. Invoices or website notifications are used for that purpose.
• Platform sales: In the case of B2C sales via a digital platform, e.g. Apple or Google, the JCT is collected by the platform operator instead of the individual seller.

Japan determines if a sale is B2B or B2C mainly by looking at the type of service being provided, instead of focusing only on customer classification. Criteria for registering for JCT depend on sales figures and the nature of services sold, so businesses will need to review their own circumstances when assessing registration needs.

Japanese Consumption Tax currently has a standard rate of 10%, which applies to digital services including SaaS. A reduced rate of 8% is set for certain items such as food and specific print publications; this rate is not applied to software or digital subscriptions. When setting prices or preparing invoices, it is important to review the classification of each service, especially if multiple types of services are included together, and plan around the 10% rate when pricing or invoicing.

Introduced in October 2023, the Qualified Invoice System sets out a framework for how businesses in Japan document input tax credits for purchases, including SaaS. Generally, buyers obtain a qualified invoice from a registered seller to confirm JCT paid and identify eligible deductions.

A qualified invoice includes:

• Seller’s name and JCT registration number (“T” plus 13 digits)
• Date and description of the service
• Total amount and the corresponding tax rate (per rate)
• Total tax amount and the name of the buyer

Relevance for foreign providers:

• Business customers may ask for qualified invoices when managing their input tax records.
• Buyers looking to claim credits sometimes consider whether a supplier is registered to issue qualified invoices.
• Registration status is one aspect buyers may factor in when making supplier selections.

il Japanese consumption tax (JCT) possesses common features with value-added tax (VAT), yet the former follows its own national policies. The tax assessment under both JCT and VAT occurs at different stages in the distribution chain and includes appropriate paperwork concerning credits for taxes paid on inputs. On the contrary, sales tax in the USA is levied only once when the transaction takes place, and there is no provision for an input tax credit.

Before entering the Japanese market, review factors such as your total sales to Japan, the distribution between individual and business clients, and the suitability of your processes to meet local invoicing standards:

• Check if your taxable sales approach or surpass the JPY 10 million registration threshold.
• Assess whether your sales are mostly to individuals or if they include B2B electronic services with distinct tax rules.
• Ensure your billing system can produce qualified invoices that satisfy Japanese regulations.
• Identify any platform sales, since these may have specific requirements for compliance.

Monitoring shifts in your customer base helps determine if changes to invoicing practices or tax compliance measures are needed.