CFO Insights 2021 May

Proactive planning for the introduction of the consumption tax qualified invoice system in 2023

CFO Insights is a monthly publication to deliver an easily digestible and regular stream of perspectives on the challenges confronting CFOs. In this article, the outline of a new qualified invoicing system, the business impact and certain milestones are described.


As many companies may already be aware, the current Japanese consumption tax (“JCT”) system will transition to a new qualified invoicing system beginning 1 October 2023. Businesses are currently not required to include the amount of JCT on their invoices, and businesses as a JCT taxpayer that incur input JCT on payments in taxable transactions of said invoices will generally be allowed to recover the input JCT paid. However, under the qualified invoicing system, recovery will only be allowed for input JCT paid related to a qualified invoice, which must include certain additional information. As a result, some businesses may face situations in which they are no longer able to recover previously recoverable input JCT once the new system goes into effect.

To prevent the loss of recoverable input JCT, it is important that businesses be proactive to understand the scope and timing of the planned changes and how those changes may impact their current invoicing arrangements. The following provides an outline of the invoicing requirements under the current system and the qualified invoice system, as well as certain milestones to keep in mind. Finally, we will provide an example of a situation in which a business may be impacted by the implementation of the new rules and how such business may be able to plan ahead to mitigate the potential impacts.

Invoicing requirements under the current system

As mentioned, the current JCT system does not require businesses to state the JCT amount on their tax invoices. In the past, JCT taxpayers typically determined the input JCT amount based on books and records rather than using invoices, as JCT law does not require to show JCT rate and amount on the invoices. This method of calculating JCT was practically feasible until the introduction of the multiple JCT rate system, which went into effect starting 1 October 2019. Under the multiple rate system, the standard JCT rate increased from 8% to 10%, with the exception of most food and beverages and certain print newspaper subscriptions for which the 8% rate was retained. Additionally, a 0% rate may also apply in certain circumstances (e.g., for export transactions).

With the change in the JCT rates, a rate-classified invoice system was implemented, under which businesses may differentiate between 8% and 10% items on invoices and state the total consideration for each rate. The rate-classified invoice system applies for the period of 1 October 2019 through 30 September 2023 as a transitional measure until the qualified invoice system is introduced. However, the imposition of different rates has resulted in some JCT taxpayers incorrectly accounting for input JCT as a result of not being able to rely on tax invoices stating the correct JCT rate/amount.  The appropriate applicable rate needs to be cofirmed by the contractual parties.

Invoicing requirements under the qualified invoice system

Unlike the requirements currently in place, the qualified invoice system will require additional information to be included on invoices and will resemble the systems used by countries that impose value added tax and goods and services tax. Under the qualified invoice system, to claim a credit for input JCT paid, JCT taxpayers will be required to retain a qualified invoice issued by certain registered businesses. To register and become eligible to issue qualified invoices from 1 October 2023, a business must submit an application to the appropriate National Tax Office between 1 October 2021 and 31 March 2023. Only JCT taxpayers are eligible to be registered.

Once successfully registered, a business is expected to be noticed its registration numbers from the National Tax Agency with the approval of registration by mail, and after the registration date, the registered business must provide qualified invoices to customers who are JCT taxpayers and retain copies of the invoices for 7 years. Note that non-registered businesses cannot issue qualified invoices, so JCT taxpayers receiving invoices from non-registered businesses will no longer be able to claim a credit for input JCT paid on those invoices once the new rules go into effect (certain transition rules will apply).

The timeline below sets out the relevant dates/milestones for the transition to both the multiple rate and qualified invoice systems.

Information required on a tax invoice

For an invoice to be considered qualified, it must include certain information. The requirements are fairly similar to the what must be included under the current system. However, additional detail on the JCT amount and a registration number must be included on qualified invoices, in principle. The table below summarizes the requirements under the current and the qualified invoice systems.

Potential pitfalls of the transition to the qualified invoice system

Under the current rules, a JCT taxpayer can treat amounts paid in a taxable transaction to a supplier that is a JCT exempt enterprise (i.e., a company that is not required to file a JCT return) as inclusive of JCT and recover “deemed” input JCT in its JCT return. However, as outlined above, under the new qualified invoice system, JCT taxpayers will generally only be allowed to recover input JCT if a qualified invoice was issued. As a JCT exempt enterprise cannot issue a qualified invoice, the deemed input JCT that is currently deductible may become a real cost to the JCT taxpayer. Transitional rules will be implemented to allow businesses to recover a certain percentage of deemed input JCT even after 1 October 2023, but businesses should start assessing any taxable transactions they have with JCT exempt enterprises to ensure that any risk of JCT leakage is mitigated.

The example below illustrates this point by showing the input JCT treatment for a company (“ABC Co”), which is a JCT taxpayer, that currently treats an amount paid (e.g., commissions) in a taxable transaction to a contractor (a JCT exempt enterprise) as inclusive of JCT and recovers deemed input JCT on its JCT return.

As noted in the example, the transitional rules can temporarily help mitigate the loss of deemed input JCT to an extent, but the impact can still be significant, particularly if a business has large volumes of taxable transactions with JCT exempt enterprises. Further, even if a contractor is not a JCT exempt enterprise, input JCT is not recoverable if the contractor does not issue a qualified invoice. As such, businesses should proactively quantify the amount of potential non-recoverable input JCT and may need to negotiate with its JCT taxpaying contractors to ensure they issue a qualified invoice.

Finally, businesses should understand the legal implications before beginning any negotiations with contractors. Certain legislation, such as the Subcontractor Act and Antitrust Act in Japan, contain provisions preventing the abuse of bargaining power by businesses and failure to adhere to these rules can result in adverse legal ramifications.


Businesses in Japan are no strangers to increases in the JCT rate, as the system has undergone several rate changes in recent years. However, the introduction of the qualified invoice system is an additional layer of complexity that may bring about new issues for certain businesses to face that might have wide-ranging business implications.

One such implication is the risk of underestimating the scale of the work involved in either implementing/adapting IT systems or renewing business contracts. This is because companies may mistakenly assume that the transition is purely a tax issue and not a business transformation issue. For example, some businesses require IT enhancements and upgrades to meet the invoicing requirements, while others may need to renegotiate contract terms with third parties.

As a result, businesses should be proactive and take steps to ensure that they make the optimum use of the time remaining prior to the introduction of qualified invoices. In particular, to assess which of their activities will be affected by the changes, and to ensure that appropriate steps are taken to be ready by 1 October 2023.

Should you have any inquiries, please contact the author, Fumiko Mizoguchi (

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