Japan to target Amazon, Google and other non-resident B2C digital service providers

Plans to subject to Japanese Consumption Tax the provision of electronic and digital services to consumers by non-resident providers have progressed.  The Government Tax Commission last month discussed further details following the announcement earlier this year of plans to levy Consumption Tax on B2C foreign internet services.

The changes will affect such services as: music and film downloads; e-books; cloud software; internet telephony; and online games. The major providers for these services are: Amazon; Skype; Google; Microsoft; Apple and i-Tunes.

Whilst not date has been fixed for any changes, they could come as soon as October 2015.

Currently, the Japanese indirect tax regime does not provide for taxation on digital services provided to its population from outside of the country. It follows the destination principle, meaning a potential tax liability only arises based on the main residency of the service provider – thereby effectively exempting foreign companies.

This position disadvantages local digital providers since they have to charge 8% Consumption Tax. This handicap has grown following the rise in Japanese Consumption Tax from 5% to 8% on 1 April 2014. There are also plans to raise the tax to 10% in October 2015.

The Commission has therefore proposed that the Place of Supply (and therefore taxation) should be switched to the location of the consumer. This would follow the latest OECD digital tax guidelines issued earlier this year, and the original Ottawa Taxation Framework which set the broad principles for the implementation of VAT systems. The EU was this first to adopts this principle of levying VAT based on the rules of the country where the consumer is located. From 2015 electronic services for B2C by  EU companies will change to being subject to VAT in the country of the consumer. It is already based on the country of the consumer for digital consumer services by companies outside of the EU.

The Japanese government will look to implement the changes either this Autumn or in 2015. The effects for non-resident will include:

• The technical ability to identify the location of their consumers, typically by IP address or credit card address
• The need to determine B2B (still zero rated under reverse charge rules) and B2C customers which will now be liable to the indirect tax
• The obligation to register with the Japanese tax office as a Consumption Tax payer
• Potential requirement to appoint a local tax agent or fiscal representative.
• Monthly or quarterly filings of tax receipts, including regular payments

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