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－ 146 － CHAPTER VIII
CONSUMPTION TAX

8/1
8/1 8/1 8/1 General

Consumption tax is an indirect tax fairly and widely imposed on general con-
sumption. In domestic transactions, taxpayers are business enterprises offering
asset transfers, loans and services for consumption and these who receive foreign
goods from bonded areas. Consumption tax is added on (shifted) to the price of
goods and services offered by enterprises and ultimately borne by consumers. Since
this tax is assessed on transactions by enterprises at each manufacturing, wholesale,
and retail stage, it contains a scheme for avoiding tax accumutation by way of
deducting taxes on purchases, thus making it neutral to industry and the economy
in general.
The tax period for the calculation of tax payable on domestic transactions is for
individual proprietors, the calendar year which overlaps with the tax period for their
income tax returns, and for corporations, the accounting period which overlaps with
their corporate tax returns. Calculation of the deductible consumption tax on
purchases is based on both book entries and invoices or delivery statements cur-
rently in use instead of invoices. For small and medium-sized business enterprises,
a simplified taxation system is utilised to alleviate the administrative burden an tax
payers, thereby enabling calculation of the tax amount from the sales amount. The
rate of tax is a flat 4% (together with the 1% local consumption tax, a local tax, the
tax rate reaches 5%). Various amendments were rendered in 1991 notably on the
scope of exemption and on the simplified taxation system, which was followed by
amendments in 1997 for the introduction of the current flat rate of 4% and abolition
of the special deduction system for small and medium-sized enterprises. The re-
duction of the special measure for small & medium-size enterprises introduced in
the FY 2003 reform will be applied from FY2004.

8/2
8/28/2 8/2 Taxable Items

1.
1. 1. 1. General
Consumption Tax Law (hereafter called the “Law”) applies to asset transfers
by enterprises in Japan and foreign goods received from bonded areas.
“Asset transfers” mean sales and leasing of assets and provision of services
effected for compensation as a business activity. For such asset transfers, tax-
able items are those effected by enterprises in Japan.

Ⅷ Consumption Tax
－ 147 － Even among asset transfers by enterprises in Japan, there are categories not
subject to taxation, the so-called nontaxable transactions. Among taxable
transactions, moreover, certain items including export transactions are ex-
empted from consumption tax.
Transactions not subject
to consumption tax includes asset transfers by consumers and asset
transfers made outside Japan
Tax-exempt transac-
tions (including exports) Taxable transactions
(Transfers of taxable
assets) Taxable transactions Transactions subject to
consumption tax
Non-taxable transac-
tions

2.
2.2. 2. Transactions subject to Consumption Tax
Transactions fall within the scope of the law if they are ⑴ domestic
transactions, ⑵ a business activity, ⑶ effected for compensation, and ⑷
categorized as sales and leasing of assets or provision of services.
⑴ Domestic transactions
The consumption tax is levied only on transactions made in Japan. There-
fore, in cases where enterprises have transferred assets purchased in foreign
countries to third parties without bringing them into Japan, such transactions
are not subject to taxation.
The criteria for judging whether or not a transaction has been made in Japan
are shown elsewhere in this section.
⑵ Business activity
Consumption tax is levied only on transactions made as a business activity.
This leaves sales of household assets by an individual entrepreneur free from
taxation.
In addition, taxable asset transfers shall include the sales and leasing of
assets and the provision of services effected for compensation in conjunction
with business activities.
⑶ Effected for compensation
Consumption tax is, in principle, levied only on transactions made for
compensation. The activities shown below are regarded as asset transfers ef-
fected for compensation as a business activity.
⒜ Consumption or use, for household purposes by an individual entrepre-
neur, of inventory or other assets that have been used for business purposes
and;
⒝ Gift assets by a corporation to its directors.
As explained above, taxable items only include transactions made for

Ⅷ Consumption Tax
－ 148 － compensation. Therefore, excluded from taxation are activities such as the
use and consumption of merchandise or raw materials for purposes including
advertisement, other publicity, and research and development conducted
directly by the enterprise.
Insurance proceeds received, dividends received (limited to those related
to capital contributions), and compensation for damages inflicted on persons
or assets do not fall under compensation related to asset transfers.
The taxability of membership dues or annual fees charged by trade groups
or associations shall depend on whether or not such payments clearly con-
stitute compensation for asset transfers provided by the respective trade
group or association. When such a correlation is not clear, payments shall
not be taxable if the trade group or association concerned does not con-
sistently treat such payments as compensation for asset transfers and if the
enterprises that are members of the organisation do not recognise such
payments as taxable purchases.
The transactions listed below are treated as transactions made for com-
pensation.
⒜ Asset transfers made as payment in substitute;
⒝ Asset transfers made as a substantial gift;
⒞ Capital contribution of assets other than cash;
⒟ Successions of loans and other monetary claims (excluding general
successions); and
⒠ Transmission of wireless communications for the purpose of direct
reception by a number of unspecified persons per a law requiring the
receiving persons to enter into a uniform contract for such reception and
charging fees as prescribed in the contract.
⑷ Sales and leasing of assets or provision of services
⒜ Sales of assets
Sales of assets means transfers to third parties of assets without modi-
fying their identity and without regard to the mode of these transfers. As
such, they also include transfers of assets made for the fulfillment of guar-
antee obligations owed on behalf of third parties or the realisation of assets
made per procedures for compulsory conversions. Similarly, transfers of
ownership or other rights on land made per the procedures prescribed in the
Land Expropriation Law or other laws with compensation for the loss of
rights paid by the parties acquiring such rights are included in the sales of
assets effected for compensation.
⒝ Leasing of assets
Leasing of assets includes any and all acts made for the creation of rights
pertaining to assets and permitting their use by other parties.

Ⅷ Consumption Tax
－ 149 － “Creation of rights pertaining to assets” means the creation of surface
rights or easements pertaining to land, granting the right of expropriation,
or a licence for industrial property rights (including patent rights, utility
model patents, design rights and the right of trademark) and the creation of
copyrights pertaining to authors’ works.
“Any and all acts permitting the use of assets by other parties” include,
for example, the following:
① Use or deposit of industrial property rights;
② Reproduction, performance, and broadcasting of authors’ works or any
other acts permitting their exploitation and;
③ Provision of know-how.
⒞ Provision of services
Provision of services means the rendering of services such as civil engi-
neering and construction work, repair, transportation, safe custody, print-
ing, advertisement, brokerage, entertainment, technical assistance, provi-
sion of information, stage performance, and writing. It also includes services
rendered by lawyers, certified public accountants, certified tax accountants,
writers, athletes, movie directors, and professional
go or shogi players,
drawing on their professional knowledge or skills.

3.
3.3. 3. Criteria for Classification of Domestic and Overseas Transactions
a. Sales or leasing of assets
The classification of domestic and oversees transactions is based on
whether the assets sold or leased are physically located in Japan at the time of
the transaction.
As for the following asset categories, however, classification is based on
whether the relevant entities or places are located in Japan at the time of sale
or lease.
⑴ Ships (limited to registered vessels)
Classification depends on the location of the official agency which regis-
ters the ship. In cases where non-Japanese ships are leased by residents to
other residents and where Japanese ships are leased by nonresidents, the
residence, main office, or principal place of business of the lessor deter-
mines classification.
⑵ Ships other than those covered by ⑴ above
Classification depends on the location of the office, place of business, or
similar facility of the seller or the lessor where the business of the sale or
leasing is conducted.
⑶ Aircraft

Ⅷ Consumption Tax
－ 150 － Classification depends on the location of the official agency which regis-
ters the aircraft. In cases where the aircraft is not registered, the office of
the seller or the lessor where the business of sale or leasing is conducted
determines classification.
⑷ Mining rights or mine lease rights, stone-quarrying rights, and other
rights for the quarrying or excavation of earth and rocks, mining concession
areas, mine lease areas, or stone quarrying areas covered by quarrying or
excavation rights determine the classification.
⑸ Patent rights, utility model rights, design rights, rights of trademark,
rights of circuit layings and use rights (including rights for exploitation); the
location of the official agency that registers these rights determines classi-
fication. In cases where there are registrations of the same right in two or
more countries, the place of the seller’s residence determines classi fica-
tion.
⑹ Copyrights (including publishing rights, quasi-copyrights, and other
rights of a similar nature) or production formulas using special technology or
others of similar nature (know-how); the place of abode of the seller or
lessor.
⑺ Goodwill, fishing rights, or right of entry into a fishing ground; the place
of abode of business entities doing business in connection with those rights.
⑻ Assets shown in ⒜ through ⒡ below; the place shown correspondingly
for each item.
⒜ Securities (securities provided for in Clause 1, Article 2 of the
Securities Transaction Law (excluding shares of golf club memberships));
the place where the securities are situated.
⒝ Registered national government bonds and other bonds (national gov-
ernment bonds, local government bonds, and corporate bonds (including
bonds issued under special laws by juridical persons other than corpora-
tions) registered under the provision of the Law Concerning National
Government Bonds and the Corporate Bond Registration Law and foreign
bonds of a similar nature) and foreign bonds of a similar nature); the place
where the official agency that registers these bonds is situated.
⒞ Equity interest of investors in corporations; the place where the main
office or the principal place of business of the corporation concerned is
situated.
⒟ Mortgage securities; the place where the mortgage securities are
situated.
⒠ Loans, deposits, accounts receivable and other monetary claims (ex-
cluding those shown in ⒡ below and including monetary claims per-
taining to negotiable certificates of deposit and commercial papers); the

Ⅷ Consumption Tax
－ 151 － place where the office of the creditor concerned conducting the sale is
situated.
⒡ Shares of golf club memberships and monetary claims pertaining to
deposits with golf clubs or other sports clubs; the place where the golf
club or other sports club is situated.
⑼ Assets other than those listed in ⑴ through ⑻ above without any clear
indication where they are situated; the office where the entity engaging in
the sale or leasing of these assets conducts such business.
b. Provision of Services
Classification of domestic and foreign transactions is based on whether or
not the service in question is provided in Japan.
As for the following service categories, however, classification is based on
whether or not the places shown below are situated in Japan at the time the
service is provided.
⑴ Transportation of passengers or cargoes conducted within and outside
Japan; the place of departure, shipment, destinations of the passengers, or
cargoes.
⑵ Communications conducted within Japan and internationally; the place of
dispatch or reception.
⑶ Mail services conducted within Japan and internationally, etc.; Place of
forwarding or delivery.
⑷ Insurance; Place where the office of the entity (engaged in the business of
insurance excluding those who act as agents in the conclusion of insurance
contracts) concluding insurance contracts is situated.
⑸ Provision or design of data; the place where the office of the entity en-
gaged in the provision or design of data conducts such business is situated.
⑹ Provision of services pertaining to research, planning, projection, con-
sultation, supervision, or examination requiring professional knowledge in
specialised fields of science and technology made in connection with the
construction or production of manufacturing facilities; the place where most
of the materials needed for the construction or production of the manu-
facturing facilities are procured.
In this context, manufacturing facilities shall mean the following items:
⒜ Buildings (including attached facilities) or structures;
⒝ Facilities for mining and manufacturing production, electric power
generation and transmisson, railways, roads, port facilities, and other
transportation services or fishery production;
⒞ Facilities for the transformation and distribution of electrical current,
the storage and supply of gas, the storage of oil, communications and
broadcasting, water service for industrial use, water supply and sewerage

Ⅷ Consumption Tax
－ 152 － systems, waste water disposal stations (including facilities of a similar
nature), agricultural productions and forestry production and;
⒟ Ships, railway vehicles and aircrafts.
⑺ Provision of services other than those listed in ⑴ through ⑹ above,
conducted within Japan and internationally without any clear indication as
to where they have been provided; the place where the office of those en-
tities engaged in the provision of such services is situated.
c. Financial transactions
For the lending of money with interest as compensation (including the ac-
quisition of national government bonds and other bonds for interest as com-
pensation and the holding for special drawing rights provided for in the
Agreement of the International Monetary Fund) and other acts stated below,
classification of domestic and foreign transactions shall be based on whether or
not the office of the entity concluding these acts is situated in Japan.
⑴ Placing of deposits or savings;
⑵ Placing of money in trust for collective management, including jointly
managed trusts and investment trusts that aim dividends from revenue as
compensation;
⑶ Payment of mutual installments as compensation or installments of
fixedperiod savings;
⑷ Payment of installments to mutual aid credit contracts;
⑸ Obtaining mortgage securities for interest as compensation;
⑹ Acquisiton of national government bonds and other bonds for profits from
redemption as compensation;
⑺ Discounting of notes and;
⑻ Receipt of, or other succession to, monetary claims (not including cases
of general succession).

4.
4.4. 4. Non-taxable Transactions
The following transactions are exempt from taxation:
a. Sales and leasing of land
Sales and leasing of land (including establishment, sales, and leasing of
rights relating to land); the rights relating to land including superficialities,
easements, perpetual tenancy rights, and other rights relating to the use of
and benefiting from land, except for mining rights and hot springs usage rights.
Land leased for a period shorter than one month and used in conjunction
with buildings, parking lots, and other facilities are taxable.
b. Sales of securities and means of payment
Sales of securities such as national government bonds, corporate bonds, and

Ⅷ Consumption Tax
－ 153 － stocks (excluding shares of golf club memberships); sales of registered bonds,
ownership, or membership shares of partnership and cooperative associations
and monetary claims certificates of deposits.
Sales of means of payment (excluding those for collection or sale) and pro-
vision of money-changing services.
c. Money lending and other financial transactions
The lending of money for interest as compensation, provision of such ser-
vices as guarantees, provision of services effected, as compensation, for
trustee remuneration from jointly managed money trusts or bond investment
trusts, insurance premiums (excluding fees received separately as administra-
tive expenses), and other similar services (such as sales of assets for com-
pensation for specified interest, and insurance premiums for financial leasing,
installment sales fees, and mutual-aid installments).
d. Sales of postal and other stamps
Sales of postal and other stamps (provided sales are made at designated
places) and similar items.
e. Sales of certificates for the provision of goods and services
Sales of certificates for the provision of goods and services (such as “tele-
phone cards”).
f. Registration and licencing fees by the national government and local public
bodies
Provision by the national government and local public bodies of services
related to registration, licensing, passport control, resident and family certifi-
cation, and certain other similar services.
g. Services such as international postal money transfers
h. Services for foreign currency transactions
i. Medical services, etc. in the public medical care systems
Medical services (including payment of medical benefits) made under
medical insurance laws, such as the Health Insurance Act, the Elderly’s
Health Protection Act, the Livelihood Protection Law, the Law Concerning
Compensation for Ill Health caused by Environmental Pollution, the Workers
Accident Compensation Act, and other similar medical services, and medical
treatment given to the victim related to indemnity under the Automobile Ac-
cident Compensation Security Act (up to a certain limit with respect to pay-
ment for special hospital rooms).
j. Nursing Care Services specified services provided under the Nursing Care
Insurance Law
k. Social Welfare Services
Social Welfare Services defined under the Social Welfare Services Act (in-
cluding relevant rehabilitation and relief services defined under the Rehabili-

Ⅷ Consumption Tax
－ 154 － tation and Emergency Relief Act; excluding sales and leasing of assets or
provision of services by industrial training institutes).
l. Transfer of assets, etc., conducted by businesses similar to social welfare
services, such as meal delivery services for the elderly, etc.
m. Delivery of babies (including delivery not covered by medical insurance laws
under medical insurance laws)
n. Burial and crematory services
o. Transfer or lease of equipment with special properties, structures, or func-
tions for the physically handicapped
p. Educational services
Services effected as compensation for tuition, entrance fees, entrance ex-
amination fees, facility charges, and certification fees for schools defined under
Article 1 of the School Education Act, special schools under Article 82 ⑵ of
the same law, vocational schools under Article 83 of the same law (provided
that the course of study lasts more than a year), and other schools de- fined
under other laws specified in Articles 82 ⑵ and 83 ⑴ of the same law.
q. Transfers of textbooks defined in the School Education Act
r. Housing rent
Note: Transactions mentioned at above l, m, o, n, g, r, and in some parts of k
and p have been exempt from taxation since 1 October 1991.

5.
5.5. 5. Tax Exemption for Exports, etc.
In principle, consumption tax seeks to impose tax on goods and services in the
country where they are consumed (principle of taxation at consumption places).
Therefore, transfer of taxable assets that taxable business operators engage in
trades, similar to export trading and international transportation, is exempt from
consumption taxation.
In addition, according to international practice, transfer of taxable assets to
embassies and other diplomatic missions of foreign governments are exempt from
consumption tax taxation.
Tax exemptions are differentiated from non-taxable transactions in that the
consumption tax levied on purchases made for tax-exempt transactions is de-
ductible.
a. Tax exemption for exports
⑴ Scope of exemption
Export transactions qualifying for exemption are taxable asset transfers
effected within Japan and specified as follows:
⒜ Sales or leasing of assets effected as exports from Japan
This category applies exclusively to enterprises directly involved in

Ⅷ Consumption Tax
－ 155 － export transactions. It does not apply to enterprises subcontracted for
the processing of goods manufactured for export and those selling export
items to enterprises engaged in export transactions.
⒝ Sales and leasing of foreign cargoes
Foreign cargoes are those for which export licences have been ob-
tained and cargoes arriving from foreign countries (including marine
products collected or caught by foreign ships operating on the high seas)
for which import licences have not been obtained.
⒞ Transportation of passengers or cargoes, communications and mail
services conducted within Japan and internationally
International transportation, communications and mail services are
regarded as export transactions.
⒟ Repair work on ocean liners done at the request of ship operators or
leasers.
⒠ Sales or leasing of aircraft for the transportation of passengers or
cargoes exclusively between destinations within and outside Japan, or
between destinations outside Japan (aircraft operating in international
routes) for air transportation enterprises provided for in the Aviation Act.
⒡ Repair work on aircraft operating in international routes done at the
request of air transportation enterprises.
⒢ Sales or leasing of containers used for the transportation of cargoes
between destinations within and outside Japan or between destinations
outside Japan, to ship operators leaseship or air transporters (ship op-
eration business enterprises, etc.), or repair work on containers done at
the request of ship operation enterprises, etc.
⒣ Services to ship operation enterprises, etc., such as pilotage and other
assistance in the entry or landing and departure of ocean liners or aircraft
operating in international routes, or facilities for the entry or landing and
departure, anchorage or parking of ocean liners, etc., and other similar
services.
⒤ Services related to foreign cargoes such as stevedoring, transportation,
custody, tallying, surveying, and other similar services.
These services further include those related to cargoes kept in des-
ignated bonded areas, bonded warehouse, bonded exhibiting areas, and
bonded comprehensive areas for the purpose of export, and cargoes kept
in these places for which import licences have been obtained. Further-
more, “other similar services” related to foreign cargoes include, for
example, tallies on foreign cargoes, services related to harbor transpor-
tation customs clearance of imported cargoes, and fumigation of vegeta-
bles and fruits.

Ⅷ Consumption Tax
－ 156 － ⒥ Sales and leasing to nonresidents of mining rights, mine lease rights,
stone-quarrying rights, and other rights for the quarrying and excavation
of earth and rocks, industrial property rights (patent rights, utility model
patents, design rights, and trademark rights) or circuit laying and use
rights (including right to the use of these rights), copyrights (including
publishing rights, quasi-copyrights, and similar rights), production for-
mulas using special technology and others of a similar nature (knowhow),
franchise rights, fishery rights, or right of entry into fishing grounds.
⒦ In addition, the provision of services to nonresidents, except for:
⒜ Transportation or custody of assets situated in Japan;
⒝ Services related to food, drinking, and lodging in Japan; and
⒞ Services similar to ⒜ and ⒝ above and directly provided in Japan.
b. Tax exemption for sales of export goods at export goods sales facilities
Sales of goods (exports for daily life) by enterprises operating export goods
sales facilities for nonresidents, such as foreign travelers and U.S. military
personnel stationed in Japan, are exempt from consumption tax by fulfilling
certain procedures.
c. Tax exemption for sales of goods loaded on ocean liners, etc.
The tax exemption for export transactions in ⑴ above applies to the
loading of Japanese goods on ships or aircraft registered in foreign countries
(domestic registered ships, etc.) while the tax exemption for the loading of
goods for use aboard ships or aircraft applies to the receipt of delivery from
bonded areas of goods for use aboard ships or aircraft for loading in foreign-
registered ships, etc. For an equitable balance, the same exemption is afforded
to the loading of goods for use aboard Japanese ships or aircraft.
d. Tax exemption for sales of taxable assets to foreign embassies and other
diplomatic missions
Sales of taxable assets by enterprises designated by the Director General of
the National Tax Agency to foreign embassies, legations, consulates, or other
similar diplomatic missions or to foreign ambassadors, ministers, consuls, or
other similar diplomatic representatives are exempt from consumption tax,
provided that such sales have been effected with the embassies, etc., or the
ambassadors, etc., by presenting documents in prescribed form certifying that
the taxable assets in question are necessary for the performance of their
diplomatic, consulate, and other missions, with attached papers showing the
particulars of the purchases in prescribed form.
As part of the principle of reciprocity, however, this exemption shall be
restricted for embassies, or ambassadors, etc., representing countries that
restrict exemption from taxes similar in nature to consumption tax for Japa-
nese embassies, etc., in these countries, or Japanese ambassadors, etc., ac-

Ⅷ Consumption Tax
－ 157 － credited in these countries.
To qualify for this exemption, the designated enterprises are required to
keep papers presented by the embassies, etc., or the ambassadors, etc., in
good order and maintain their files at the place of tax payment or at their of-
fices that conducted the asset transfers in question for seven years after the
time limit for filing final tax returns.
With the exception of unavoidable circumstances, the embassies, or am-
bassadors, etc., may not use the assets in question for purposes other than
the performance of their missions for two years after the application of this tax
exemption.
e. Tax exemption for the sale of goods to shopping facilities operated by the
U.S. Navy.
Sales by enterprises to shopping facilities operated by the U.S. Navy or
PXes, of goods purchased by members or civilian employees of the U.S. armed
forces or their families (members of the U.S. armed forces) for the purpose of
export and that follow prescribed procedures are exempt from consumption tax.
The prescribed procedure mentioned above requires that U.S. armed forces
members, at the time of purchase, submit papers to the shopping facilities
(operated by the U.S. Navy or PX) with entries noting that the purchase in
question is for the purpose of export in exchange for delivery of the purchased
items.
The scope of goods eligible for this tax exemption is the same as that for
goods eligible for tax-exempt sales at export goods sales facilities in b. above.

6.
6.6. 6. Import Transactions
a. Taxable Foreign Cargoes
⑴ Transfers of cargoes without compensation
Foreign cargoes received from bonded areas are subject to taxation even
if their receipt involves no payment of compensation. In domestic transac-
tions, however, transfers of cargoes effected without compensation are not
subject to taxation. Imports are, in effect purchases for consumption in
Japan, and taxation on the receipt of cargoes without compensation is
necessary to keep the tax burden balanced between domestic and foreign
products.
⑵ Receipt of delivery from bonded areas
Cargoes such as mail received from bonded areas are regarded as having
been received from bonded areas and, as such, are subject to taxation.
⑶ Consumption or use inside bonded areas
Consumption or use of foreign cargoes inside bonded areas (designated

Ⅷ Consumption Tax
－ 158 － bonded areas, bonded storehouses, bonded factories, bonded exhibiting
areas, and comprehensive bonded areas) is also regarded as receipt of de-
livery from bonded areas and, as such, is subject to taxation. In cases where
foreign cargoes are consumed or used as raw materials for the manufacture
of taxable goods, such consumption or use is not subject to taxation.
In cases where goods are received from bonded areas for domestic
consumption or use instead of being re-exported to foreign countries, such
products are subject to taxation based on their delivery price at the time of
the import declaration.
Consumption or use of sample tests of foreign cargoes extracted by
customs officials under the Customs Act, or those taken into custody by
authorized officials of public agencies under the provisions of other relevant
laws and regulations are excluded from taxation.
b. Tax-Free Foreign Cargoes
Foreign cargoes excloded or exempt from taxation are: Securities, postage
stamps, revenue stamps, certificate stamps, and commodity stamps, certain
kinds of equipment for the physically handicapped, and certain kinds of text-
books are exempt from taxation;
c.
c.c. c. Tax-Exempt Foreign Cargoes
Excluded or exempt from taxation are accorded foreign cargoes such as:
⑴ Foreign cargoes amounting to less than ¥10,000 in total taxable value are,
in principle, exempt from taxation;
⑵ Ocean liners imported by enterprises engaged in ship operations are
exempt from taxation and;
⑶ Cargoes for use by diplomats are exempt from taxation.

8/3
8/38/3 8/3 Taxpayers

1.
1. 1. 1. General
Taxpayers are defined as enterprises and those who receive foreign goods from
bonded areas.
In other words, taxpayers in domestic transactions are limited to enterprises,
including individual proprietors. In contrast, consumers can become taxpayers
when they receive taxable cargoes from bonded areas.
Enterprises include individual proprietors and corporations. In this context,
however, organisations without juridical personality, such as unincorporated
associations and foundations with officers designated as representatives or ad-
ministrators, are regarded as corporations and, as such, are subject to the pro-
visions of the consumption tax. Small enterprises with taxable sales during the

Ⅷ Consumption Tax
－ 159 － base period of less than 10 million are exempt from tax liability on sales of
taxable assets during a tax period. However, this does not apply if there is no tax
base for the taxation period, and an exception is established for a corporation
whose capital is 10 million or more at the time of commencing its taxation pe-
riod. With regard to the level of the tax exemption system, taxable sales had
been set at 30 million since the introduction of consumption tax. However,
this exemption level was reduced to 10 million at the time of the revision in
2003, applicable to the taxation period beginning on April 1, 2004.

2.
2.2. 2. Base Period
a. Definition of “base period”
The “base period” is the period that determines the existence or absence of
tax liability. For individual proprietors, it is the calendar year two years before
the current tax year. For corporations with an accounting period of one year,
it is the period two years before the current accounting period.
b. Taxable sales during the base period
The taxable sales during the base period is the amount obtained by de-
ducting the total sum of refunded sale prices, not including tax, (amounts for
returned goods unsold, deductions, or rebates) from the total sum of prices
(not including the consumption tax) received as compensation for the transfer
of taxable assets effected within Japan during the base period.
In cases where a corporation’s base period is not one year, the taxable
sales during the base period is the amount obtained by prorating the balance
after deducting the total sum of refunded sales prices, not including tax, from
the total sum of prices received as compensation for the transfer, etc. of
taxable assets during the above-mentioned base period. The proration is made
by first dividing the above balance by the total number of months in the ac-
counting period included in the base period and multiplying the result by 12.
These calculations are to include sales in export transactions exempted
from the consumption tax and the amount returned from the compensation
received in export transactions.

3.
3.3. 3. Election of Non-Exemption from Tax Liability
Under consumption tax law, deductions of various kinds, including deductions
for amounts paid as a consumption tax on purchases are, as detailed later ap-
plicable only to taxpayers. Therefore, enterprises primarily engaged in export
transactions, with taxable sales amounting to less than 10 million for the base
period, can elect to forego tax liability exemption to qualify, as taxpayers, for
deduction or refund of the amount paid as consumption tax on their purchases.

Ⅷ Consumption Tax
－ 160 － 4.
4.4. 4. Special Rules in Cases of Inheritance, Corporate Mergers, and Corporate
Division, etc.
a. Inheritance
⑴ In cases where an inheritance takes place during the current year, and
the successor’s taxable sales amount to less than 10 million for the cor-
responding base period, if the business of the ancestor has total taxable
sales of 10 million or more for the said base period, there is no tax liability
exemption for the transfer of taxable assets by the successor during the
period from the day after the inheritance to 31 December of the same year.
⑵ In cases where the successor of an inheritance that took place two years
before the current year has taxable sales amounting to less than 10 million
for the base period corresponding to the current year and the total of these
taxable sales by the successor in question for said base period and the
taxable sales by the ancestor for the same base period exceed 10 million,
there is no tax liability exemption for the transfers, etc. of taxable assets by
the successor during the year.
In the case of an inheritance by two or more successors of business es-
tablishments operated by the ancestor at two or more places of business,
and where each place of business has been apportioned to one of the suc-
cessors, the taxable sales by the ancestor for the base period are to be
calculated as amounts generated at each succeeded place of business.
In cases where the inheritance of the ancestor’s business establishment
has taken place during the three years preceding the current year, tax li-
ability is determined by the total taxable sales by the ancestor in question
during the base period and the taxable sales by the successors during the
same base period.
b. Corporate mergers
⑴ Mergers
⒜ Determination of tax liability for the accounting period during which
mergers took place
In cases where mergers took place during the current accounting pe-
riod and the transferee corporations with taxable sales amounted to less
than 10 million for the base period corresponding to the current ac-
counting period succeeded to the business of the amalgamated corpora-
tions with taxable sales exceeding 10 million for the base period, there
shall be no tax liability exemption relating to the transfer, etc. of the
taxable asset during the period from the day of the said merger to the end
of the current accounting period.
⒝ Determination of tax liability in case where mergers took place after

Ⅷ Consumption Tax
－ 161 － the start of the base period
If mergers took place during the period from the second day of the base
period corresponding to the current accounting period to the day prior to
the current accounting period and if the sum of taxable sales by trans-
feree corporations for the base period and of taxable sales by the amal-
gamated corporations for the period corresponding to the said base pe-
riod exceed 10 million, there shall be no tax liability exemption during
the current accounting period (limited to cases where taxable sales for
the base period are lower than 10 million).
⑵ Incorporation by merger
⒜ Determination of tax liability for the accounting period during which an
incorporation by merger took place
In case where a corporation was established by merger and one of the
amalgamated corporations has taxable sales exceeding 10 million for the
base period corresponding to the accounting period in which the day of
the said merger fell, there shall be no liability exemption for transfer, etc.
of taxable assets by the corporation established by the merger during the
accounting period in which the day of the said merger fell.
⒝ Determination of tax liability in cases where incorporation by merger
took place after the start of the base period
If mergers took place during a period from the day two years before the
first day of the current accounting period to the day before the first day of
the current accounting period and if the sum of taxable sales by trans-
feree corporations during the said period and of taxable sales by amal-
gamated corporations for the period corresponding to the base period of
transferee corporations exceed 10 million, there shall be no tax liability
exemption for transfers of taxable assets by the transferee corporations
for the accounting period (limited to cases where taxable sales of trans-
feree corporations for base period lower 10 million).
c. Corporate divisions, etc.
⑴ Scope of divisions, etc.
The scope of divisions covers corporations established through invest-
ment in kind and so-called irregular investment in kind (postmortem in-
corporation) in addition to divisions under the Commercial Code (division
for incorporation, division for absorption). We define that “division” is a
reorganization form where a new corporation succeeds to the existing
business while “division for absorption” is a reorganization form where the
existing corporation succeeds to the business.
⒜ Divisions, etc.
1. Division for incorporation

Ⅷ Consumption Tax
－ 162 － Corporations stipulated in the Commercial Code or the Private
Limited Company Law
2. Incorporation in certain investment in kind
This is a corporation whose total of outstanding shares is owned by
the investing company or whose total of capital is subscribed by the
investing company.
3. Postmortem incorporation
When a corporation incorporates a new corporation with money
contributed to set up another corporation and when the founding
corporation transfers the assets of the corporation incorporated to a
third party after the incorporation based on a “postmortem incorpo-
ration” contract stipulated in the Commercial Code or the Private
Limited Company Law, the founded corporation that meets the re-
quirements stated below falls into postmortem incorporation.
a) The total of outstanding shares of or the total of capital of the
founded corporation is owned by the investing company (the equity
is wholly owned) at the time of incorporation
b) Transfer of the assets of the founded corporation is scheduled at
the time of incorporation and when the transfer is executed within
the six months after the incorporation
⒝ Division for absorption
Divisions stipulated in the Commercial Code or the Private Limited
Company Law
⑵ Method for concrete determination of tax liability
⒜ Case of divisions
1. Determination of tax liability of divided subsidiary corporations
(corporations formed through division)
a) Accounting period that includes the day of the division (first ac-
counting period)
When taxable sales of the parent corporation within the period
corresponding to the base period of the accounting period of a di-
vided and newly established subsidiary corporation (any of the par-
ent corporations if they are two or more) exceeds 10 million, there
shall be no tax liability exemption.
b) When a division takes place within the period one day before the
year prior to the start day of the accounting period until one day
prior to the start day of the accounting period (second accounting
period of one-year settlement corporation)
When taxable sales of the parent corporation (any one of the
parent corporations if the parent companies are two or more) for the

Ⅷ Consumption Tax
－ 163 － period corresponding to the base period of the accounting period of
the divided subsidiary company exceed 10 million, there shall be no
tax exemption.
c) When divisions took place before at least one year and two days
prior to the start day of the accounting period (not including the
case where there are two or more parent corporations) (third ac-
counting period or later of one-year settlement corporations)
If taxable sales of the corporation for the base period of the ac-
counting period is lower than 10 million and if the divided subsidiary
satisfies specific requirements at the last day of the base period
concerned with the accounting period and if the sum of taxable sales
of the subsidiary for the base period of the accounting period and of
taxable sales of the parent corporation exceeds 10 million, there
shall be no tax liability.
※The specific requirements are as follows:
The total of outstanding shares of a subsidiary or more than 50/100
of capital of a subsidiary is owned by the parent corporation and a
person who has special relationship with the parent corporation.
2. Determinaton of tax liability of a dividing parent corporation
(corporation who had divisions)
a) Accounting period that divisions took place and the following ac-
counting period
Tax liability shall be determined by taxable sales of the parent
corporation for the base period.
b) When divisions took place at least one year and two days prior to
the start day of the accounting period (third accounting period or
later of one-year settlement corporations after divisions)
If taxable sales of the parent corporation for the base period of the
accounting period is lower than 10 million and if the divided sub-
sidiary satisfies specific requirements at the last day of the base
period concerned of the accounting period and if the sum of taxable
sales of the parent corporation for the base period of the accounting
period and of taxable sales of the subsidiary for the period corre-
sponding to the base period exceeds 10 million, there shall be no
tax exemption.
⒝ Case of division for absorption
1. Determination of tax liability of a divided and succeeding corporation
(corporation that succeeds to the business of the divided corporation)
a) Accounting period within which a division took place for absorption
(accounting period that the division took place)

Ⅷ Consumption Tax
－ 164 － If taxable sales of a succeeding corporation for the base period of
the accounting period within which the division took place for ab-
sorption is lower than 10 million and if taxable sales of the divided
corporation (taxable sales of any one of the divided corporations if
they are two or more) for the period corresponding to the base pe-
riod exceed 10 million, there shall be no tax exemption.
b) When a division took place for absorption within the period from
one year and one day prior to the start day of the accounting period
until one day prior to the start day of the accounting period (ac-
counting period following the accounting period that the division
took place)
If taxable sales of the dividing corporation is lower than 10 mil-
lion for the base period of the accounting period and if taxable sales
of the divided corporation (taxable sales of any one of the divided
corporations if they are two or more) exceed 10 million, there shall
be no tax exemption.
c) When a division took place within the period of at least one year
and two days prior to the start day of the accounting period (third
accounting period or later of one-year settlement corporations)
Determination of tax liability depends on taxable sales of the di-
vided and succeeding corporation for the base period.
2. Determination of tax liability of the dividing corporation (corporation
that divided itself)
Determination of tax liability depends on the taxable sales of the
dividing corporation for the base period.

8/4
8/48/4 8/4 Place of Tax Payment

a. Place of tax payment for domestic transactions
⑴ Individual proprietors – ① if they have domiciles in Japan, the place of
payment is the location of the domicile; ② in cases where they have dwellings
instead of domiciles, the location of the dwellings; and ③ in cases where they
have neither domiciles nor dwellings but have ofifces in Japan, the location of
the office.
⑵ Corporations – ① for domestic corporations, the location of their main
office or principal place of business; and ② for foreign corporations with of-
fices in Japan, the location of the office.
b. Place of tax payment for import transactions
The place of payment for foreign cargoes received from bonded areas is the
location of the bonded area.

Ⅷ Consumption Tax
－ 165 － 8/5
8/58/5 8/5 Attribution of Asset Transfers, etc.

a. In asset transfers, etc. those who substantially enjoy compensation are re-
garded as entities who have effected asset transfers, etc.
b. In the case of assets belonging to trust properties, their transfers are regarded,
in principle, as having been effected by the beneficiaries.

8/6
8/68/6 8/6 Time of Asset Transfers, etc.

1.
1. 1. 1. General Rules
The realisation of tax liability for domestic transactions is at the time of
transfer of taxable assets, etc.
a. Time of inventory sales
Sales of inventory are regarded as having been effected on the day of de-
livery. The day of delivery is the day that an enterprise concerned has con-
sistently chosen for sales out of all days that can be reasonably regarded for
delivery, based on the type and quality of the inventory as well as the contents
of the sales agreement, such as the day of shipment; day of receipt upon in-
spection by the counterparty; the day on which the inventory sold becomes
available for beneficial use by the counterparty; and the day on which the
volume of sales has been confirmed by methods such as a meter check.
If forests or wilderness areas constitute the inventory and the day of de-
livery is not clear, delivery is regarded as having been made either on the day
on which payment of approximately more than 50 percent of the sales price has
been received or on the day on which an application has been submitted for
registration of the transfer of ownership, whichever is earlier.
b. Time of asset transfers by contract
The time of asset transfers by contract is, in principle, for a contract re-
quiring delivery of goods by the day on which all of the objects of the contract
have been completed and, when delivered to the counterparty for a contract
not requiring delivery of goods, the day on which contracted services have
been fully provided.
c. Time of transfer of fixed assets
The time of transfer of fixed assets is, in principle, the day of delivery. In
cases where the fixed assets consist of land, buildings, or other similar assets,
the time of their sale can be the day the sales agreement takes effect.
d. Time of asset transfers, etc. in return for rent payments as compensation
The time of asset transfers, etc. in return for the payment of rent as com-
pensation (excluding amounts received in advance) based on lease agreements

Ⅷ Consumption Tax
－ 166 － is the day on which rent comes due in accordance with the agreement or
business customs.

2.
2.2. 2. Exceptions for Time of Asset Transfers for Installment Sales
a.
a.a. a. Tax period during which installment sales took place
In cases where assets (inventory in the case of individual proprietors) have
been sold or transferred on a deferred payment basis, or where asset transfers
have been effected in construction work (including manufacture and excluding
long-term, large-scale construction work) or other supplies of services con-
tracted on a deferred payment basis and where the amount of compensation for
such sales or transfers are to be recognised by way of a deferred payment basis,
portions of such assets or the objects of such contracts for which installments
have not yet come due during the tax period that includes the day of such
sales (excluding amounts received during that tax period) are regarded as not
having been sold or transferred during that tax period and the amount of
compensation for the portions for which installments have not yet come due
may be deducted from the amount of compensation for such assets or the
object of the contract.
b. Tax periods after the tax period during which sales on a deferred payment
basis took place
During the next tax period and each subsequent tax period following the
period during which installment sales took place, asset transfers are regarded
as having taken place during the respective tax period corresponding to in-
stallments coming due (excluding amounts received as installments before the
first day of that tax period and including amounts coming due after the last day
but received during that tax period).

3.
3.3. 3. Exception for Time of Asset Transfers for Construction Work
a.
a.a. a. Long-term, large-scale construction work
In cases where asset transfers are effected based on long-term contracts for
construction work on a large-scale and where the amount of compensation is
calculated by the percentage of completion method, asset transfers for the
portions corresponding to compensation calculated in a tax period can be
treated as having been effected during that tax period.
b. Construction Work
In cases where asset transfers are effected on contracts for construction
work (excluding long-term, large-scale construction projects of great size)
and the amount of compensation for such transfers (excluding those showing
losses) are to be recognised by the percentage of completion method, assets

Ⅷ Consumption Tax
－ 167 － transferred for the portion corresponding to compensation calculated in a tax
period can be treated as having been effected during that tax period.
c. Tax period during which the delivery was made
In cases where construction work (including long-term, large-scale con-
struction work of great size) was completed and delivered, the amount of
compensation for the portion for asset transfers deemed effected before the
period during which the delivery was made may be deducted from the amount
of compensation for such asset transfers.

8/7
8/78/7 8/7 Tax Base and Tax Rate

1.
1. 1. 1. Tax Base
a. Tax base for domestic transactions
The tax base for domestic transactions is the amount of compensation for
the transfer, etc. of taxable assets, etc.
The amount of compensation for the transfer of taxable assets is the amount
of all money, goods other than money, rights, or other economic benefits re-
ceived or to be received as compensation for the transfer of taxable assets, not
including amounts equal to those paid as consumption tax and local con-
sumption tax.
In this context, the term “amounts to be received” does not, in principle,
mean the market value of the transferred assets, but rather such amounts that
have been agreed upon between the parties.
In addition, goods other than money, rights, or other economic benefits
include arrangements that substantially produce the same economic results as
the receipt of consideration for transfer of assets, such as the delivery of
goods other than money or rights, or the lending of money free of charge or at
rates lower than current market rates as essencially compensation for the
transfer of taxable assets, etc.
⑴ Amount of compensation for special forms of transfer of taxable assets,
etc.
⒜ Payment in substitute
The amount of compensation for asset transfers, etc. made as payment
in substitute is the amount equal to liabilities eliminated by the payment
in substitute.
⒝ Substantial gift
The amount of compensation for asset transfers, etc. made as sub-
stantial gift is the amount equal to the value of the accompanying liabili-
ties.

Ⅷ Consumption Tax
－ 168 － ⒞ Investment in kind
The amount of compensation for asset transfers, etc. made as invest-
ment in kind is the amount equal to the value of the shares (including
investment certificates) acquired in return for investment at the time of
acquisition.
⒟ Exchange
The amount of compensation for asset transfers, etc. made in the form
of exchange is the amount equal to the value of the assets acquired in
exchange at the time of acquisition.
In case where margins of exchange are paid and received, the receiving
party shall add amounts received as margin to the value of the assets
acquired by exchange, while the paying party shall deduct amounts paid
as margin from the value of the assets acquired by exchange.
⑵ Calculation of compensation amount
⒜ Division of the amount of compensation for co-mingled sales of taxable
and non-taxable assets
In cases where taxable assets and non-taxable assets have been sold
together for one price without respectively marking the amounts of their
compensation, the price must be divided into components in a reasonable
way. If no reasonable methed is available, the division is to be made in
proportion to the respective market values of the taxable and
non-taxable assets.
⒝ Money or other valuables received for the payment of stamp tax, etc.
In cases where money, etc. received by enterprises as compensation
for the transfer of taxable assets, etc. include amounts equal to the value
of stamp duties and other charges owed, in principle, by the enterprises
to the national government or local public bodies, such amounts for the
payment of stamp duties and other charges may not be deducted from the
amount of compensation for the transfer of taxable assets.
Meanwhile, registration and license tax, automobile tonnage tax,
automobile acquisition tax, other transaction taxes, and public charges
owed, in principle, by entities who receive transfers, etc. of taxable assets
shall not be included in the amounts of transfers of taxable assets for
compensation so far as that effect is clearly stated in bills, etc.
⒞ Treatment of specific indirect taxes
Amounts of compensation for the transfer of taxable assets, etc. should
include the liquor tax, tobacco tax, gasoline tax, and LPG tax, etc.
However, since the taxpayers for the light oil delivery tax, golf course
utilisation tax, and bathing tax are consumers, these taxes should not be
included in the amount of compensation in cases where such amounts are

Ⅷ Consumption Tax
－ 169 － clearly marked.
⒟ Treatment of returned unsold goods and discounts, etc.
In cases where returned unsold goods, discounts, or rebates take place
in connection with the transfer of taxable assets, etc. exclusion of the
amount of returned or unsold goods, discounts, or rebates from the sales
figures and recognition of the balance as the amount of compensation is
permitted on condition of consistent application of the same principle.
⒠ Value of self-consumption
In cases where individual proprietors use their assets for selfcon-
sumption or corporations transfer their assets to their directors as gifts,
or at extraordinarily low prices, the amount of compensation is deter-
mined on the basis of the market value of the assets so used or trans-
ferred.
However, in cases where individual proprietors use their inventories for
self-consumption or corporations transfer their inventories to their di-
rectors as gifts and they declare in their final tax returns amounts larger
than the compensation actually paid for the taxable purchases of such
inventories as the amounts of compensation for assets used for selfcon-
sumption, and larger than approximately 50 percent of the normal sales
price of those inventories the declared amounts are acceptable.
b. Tax base of consumption tax for import transactions
The tax base for import transactions is the delivery price (including customs
duties and other selective consumption taxes) of imported goods.

2.
2.2. 2. Tax Rate
The current tax rate is 4% (a1% Local Consumption Tax, a local tax, was also
introduced with the current rate for a total of 5%).
The tax rate was raised from 3% on 1 April 1997.

8/8
8/88/8 8/8 Tax Credit for Consumption Tax on Purchases, etc.

1.
1. 1. 1. Tax Credit for Consumption Tax on Purchases
Concerning taxable purchases made by enterprises in their country or taxable
cargoes received from bonded areas, the consumption tax arising on taxable
purchases in the said taxable period and the consumption tax imposed or to be
imposed on taxable cargoes that are received from bonded areas may be de-
ducted from the consumption tax to the taxation standard value (amount of
consumption tax on sales) for the taxable period that include the days when the
said taxable purchases are made or the days when the deliveries of taxable

Ⅷ Consumption Tax
－ 170 － cargoes from bonded areas are received (which include the period of the days
when the special returns are filed for the said taxable cargoes)
a. Qualifying enterprises
⑴ This deduction is only afforded to enterprises with tax liability and not to
those exempt from payment.
⑵ This deduction is applicable to the period which includes the days of
taxable purchases or receipts for deliveries of taxable cargoes from bonded
areas in Japan (in case special returns are filed for taxable cargoes, the
period that includes the days when the special returns concerned are filed)
b. Definition of taxable purchases
Taxable purchases means receipt of transfers or the borrowing of assets
from other entities or receipt of services provided by other entities, each made
as a business activity by business enterprises. Provision of services made in
return for the payment of salaries and transfers of non-taxable assets and
tax-exempt transfers of assets do not fall under this definition.
Taxable purchases also include, however, purchases by enterprises of tax-
able assets from tax-exempt enterprises or consumers.
c. Purchases excluded from taxable purchases
Taxable purchases are those made for business purposes. Therefore, those
made by individual proprietors for self-consumption do not fall under this
category.
Since the provision of services in return for the payment of salaries is not
included in this category, directors’ compensation, personnel expenses, la-
bour costs, and retirement deductions are not taxable purchases. However,
business trip expenses, hotel charges, and other daily deductions that are
considered necessary for such trips under normal circumstances, as well as
commuting deductions to pay for transportation, all of which are considered
necessary for such trips under normal circumstances, are treated as com-
pensation paid in conjunction with taxable purchases.
Furthermore, purchases involving transfers of non-taxable assets or taxable
assets accorded tax exemption, etc. are not taxable purchases. Therefore,
interest paid, ground rent paid, employees’ overseas business trip expenses,
and international telephone charges do not represent compensation paid in
conjunction with taxable purchases.
In addition, since transactions that do not fall under “asset transfers” are,
by definition, not included in this category, dividends paid and proceeds from
insurance paid are not taxable purchases. Tax credit is only allowed for taxable
purchases made in Japan, taxable purchases made outside Japan are not in-
cluded in this category.
Similarly, of cargoes received from bonded areas, tax credit is not allowed

Ⅷ Consumption Tax
－ 171 － for those afforded tax exemption under other laws or treaties.
d. Calculation of the tax credit amount
⑴ Calculation of the tax credit amount
In principle, the entire amount of consumption tax paid on taxable pur-
chases is deductible. However, in order to limit the deduction accorded to
purchases involving non-taxable transactions, if the amount of non-taxable
sales exceeds 5 percent of total sales during a tax period, the amount de-
ductible as a tax credit on taxable purchases can be calculated either by the
itemised method or the proportional method.
Enterprises have the option of choosing either method. In cases where
the proportional method is selected, however, it must be used for at least
two years.
⒜ Itemised method
The amount of tax on taxable purchases during a tax period is divided
into tax attributable to taxable sales, etc. tax attributable to the sale of
other assets, etc. and tax common to both taxable and other sales. The
deductible amount of tax is equal to the sum of ① taxes attributable to
taxable sales only and ②taxes common to both taxable and other sales
multiplied by the proportion of taxable sales to total sales.
However, the amount of tax common to both taxable and other sales
can be allocated between the two by using the predetermined proportion
(based on the number of employees, floor space, and similar considera-
tions) approved in advance by directors of the tax offices in lieu of the
actual proportion of taxable sales to total sales.
Note:
Proportion of taxable sales =Amount of compensation for
taxable assets sold in the country
Total amount of compensation
for assets sold in the country

“Tax attributable only to taxable sales” in ⒜ above includes, for
example, taxable assets sold to third parties without any processing,
costs of raw materials, containers, wrapping papers, machinery and
equipment, machine tools, other tools, fixtures consumed or used only for
the manufacture of taxable assets, and other costs relative to taxable
assets such as warehouse charges, freight, advertising expenses, and
processing fees. In cases where trial articles and testing products are
distributed to customers and other entities concerned as a sales promo-
tion for taxable assets, the amount of tax on taxable purchases of such
trial articles and testing products is treated as tax attributable only to the
transfer, etc. of taxable assets. Moreover tax attributable only to the

Ⅷ Consumption Tax
－ 172 － transfer, etc. of taxable assets and that qualify for export exemption are
included in this category.
In addition, amounts of compensation for the transfer of non-taxable
assets made within Japan that constitute export transactions (including
interest on loans to nonresidents and foreign bonds) are treated as the
amount of compensation for export transactions. And exports of assets
for sale outside Japan or self-consumption or use in foreign countries are
treated as export transactions.
Note: This treatment does not apply to the export of loans and securities
as principal.
“Tax attributable only to the transfer, etc. of other assets” includes,
for example, costs for the development of land for sale and purchases of
medicine, etc. necessary for medical tests and treatment made under the
provisions of the Health Insurance Act.
⒝ Proportional method
The amount of deduction is calculated by multiplying the amount of tax
on taxable purchases, etc. by the percentage of taxable sales to total
sales.
⑵ Calculation method for the percentage of taxable sales
Percentage of taxable sales means the weight of the amount of compen-
sation for taxable assets sold within Japan during a tax period in respect to
the total amount of compensation for assets transferred within Japan during
the tax period.
In the above definition, both the total amount of compensation for assets
sold and the total amount of compensation for taxable assets sold do not
include the amount of consumption tax. These figures also show the net
after deducting the amount of refunded sales prices (due to returned goods
unsold, discounts, and rebates). This definition naturally includes amounts
of compensation in export transactions but excludes amounts of compen-
sation in foreign transactions.
In calculating the percentage of taxable sales, the amount of compensa-
tion for transfer of assets, etc. and the amount for transfer of taxable assets,
etc. are to include:
① Amount of compensation for the sales of non-taxable assets made
within Japan constituting export transactions (including interest on loans
to nonresidents and foreign bonds) and;
② The value of assets (FOB price) exported for sale and selfconsumption
or use outside Japan.
e. Qualifications
To qualify for tax credit on purchases, it is necessary to keep both books

Ⅷ Consumption Tax
－ 173 － and documents as follows for seven years at the place of tax payment or the
taxpayers’ office:
⑴ Books that record the particulars of taxable purchases and prices and;
⑵ Statements of delivery, bills, etc., or papers issued by customs superin-
tendents that show the particulars of taxable purchases and prices.

2.
2.2. 2. Adjustment of Tax Deductions on Purchases
a.
a.a. a. Adjustment of deduction for refunds of compensation for purchases
⑴ Adjustment for refunds of compensation for purchases
In cases where, in conjunction with taxable purchases made within Japan,
enterprises receive partial or total return of the compensation paid for such
purchases, or have their accounts payable or other liabilities for compen-
sation reduced by returning purchased goods unsold, received discounts, or
rebates (refund of purchase prices, etc.), adjustment must be made in the
amount of tax on purchases used as the basis for calculation of the deduc-
tion for the consumption tax on purchases for a tax period, which includes
the day of the refund of purchase prices, etc.
⑵ Methods of adjustment
In the case of return of compensation for purchases, etc., the amount of
consumption tax on the amounts received as a refund of the purchase price
during the tax period (an amount equivalent to 4/105 of the amount re-
ceived as a refund of the purchase prices), is deducted from the amount of
tax on taxable purchases during the tax period. The methods of calculation
are as follows:
⒜ In cases where the percentage of taxable sales is 95% or more:
The amount of consumption tax on the amounts received as a refund of
purchase prices during the tax period is deducted from the total amount
of taxes on the taxable purchases.
⒝ In cases where the percentage of taxable sales is less than 95% and the
amount of deduction for consumption tax on purchases is calculated by
the itemised method:
① The amount of consumption tax on the amounts received as a refund
of the purchase price during a tax period in conjunction with taxable
purchases required only for transfers of taxable assets is deducted from
the total amount of taxes on taxable purchases required only for
transfers of taxable assets during the tax period.
② The amount calculated by multiplying the total amount of the con-
sumption tax on the amounts received as a refund of the purchase price
during a tax period in conjunction with taxable purchases required only

Ⅷ Consumption Tax
－ 174 － for the transfer, etc. of both taxable and other assets by the per-
centage of taxable sales, is deducted from the amount calculated by
multiplying the total amount of tax on taxable purchases required for
the transfer of both taxable and other assets by the percentage of
taxable sales (including percentages similar in nature to the percentage
of taxable sales).
⒞ In cases where the percentage of taxable sales is less than 95% and the
amount of deduction for the consumption tax is calculated by the pro-
portional method:
Amounts calculated by multiplying the amount of consumption tax on
amounts received as return of compensation during a tax period by the
percentage of taxable sales are deducted from amounts calculated by
multiplying the total amount of taxes on taxable purchases during the tax
period by the percentage of taxable sales.
b. Adjustment of deduction for the consumption tax on purchases in other
circumstances
⑴ In the case of fixed assets subject to adjustment, the deduction for con-
sumption tax on purchases is adjusted in the following circumstances:
⒜ When calculation of the deduction for consumption tax on purchases by
the proportional method has resulted in a material change in the per-
centage of taxable sales and;
⒝ When the use of fixed assets subject to adjustment has been changed
from exclusive use for non-taxable business to exclusive use for taxable
business, or vice versa.
⑵ With respect to the amount of tax on taxable purchases of inventories,
adjustment is made in the following circumstances:
⒜ When a tax-exempt enterprise has become a taxable enterprise and;
⒝ When a taxable enterprise has become a non-taxable enterprise.

3.
3.3. 3. Simplified System
Taking the administrative burden of small and medium-sized enterprises into
account, a simplified tax system has been designed to help them easily calculate
deductable tax on purchases based on the amount of consumption tax on sales.
Through a revision in 2003, the upper limit to the application was reduced
from taxable sales of 200 million to 50 million, to be effective from the taxation
period beginning on April 1, 2004 onward.
a. Simplified tax system
Enterprises whose taxable sales during the base period are less than 50
million, can choose to regard the amount calculated by multiplying their taxes

Ⅷ Consumption Tax
－ 175 － on purchases by the deemed rate of purchases defined according to their type
of business of their taxes on sales (less the amount of taxes on refunded sales)
as tax on taxable purchases. Once this simplified tax system is chosen, it
cannot be changed for two years.
b. Applicable tax period
This simplified tax system is applicable for the tax period following the pe-
riod when notification is submitted and in each tax period thereafter with
taxable sales amounting to less than 50 million for the corresponding base
period.
Although advance notification is required, notification submitted during
the tax periods below makes this system applicable from that tax period:
⑴ Tax period during which the enterprise concerned started its business in
Japan;
⑵ Tax period during which the enterprise concerned inherited the business
of an ancestor who also used this system;
⑶ Tax period during which the enterprise concerned merged with the
business of an amalgamated corporation which also used this system and;
⑷ Tax period during which the enterprise concerned divided for absorption
with the business of a divided corporation which also used this system.
With respect to the determination of taxable sales of a subsidiary formed
through divisions or of the dividing parent corporation for the base period,
taxable sales of the parent corporation or of the subsidiary for the base
period are taken into accounts. However, taxable sales of a merger corpo-
ration or of a divided and succeeding corporation, or of a dividing corpora-
tion are determined based on their taxable sales for the base period.
c. Deemed rates of purchases
･Type 1 businesses: 90%
Type 1 businesses corresponding to wholesalers
･Type 2 businesses: 80%
Type 2 businesses corresponding to retailers
･Type 3 businesses: 70%
Type 3 businesses corresponding to those listed below.
･Agriculture ･Construction
･Forestry ･Manufacturing (including manufacturing retailers)
･Fishery ･Electricity, gas, heat, or water supply
･Mining
･Type 4 businesses: 60%
･Type 5 businesses: 50%
Type 5 businesses corresponding to those listed below.
･Real estate

Ⅷ Consumption Tax
－ 176 － ･Transport and communication
･Service industry (except restaurants)
Type 4 businesses corresponding to those other than Type 1, 2, 3, or 5.
The rates should be applied to all sales of an enterprise.
d. Relationship to other deductions
This system provides an exception for calculating the consumption tax
deduction on purchases. Therefore, other schemes of deduction (such as the
deduction for the consumption tax on the amounts of refunded sales, the de-
duction for the consumption tax on losses from bad debts) are applicable as
separately determined.
During the tax period in which this system is applicable, no adjustment is to
be made on the consumption tax deduction amount on purchases of fixed as-
sets subject to adjustment and the deduction for the consumption tax on in-
ventories in conjunction with the shift of status from non-taxable business
enterprises to taxable business enterprises.

8/9
8/98/9 8/9 Other Deductions

1.
1. 1. 1. Tax Deduction for Refunds of Sale Prices
This deduction is conditional on the maintenance of books or other documents
recording the particulars of refunds of sale prices.
In cases where prices of taxable sales are refunded due to the return of goods
unsold, discounts, or rebates, the refund of sale prices can be deducted from the
amount of consumption tax for the tax period during which such refunds are
made.

2.
2.2. 2. Tax Deduction for Losses from Bad Debts
When, due to circumstances in accounts receivable and other claims on the
buyers, all or part of the compensation for transfers of taxable assets including
tax have become unrecoverable, the amount of consumption tax included in the
unrecoverable amounts of sales are deductible from the amount of consumption
tax during the tax period in which the bad debt takes place.
The application of this deduction is conditional on the maintaining of sup-
porting documents.

Ⅷ Consumption Tax
－ 177 － 8/10
8/10 8/10 8/10 Self Assessment and Payment

1.
1. 1. 1. Domestic Transactions
a. Tax period
⑴ General
Tax period is the time frame for which payable amounts of the consump-
tion tax are calculated. Taking into account the taxpayer’s burden for tax
collection and returns, the tax period is the calendar year for individual
proprietors and the accounting period for corporations.
An arrangement has also been made to shorten the tax period, taking into
account the interest payment burden from the payment of the consumption
tax on purchases by enterprises primarily engaged in export transactions or
those who are regular recipients of consumption tax refunds.
⑵ Shorter tax periods
When taxpayers so elect, each of the quarters from January to March,
April to June, July to September, and October to December becomes the
tax period for individual proprietors, while each of the quarters starting from
the first month of an accounting period becomes the tax period for corpo-
rations.
b. Final return and payment of taxes
Enterprises must file their final return and pay taxes (with the local con-
sumption tax) due within two months of the day following the last day of the tax
period. In addition, individual proprietors must file their final return and pay
taxes by the end of March of the following year.
c. Interim tax declaration and payment
Businesses (excluding those which selected the period of tax payment as
stated in the above a ⑵) shall submit their interim tax declaration and pay the
tax as indicated in the items stated below unless the annual tax amount paid in
the last period for tax payment is less than 480,000.
① In the case of a business which paid more than 480,000 and 4 million or
less as the annual tax amount during the last period for tax payment:
An interim declaration shall be submitted within two months from the day
following the end of the period of six months from the day of commencement
of the period for tax payment, and the tax in the amount of half as much as
the annual tax amount shall be paid as decided by the end of the relevant
period.
② In the case of a business which paid more than 4 million and less than
48 million:
An interim declaration shall be submitted within two months from the date

Ⅷ Consumption Tax
－ 178 － following the end of each three-month period from the day of commence-
ment of the last period for tax payment, and the tax shall be paid in the
amount of a quarter as much as the annual tax amount as decided by the end
of the relevant period.
③ In the case of a business which paid more than 48 million as the annual
tax amount during the last period for tax payment:
An interim declaration shall be submitted within two months from the day
following the end of the period of one month from the day of commencement
of the period for tax payment (for a month from the day of commencement of
the period for tax payment, after passage of two months from the date of
commencement of the period for tax payment) and the tax shall be paid in
the amount of a twelfth as much as the annual tax amount as decided by the
end of the relevant period.
d. Attachment of certain details to a final return, etc.
Taxpayers are obliged to attach the details of the prices of assets trans-
ferred in the tax period, etc., and of the tax amount of taxable purchases, etc.,
in the tax period to a final return, an interim return, or a return of claim for a
refund.

2.
2.2. 2. Import Transactions
a.
a.a. a. General
① Self-assessment system
In the case of goods subject to the self-assessment system under customs
law, business enterprises must file tax returns and pay (with the local con-
sumption tax) taxes to the Director of Customs Offices at the time of re-
ceipt of taxable goods from bonded areas.
However, when a business enterprise files a special return on tariff with
the Custom-House, the enterprise shall pay the taxes to the Cus-
tom-House by the end of the following month of the day that the enterprise
files a return and takes goods out of the bonded area.
② Official assessment system
In the case of goods subject to the official assessment system, business
enterprises must file assessment case returns to the Director of Customs
Offices and the director must collect the consumption tax (with the local
consumption tax).
b. Deferment of payment (in the case of ①)
① Deferment on a one-time basis
Payment can be deferred for a period up to three months each time the
goods are delivered if collateral is offered.

Ⅷ Consumption Tax
－ 179 － ② Deferment on a one-month basis
Payment of tax for a specific month can be deferred for a period up to
three months from the end of that month if collateral is offered.
③ Deferment of special returns
When a guarantee is submitted to the Custom-House, payment can be
deferred up to two months from the end of the month when the enterprise is
supposed to take goods out of the bonded area.

8/11
8/11 8/11 8/11 Special Provisions Concerning Government and Entities

1.
1. 1. 1. Special Provisions Concerning National and Local Governments
a. Unit of calculation
The national government and local public bodies are regarded as one cor-
poration for each of their general accounts and special accounts.
b. Time of asset transfers, etc.
Asset transfers, etc. and taxable purchases by the national government or
local public bodies can be regarded as being made on the last day of the ac-
counting year during which receipt or payment of compensation is made.

2.
2.2. 2. Special Provisions Concerning Deductions on Purchases
With respect to the national government, local public bodies, corporations
listed in Schedule3 of the Corporation Tax Law, and public organisations and
associations without juridical personality, the amount of tax on purchases cor-
responding to specific revenue (such as taxes, subsidies, and donations) is ex-
cluded from deduction.
With respect to the general accounts of the national government and local
public bodies, the amount of consumption tax on sales and the aggregate amount
of various deductions are regarded as identical and the bodies are therefore
exempt from filing tax returns.

3.
3.3. 3. Special Provisions Concerning Due Date for Tax Returns
With respect to the national government and local public bodies, exceptions
are provided concerning the due date for tax returns.
The due dates are the following months after the settlement of the accounting
period:
National government 5 months
Local government 6 months
Local public corporation 3 months

Ⅷ Consumption Tax
－ 180 － 8/12
8/12 8/12 8/12 Obligation to Show Net Price

When a taxable business in order to transfer a taxable asset to a consumer
indicates the price of the asset in advance by means of a tag or advertisement,
the undertaker shall indicate the total amount paid including the relevant
consumption tax and local consumption tax. This provision initially established
in the revision of FY 2003 will be applicable from April 1, 2004 onward.

(reference) Local Consumption Tax
a. General
The Local Consumption Tax (Prefectural Tax) was established on, 1 April
1997 to replace the Consumption Transfer Tax in order to build strong fi-
nances or local finances to promote decentralisation and to enhance local
welfare.
b. Taxpayer
The business and the person to receive foreign cargoes from the bonded
area (consumption tax payer)
c. Tax Base
⑴ As for domestic transactions, the tax base is the amount of the Con-
sumption Tax.
⑵ As for import transaction, the tax base is the amount of the Consumption
Tax levied on the receipt of taxable cargoes from bonded areas.
d. Tax Rate
The tax rate is 25% of the amount of consumption tax (equivalent to a
consumption tax rate of 1%)
e. The assessment and Payment
⑴ The enterprises that are required to file a final return must file a final
return with that of Consumption Tax and pay the declared Local Con-
sumption Tax amount with the Consumption Tax amount by the deadline for
declaration of Consumption Tax.
⑵ Those who receive taxable cargoes from bonded areas must file a fixed
return with that of Consumption Tax to the Director-General of Customs
and pay the declared Local Consumption Tax amount with the Consumption
Tax amount.
[Note 1] The enterprises declare and pay Local Consumption Tax with the
same return and receive a tax payment slip including the Consumption
Tax.
[Note 2] While Local Consumption Tax is a Prefectural Tax, the State is
executing this tax with Consumption Tax for the time being considering
the burden of taxpayers, etc.