When a foreign company supplies tele-services to Japanese residents or companies, the transaction will be subject to VAT, even if the services are supplied outside Japan. The tax consequences of the transaction will depend on the following scenarios:
B2C — The foreign company will be responsible for charging the VAT to the consumer and paying it over to the Japanese tax office.
B2B — The Japanese company receiving the services may be required to collect the VAT from the foreign company and pay it over to the Japanese tax office under the reverse charge mechanism.
Prior to the enactment of the new rule, services supplied in Japan were subject to VAT whereas those supplied outside Japan were not. Although this will continue to be the case after the new rule, certain IT services are now subject to an exceptional rule.
In the case of “tele-services”, where they are supplied outside Japan, they are now subject to VAT if they are received by a Japanese resident or company.
As for the definition of “tele-services”, the guidelines issued by the Japanese tax office provide as follows:
I. “Tele-services” include transactions such as the following:
(1) The distribution of digital books, music, images and software (including various applications such as games) via the Internet.
(2) Services that enable customers to use cloud-based software and databases on their own.
(3) The distribution of advertisements via the Internet.
(4) Services that enable customers to use shopping sites and auction sites on the Internet.
(5) Services that provide places to sell game software, etc. on the Internet.
(6) Hotel reservation sites and restaurant reservation sites on the Internet (where an overseas operator collects service fees from hotel and restaurant companies).
(7) Foreign language lessons via the Internet.
II. “Tele-services” do NOT include transactions where Internet delivery services (or actions performed over the telecommunications line) are supplied on a basis incidental to the sale of something else or where other services such as the following are supplied:
(1) Software development.
(2) Management and investment advice relating to assets located outside Japan (including net banking).
(3) Information gathering and the related analysis provided by an overseas business operator.
(4) Legal services such as litigation services supplied outside Japan by an overseas legal professional.
This will require foreign companies to file tax returns and pay taxes in B2C transactions, effectively requiring them to charge VAT to consumers (which has the effect of placing domestic and foreign companies on a level playing field when it comes to sales prices).
This should not affect PE status, as foreign companies can retain firms such as Taxand Japan to handle the necessary tax compliance procedure to avoid the presence of a PE.
Foreign companies that conduct B2C transactions subject to VAT should conduct the appropriate tax compliance review to avoid any reputational risk that could arise.