For exports, consumption tax isexempted.This is different from a non-taxable transaction.It is an export exemption.That distinction determines whether input tax credits are available.

Provision

Article 7(1) of the Consumption Tax Act, titled “Export Exemption and Related Matters.”

A business operator,excluding one exempt from the obligation to pay consumption tax under the main text of Article 9(1), that makes in Japantaxable transfers of assets or similar transactionsfalling within any of the following categories,is exempt from consumption tax on those transactions.。

(i)Exports from Japan:transfers or leases of assets as exports

(ii)Foreign cargo:transfers or leases thereof (...)

(iii)Transport or communications of passengers or cargo extending between Japan and areas outside Japan

(iv) Ships or aircraft used exclusively for the transport specified in the preceding item:transfers, leases, or repairs of those ships or aircraftthose specified by a Cabinet Order

(v)Transactions prescribed by Cabinet Order as similar to the transfers of assets and similar transactions in the preceding items

There are two limits at the outset.

• Exempt business operators cannot use this provision.The parenthesis excludes businesses exempt under the main text of Article 9(1).
• The transaction must be domestic.The wording is “among taxable transfers of assets and similar transactions made in Japan.” An overseas transaction is outside the scope of tax in the first place, so export exemption does not arise.

No application without proof

Paragraph (2) of the same Article.

The preceding paragraph does not apply unless the taxable transfer of assets or similar transaction is proven to fall within a category listed in that paragraph,as prescribed by Ministry of Finance Order.。

Retention of documents such as export permit notices is required.“Actually exported, therefore exempt” is not enough. Without proof, the exemption does not apply.

Much practical work concerns the catch-all in item (v)

Article 17(2) of the Order for Enforcement of the Consumption Tax Act specifies the transactions prescribed by Cabinet Order under item (v).There are seven items.

Item (vii) is used most often.The exclusions in (a), (b), and (c) are crucial.

(a) Transport or storage of assets located in Japan

(b) Food, drink, or lodging in Japan

(c) Services similar to (a) and (b),the benefits of which are directly enjoyed in Japan

Not every service to a nonresident is exempt.Services whose benefits are directly enjoyed in Japan are excluded.Because (c) is a catch-all, even services not expressly listed in (a) or (b) are ineligible if their benefits are directly enjoyed in Japan.

Research or consulting commissioned by a foreign company may qualify under item (vii), but training received in Japan by employees of that company's Japanese branch may fall under exclusion (c).

Difference from non-taxable transactions

A non-taxable transaction is not outside the scope of taxation.It falls within Article 4(1), but Article 6(1) provides that consumption tax is not imposed. What falls outside the scope of taxation isOutside the scope of taxan out-of-scope transaction, such as an overseas transaction. Article 2(1)(ix) defines taxable transfers astaxable transfers of assets or similar transactionstransfers of assets and similar transactions other than those on which consumption tax is not imposed under Article 6(1).Those other transactions are taxable transfers.This also shows that non-taxable transactions remain within the category of transfers of assets and similar transactions.

Why do input tax credits remain available for export-exempt transactions?The answer does not come from Article 30(1) alone.There are three stages.

1. Article 7 merely says “consumption tax is exempted.”The transaction remains a taxable transfer of assets or similar transaction under Article 2(1)(ix).

2. Article 30(6)defines the taxable sales ratio with a numerator consisting oftaxable transfers of assets or similar transactions“total consideration for taxable transfers of assets and similar transactions.” Export-exempt sales are included.It enters the numerator.

3. Article 30(2)(i)uses the individual allocation method, under which purchases“required solely for taxable transfers of assets and similar transactions”qualify for a full credit.

Non-taxable sales are not in the numerator.That is the dividing line.

However, “non-taxable means no credit” is also too absolute.Article 30(2) restricts credits only where, in the tax period,taxable sales exceed ¥500 million, or……the taxable sales ratio is below ninety-five percent.Only those cases are subject to the restriction.If taxable sales are ¥500 million or less and the taxable sales ratio is at least 95%, Article 30(1) allows a full credit.It is.

Article 31 contains two separate systems

Its title is “Special Provisions for Input Consumption Tax Credits on Exports of Non-Taxable Assets and Similar Transactions.”Paragraphs (1) and (2) address different matters.

Paragraph (1): exports of non-taxable assets.

Where a business operator makes in Japantransfers of assets or similar transactions on which consumption tax is not imposed under Article 6(1),and those transactionsfall within the transfers and similar transactions listed in Article 7(1),and the requiredproof is provided,thenthey are deemed export transactions and similar transactions involving taxable transfers of assets and similar transactions,and the preceding Article applies.

Even non-taxable assets can qualify for credits if the transaction is an export transaction or similar transaction.This is a deeming provision.

Paragraph (2): deemed exports.“Where a business operatorexports assets for transfers or similar transactions outside Japan or for its own use,”the transaction is deemed an export transaction or similar transaction, subject to proof.It is not limited to non-taxable assets.An example is sending machinery for use at an overseas branch.

Article 17 of the Order for Enforcement of the Consumption Tax ActParagraph (3)also provides a separate deeming rule for loans and similar transactions with a nonresident debtor,for purposes of Article 31(1),treating them as transactions prescribed by Cabinet Order under Article 7(1)(v).

Points that require care in practice

• Is consulting for a nonresident exempt?Check whether it falls within exclusions (a), (b), or (c) of Article 17(2)(vii) of the Order.
• What about sales to foreign tourists in Japan?Those fall under a separate system,Article 8 of the Consumption Tax Act, Exemption for Transfers of Export Goods at Export Goods Sales Outlets.This article addresses Article 7.
• What proof should be retained?Article 7(2) requires proof in the manner prescribed by Ministry of Finance Order.
• What if an exempt business operator exports?The parenthesis in the opening text of Article 7(1) excludes it from application entirely.
• What about transactions completed entirely abroad?They are outside the scope of tax, rather than export-exempt. Input credit treatment differs.
• We sent equipment to an overseas branch.Consider the deeming rule in Article 31(2).

Stopping at “exports are not subject to consumption tax” can mean missing a refund.Export-exempt transactions permit credits, non-taxable transactions do not, and overseas transactions are outside the scope of tax. Distinguishing these categories transaction by transaction is the practical task. Companies exporting or providing services to nonresidents can consult us on designing the classifications.

Legal basis

• Article 7(1) and (2) of the Consumption Tax Act (Export Exemption and Related Matters)
• Article 17(2), each item, of the Order for Enforcement of the Consumption Tax Act (Scope of Export Exemptions and Related Matters)
• Article 6(1) of the Consumption Tax Act (Non-Taxable Transactions)
• Article 31(1) and (2) of the Consumption Tax Act (Special Provisions for Input Consumption Tax Credits on Exports of Non-Taxable Assets and Similar Transactions)
• Article 9(1) of the Consumption Tax Act (Exemption from Tax Payment Obligations for Small Businesses)
• Article 30(1), (2), and (6) of the Consumption Tax Act (Input Consumption Tax Credits)
• Article 2(1)(ix) of the Consumption Tax Act (Taxable Transfers of Assets and Similar Transactions), and Article 4(1) (Scope of Taxation)
• Article 8 of the Consumption Tax Act, Exemption for Transfers of Export Goods at Export Goods Sales Outlets.
• Article 6(1)(iv) through (viii) of the Order for Enforcement of the Consumption Tax Act (Location of Intangible Property Rights), and Article 17(3)

This article does not cover requirements for export goods sales outlets under Article 8 or the proof documents prescribed by Ministry of Finance Order. Individual determinations require review of transaction details and documents.