Consumption tax is generallypaid by the seller.The reverse charge method reverses this andplaces the tax payment obligation on the buyer.That is the mechanism.

The statutory rule in one sentence

Article 5(1) of the Consumption Tax Act, titled “Persons Liable for Tax.”

A business operator,A business operator, for transactions made in Japan,taxable transfers of assets or similar transactions（excluding specified transfers of assets and similar transactions,andspecified taxable purchases,（meaning taxable purchases that qualify as specified purchases,shall, under this Act,be liable to pay consumption tax.。

There are two components.

1. Remove “specified transfers of assets and similar transactions” from taxable transfers. The seller does not pay.

2. Add “specified taxable purchases” to transactions giving rise to a tax payment obligation. The buyer pays.

This substitution is the reverse charge.

What is covered? Specified transfers of assets and similar transactions

Article 2(1)(viii-2) of the Consumption Tax Act.

Specified transfers of assets and similar transactions　Business-to-business electronic servicesandSpecified servicesis what the term means.

Both categories are limited to services provided by foreign business operators.Purchases from domestic operators are not reverse-charged.

Services also available to consumers are not included.Item (viii-4) covers only services ordinarily limited to business customers. Not every purchase of an overseas service is reverse-charged.

Domestic or foreign status is determined from the purchaser's perspective

Article 4(4) of the Consumption Tax Act.

Specified purchases:whether they occur in Japan is determined by whether, for the services received bythe business operator making the specified purchase,as that purchase,the place specified in paragraph (3)(ii) or (iii)is in Japan.

The wording is “item (ii) or (iii).” There are two rules.

• Number 3For electronic services, the location is the domicile, residence, head office, or principal office ofthe recipientof the services.The buyer's location
• No. 2For services generally, the location iswhere the services are performed.」。Specified services, such as a domestic performance by an overseas artist, follow this rule.It is a place-of-performance test.

Assuming uniformly that the buyer's location governs leads to errors for specified services.

The same paragraph continues withThere is a proviso:provisions concerning specified purchases by foreign operators at a PE, a permanent establishment under Article 2(1)(viii-4) of the Income Tax Act or Article 2(xii-19) of the Corporation Tax Act, permanent establishment among which purchasesrequired for transfers of assets and similar transactions made in Japanare treated as made in Japan, along with other adjustments.

The input tax credit provisions also address this

Article 30(1) of the Consumption Tax Act, titled “Input Consumption Tax Credits.”

Where a business operator ... makes in Japantaxable purchases,（excluding specified taxable purchases,with the same meaning applying in this Article and Articles 32 through 36,or specified taxable purchases,or withdraws taxable goods from a bonded area, ...

Specified taxable purchases are separately listed as eligible for credits.

Their taxable base and credit calculation are also separate.Article 28(2) defines the taxable base asthe consideration paidfor specified taxable purchases, and Article 30(1) defines the creditable consumption tax asthe consideration paid for those purchases multiplied by 7.8%.That is the proviso.There is no division to back out tax from a tax-inclusive amount.

Tax is recognized on the output side and the same amount is credited on the input side.In principle, the net amount is zero for an operator entitled to a full credit.However, under the transitional measures discussed below, operators with a taxable sales ratio of at least 95% are excluded from reporting these purchases in the first place.Actual burdens arise for operators outside those transitional measures.

The seller has a disclosure obligation

Article 62 of the Consumption Tax Act, titled “Obligations of Operators Making Specified Transfers of Assets and Similar Transactions.”

Specified transfers of assets and similar transactionsAn operator making specified transfers, limited to those constituting specified taxable purchases made by another person in Japan, must, in connection with the transfer,in advance,indicate that the purchaser, under Article 5(1),is liable to pay consumption tax.。

Disclosure is the foreign operator's obligation.It is not a condition imposed on the buyer. Absence of disclosure does not remove reverse-charge treatment.

Relationship to exempt operators and simplified taxation

The subject of Article 5(1) isA business operator,“business operators.” Article 9(1), Exemption from Tax Payment Obligations for Small Businesses, provides that operators with taxable sales in the base period of¥10 million or less,excludingqualified invoice issuers,are exempt from consumption tax on taxable transfers of assets and similar transactionsand specified taxable purchases.Both are expressly covered by the exemption.Specified taxable purchases are explicitly included in the exemption.

Transitional measures exclude most operators

The basis is in the supplementary provisions of an amending Act, not the main Consumption Tax Act.The Act Partially Amending the Income Tax Act and Other Acts,Act No. 9 of March 31, 2015,Supplementary Provisions, Article 42, titled “Transitional Measures Concerning Specified Taxable Purchases.”

For each tax period from the period containing the application date of the amended Consumption Tax Act for an operator making specified taxable purchases in Japan,excluding periods subject to Article 37(1) of the amended Act,where the period'staxable sales ratio,as defined in Article 30(2) of the amended Act,is at least ninety-five percent,then,for the time being, specified taxable purchases made in Japan during that period are treated as not having occurred,and the amended Consumption Tax Act applies on that basis.

Simplified taxation is covered by Article 44(2) of the same Supplementary Provisions, Transitional Measures Concerning Special Input Consumption Tax Credits for Small and Medium-Sized Operators.

For tax periods subject to Article 37(1) of the amended Consumption Tax Act,for the time being,specified taxable purchases made in Japan during the periodare treated as not having occurred.and the amended Consumption Tax Act applies on that basis.

These are “for the time being,” not permanent measures.Both provisions appear as supplementary provisions of the amending Act on the Consumption Tax Act page of e-Gov's law database.

Points that require care in practice

• Are overseas cloud service fees reverse-charged?The question is whether the service is “ordinarily limited to business customers” under item (viii-4).
• What about performance fees paid to overseas artists?Check whether they are services prescribed by Cabinet Order under item (viii-5).
• The invoice says nothing about it.That concerns the disclosure obligation in Article 62. Whether the transaction qualifies is determined by the definitions.
• What is the impact on a company with a low taxable sales ratio?The portion that cannot be credited becomes a cost.
• What if an exempt operator buys overseas services?Check application of the main text of Article 9(1).
• Are the transitional measures still in force?They apply “for the time being.” Check the current wording of the amending Act's supplementary provisions.
• What is the taxable base?The consideration paid under Article 28(2). The creditable amount is that consideration × 7.8% under Article 30(1).

Reverse charge is a category that can change your filing obligations without your realizing it.As use of overseas SaaS and online advertising grows, specified taxable purchases can arise. Companies with low taxable sales ratios, such as property leasing, medical, or financial businesses, face an actual cost. If your overseas transactions are increasing, consult us starting with a review of your contracts.

Legal basis

• Article 5(1) of the Consumption Tax Act (Persons Liable for Tax)
• Article 2(1)(viii-2) of the Consumption Tax Act (Specified Transfers of Assets and Similar Transactions), item (viii-4) (Business-to-Business Electronic Services), and item (viii-5) (Specified Services)
• Article 4(3) and (4) of the Consumption Tax Act (Determination of Whether Transactions Occur in Japan)
• Article 30(1) of the Consumption Tax Act (Input Consumption Tax Credits)
• Article 62 of the Consumption Tax Act (Obligations of Operators Making Specified Transfers of Assets and Similar Transactions)
• Article 9(1) of the Consumption Tax Act (Exemption from Tax Payment Obligations for Small Businesses)
• Article 28(2) of the Consumption Tax Act (Taxable Base for Specified Taxable Purchases)
• Article 2-2 of the Order for Enforcement of the Consumption Tax Act (Scope of Specified Services)
• Articles 42 and 44(2) of the Supplementary Provisions to the Act Partially Amending the Income Tax Act and Other Acts, Act No. 9 of March 31, 2015

Individual determinations require confirmation of contract terms and the taxable sales ratio.