Changes in Business Relationships with Japanese Companies Following the Introduction of the Invoice System (JCT)
In October 2023, Japan introduced the Invoice System (Qualified Invoice Retention System), bringing significant changes to domestic tax procedures and commercial practices.
This system has also influenced the criteria Japanese companies use to select business partners, and so it is relevant to foreign businesses as well.
Japan Professional Alliance (JPA) continues to receive numerous inquiries from foreign entities regarding Japanese Consumption Tax (JCT) and the newly implemented Invoice System.
This article revisits the impact of the Invoice System on transactions with Japanese companies and outlines the necessary measures foreign businesses doing business in Japan should take to maintain and strengthen these relationships.
What is the Invoice System?
The Invoice System mandates the retention of “Qualified Invoices” to claim input tax credits for consumption tax.
Only businesses that meet certain requirements are allowed to issue Qualified Invoices.
For Japanese companies, if they do not receive such invoices from their business partners, they will be unable to deduct the consumption tax they paid in their tax return.
As a result, whether a partner is registered as a qualified invoice issuer has become a new criterion in business partner selection.
Changes Foreign Businesses Face
Shift in Evaluation Criteria as a Business Partner
Previously, Japanese companies selected business partners based on factors like price, quality, and delivery timelines. However, with the introduction of the Invoice System, whether a partner is a “Qualified Invoice Issuer” has become a critical consideration, especially in B2B transactions. There is a growing tendency to avoid dealing with unregistered businesses.
Higher Standards for Invoices
Under the new system, invoices must include statutory details such as JCT registration number and tax amounts by applicable tax rates.
If the invoice format does not comply, it may not be accepted for tax purposes, potentially causing disadvantages for Japanese clients.
Risks of Not Registering
| Situation | Potential Impact |
|---|---|
| Not Registered | Japanese companies may refrain from transactions due to lack of input tax credit |
| Invoice Not Meeting Requirements | Payment processing may be delayed or reissuance may be requested |
| Lack of Information Sharing | May lead to misunderstandings and loss of trust (“Are they unregistered?”) |
Measures to Maintain and Strengthen Business Relationships
Register as a Qualified Invoice Issuer
Foreign businesses conducting taxable transactions in Japan may need to register.
This requires appointing a tax representative and submitting an application to the Japanese tax office.
Review Invoice Format
Ensure compliance with Japanese laws by including your registration number (“T” followed by 13 digits) and clearly itemizing tax rates and consumption tax amounts.
Click here for our article on invoice formats.
Proactively Share Information with Japanese Clients
Once registration is complete, clearly communicate this to your Japanese business partners.
Sharing your registration number and confirming your compliance with the Invoice System enhances trust.
For example, OpenAI, known for ChatGPT, issued a statement confirming its JCT registration.
Click here to read our full article on this topic.
Why Choose JPA?
With the implementation of the Invoice System, Japanese companies now use JCT registration status as a key factor in selecting business partners.
This system is something foreign businesses cannot ignore. By taking appropriate actions, you can ensure continued and even stronger business relationships.
Understanding and responding to the Invoice System has become essential for businesses currently engaged with Japanese companies or aiming to enter the Japanese market.
At JPA, we support foreign businesses in their operations in Japan, including registration as Qualified Invoice Issuers and accounting matters.
Please feel free to contact us via our inquiry form for assistance.
