1. Introduction
  2. With October soon approaching, it brings the start of the registration process for qualified issuer registration, as more and more companies may be preparing in earnest for the introduction of the Qualified Invoice Preservation System (Invoice System), which will start on October 1, 2023.

    We will provide you with an overview of the new invoice system, from the changes from the current system to the schedule for its introduction.

  3. About Invoices
  4. invoice

    First of all, let’s briefly discuss what invoices are referred to in this system.

    Invoices (or rather, “Qualified Invoices”) here refer to documents such as sales invoices, delivery notes, etc. that are issued by the seller to their buyers that shows information such as the exact applicable tax rate, consumption taxes, etc.

    Specifically, this refers to documents and data in which the “registration number”, “applicable tax rate,” and “consumption taxes, etc.” are added to the “rate-classified invoice” which is considered the currently effective invoice.

  5. Who is a Qualified Invoice Issuer?
  6. Invoices can only be issued by a “Qualified Invoice Issuing Business Operator”, which is a taxable enterprise that has applied for and has registered with the tax office.

    In order to become a Qualified Invoice Issuing Business Operator, you need to submit an “Application for Registration as a Qualified Invoice Issuing Business Operator” (hereinafter referred to as “Application for Registration”) addressed to the director to the tax office and be successfully registered.

    Note that a qualified invoice-issuing businesses would not be exempt from tax even if its taxable sales for the base period are 10 million yen or less, and will be required to file their consumption tax and local consumption tax returns.

    As mentioned in our introduction, an application for registration can be submitted from October 1, 2021. In order to be considered a registered Qualified Invoice Issuing Business Operator from October 1, 2023, when the invoice system will be introduced, an application for registration must, in principle, be submitted by March 31, 2023 (applications for certain cases experiencing difficulty can be extended until September 30, 2023).

    In order for a tax-exempt business to be registered as a Qualified Invoice Issuing Business Operator, in principle, it is necessary to submit a “Report on the Selection of Taxable Proprietor Status for Consumption Tax” in addition to the application for registration and become a consumption taxable business. However, if the business is registered during the taxable period including October 1, 2023, it would not be necessary to submit the report indicated previously, and there would be a transitional measure that allows the business will become a taxable enterprise from the date of registration as a qualified invoice issuer.

    Schedule of Registration

    Source: National Tax Agency (Applications start October 1, 2021 Leaflet)

    A Comparison of the Rate-classified Invoice Retention Method and the Qualified Invoice Retention Method (Invoice System)

    Rate-classified Invoice Retention Method Qualified Invoice Retention Method (Invoice System)
    Applicable Period October 1, 2019 to September 30, 2023 October 1, 2021 onwards
    Items to be Included on Invoices, etc. ・ Name of the issuing entity
    ・ Date of transaction
    ・ Details of the transaction (whether the transaction is subject to a reduced tax rate)
    ・ The total amount due for each applicable tax rate (excluding or including tax)
    ・ Name of the recipient
    All items in the Rate-classified Invoice Retention Method, as well as the following:

    ・ Registration number
    ・ Applicable tax rate(s)
    ・ Consumption taxes, etc. due for each applicable tax rate

    Can tax-exempt entities issue invoices? Yes No
    Requirement for Purchase Tax Credits Retaining of accounting books and rate-classified invoices, etc. Retaining of accounting books and qualified invoices, etc.
    Can tax-exempt entities avail of the tax credit on purchase tax? Yes No. However, certain special exceptions* are available:
    ① 80% tax deduction possible from October 1, 2023 to September 30, 2026
    ② 50% tax deduction possible from October 1, 2026 to September 30, 2029

    Under the new invoice system, taxable purchases from entities other than qualified invoicing entities, including tax-exempt entities, will not be eligible for purchase tax credits.

    However, if a company were to keep invoices, etc. that contain the same information as the its rate-classified invoices, etc. listed separately as well as books (accounting records) stating that it is subject to the aforementioned transitional measures, as indicated* in the table above, they may take advantage of the transitional measures that allow a certain percentage of the amount equivalent to the purchase tax to be deducted as purchase tax during a certain period.

  7. Conclusion
  8. Once the invoice system is fully implemented, taxable enterprises will not be able to obtain purchase tax credits on purchases from businesses that cannot issue qualified invoices. Therefore, it should be expected that taxable enterprises would prefer to purchase from qualified invoice issuers who can issue invoices if they wish to continue making such purchases.

    As such, businesses are expected to prepare for registration as a Qualified Invoice Issuing Business Operator and at the same time confirm whether their suppliers would be registered as well. Otherwise, businesses may either look into registering as such, or consider whether they should continue transacting with non-registered entities.

    On the other hand, tax-exempt businesses need to consider the possibility that they would be excluded from transactions with taxable businesses. With the introduction of the new invoice system, sole proprietors and small businesses may be forced to switch from tax-exempt to taxable status. In this regard, it is necessary to assess the status of the company’s business relationships and clients (taxable or tax-exempt) and decide which is more beneficial for the business ― converting to a taxable business or remaining tax-exempt.

    With two years to go before the introduction of the invoice system, it is important for both taxable and tax-exempt businesses to review their business relationships and draft and execute a plan moving forward.