Seven things I didn’t know about the consumption tax

In the last few months I have been reading up a lot on Japanese tax law, and have come across the following interesting facts about the consumption tax:

1. The national consumption tax rate is only 4%. There is also a uniform local consumption tax defined as 25% of the national tax; the two taxes are added together to form the 5% figure that everyone pays. The local consumption tax is split evenly between the prefecture and municipality where the applicable good or service was sold.

2. Not all of that 5% goes to the government. Businesses always take the full 5% from their customers (so long as those customers are located in Japan) but only pass on a fraction of this amount to the government. They can deduct any consumption-taxable expenses—inventory, materials, machinery, fees and the like—from their consumption-taxable revenues, and pay 5% on this net amount. The idea is to charge a total of 5% tax on the final value absorbed by consumers regardless of how many middlemen were involved in getting a product/service to the consumer. Businesses generally tally up their consumption tax bills on a quarterly basis.

3. Small businesses get pretty sweet tax breaks. Businesses with annual sales of less than 50 million yen can choose to keep anywhere from 10% to 50% of the consumption taxes they charge, regardless of their actual deductible expenses. The permitted amount depends on the type of business: wholesalers keep the least while service businesses keep the most. This is a really good deal for small service businesses, since their biggest expense is usually personnel, and most personnel costs (salary, social insurance, etc.) are not subject to consumption tax. Businesses with annual sales of less than 10 million yen get an even better deal: they are completely exempt from paying consumption tax. So in quite a few cases, part of the 5% paid by the consumer is effectively absorbed by smaller suppliers and subcontractors in the value chain.

4. Consumption tax applies to imports into Japan, whether for personal or business purposes, though the rules for this are very complicated. If you are bringing valuables into Japan as an individual, the 5% tax is calculated against a “taxable value” on the item, which is usually 60% of the retail price paid overseas. This is technically separate from customs duty, but is charged as part of the same inspection process and is superseded by customs duty where customs duty applies (i.e. to alcohol, tobacco and single items valued at more than 100,000 yen). You don’t have to pay consumption tax on anything within your duty-free exemption. Here is an example of how the calculation works.

5. Consumption tax arguably creates a government subsidy for large exporters. This is because exports are not subject to consumption tax in Japan (though they may be subject to consumption tax in the importing country). So when a company like Toyota or Sony totals up their consumption taxes, they usually end up having more taxable expenditures than taxable sales, resulting in a consumption tax refund. Quite a few companies get hundreds of millions of yen a year refunded this way.

6. It’s possible for Japan residents to get a consumption tax exemption for items in excess of 10,000 yen which are to be taken overseas. This is different from the exemption for foreign tourists and comes with a bunch of qualifications, among them that the item must be a gift for someone else or to be used or consumed by the resident outside Japan, and that it must be sold at some kind of “export store” (輸出物品販売場). I might look into this further if I ever get around to buying a washlet for my parents’ house.

7. Consumption tax was introduced in 1989. Most Western European countries adopted some form of consumption tax in the early seventies, and the idea had been floated by the Japanese government as early as 1978, but nobody acted on it until the height of the bubble. The initial tax rate was 3%, all of which went to the central government. The coalition government in the early nineties proposed hiking the tax to 7% but almost immediately back-pedaled due to negative public reaction. The current 5% rate, including the local consumption tax, became effective in 1997 after the LDP returned to power.

6 thoughts on “Seven things I didn’t know about the consumption tax

  1. I would recommend taking a close look at specs before bringing a washlet overseas. Voltage is not the only issue here; residential water line pressures may vary between countries. Entirely possible it’ll work fine, but you’ll want to check to make sure you won’t damage the unit.

  2. Nice roundup… I wouldn’t mind trying to get a tax exemption on a computer purchase if I buy one before moving to the US

  3. It was a bit of a surprise to see the 1989 introduction date in that list. On reflection, there’s no reason why anyone should know it if they weren’t around at the time.

    Mind you, it is instructive to look at the debate as it played out in the press in the late eighties. You can get a good sense of why the consumption tax has almost third rail status in Japan. That reputation started with Takeshita.

    The PM who finally introduced the tax was widely seen as one of the few politicians with the nous to drive legislation through. The effort ended up exhausting his political capital and made him vulnerable when the Recruit scandal broke.

    Since then, no politician has escaped unscathed after initiating a consumption tax review.

  4. On reflection, there’s no reason why anyone should know it if they weren’t around at the time.

    My apologies for not being an old fart…

  5. You can buy a Japanese-made washlet in the US. This avoids the problem with unmatched hardware/voltage. I installed 2 of them in my house. There are also some non-Japanese models available.

  6. In my experience, at least 5 Japanese washlets have and continue to work fine in the US since 2004. The water will have a little more pressure. The ones that are sold in the US are much more expensive and have less options. The hardest part will be fabricating the water splitter and explaining which buttons do what. I have not tried it, but buying an English remote control from the manufacturer in the US may actually work.

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