The background of the invoice system dates back to April 1989, when consumption tax was first established. At that time, due to public opposition, a tax-exempt business system was adopted, which exempted certain small-scale businesses from tax payment obligations. The tax that was exempted in this manner is referred to as 'tax profit'.
Starting October 1, 2023, the primary objective of the invoice system is to eliminate 'tax profit' by requiring businesses to pay the consumption tax collected from consumers to the government rather than retaining it as profit.
Benefits of the Invoice System
Accurate Documentation of Reduced Tax Rates
In October 2019, the consumption tax rate was increased to 10%, while a reduced tax rate of 8% was introduced for certain items such as daily necessities and food and beverages. With current invoices, different consumption tax rates are mixed, requiring each product to be calculated separately based on its respective tax rate.
By introducing the invoice (qualified invoice) system, businesses can accurately record the 'consumption tax amount' and 'consumption tax rate,' thereby achieving operational simplification.
Prevents Fraud
The invoice system is effective in preventing tax fraud. With the introduction of reduced tax rates following the consumption tax hike, certain items such as food products are taxed at 8%. However, some instances have occurred where products subject to a 10% consumption tax are fraudulently labeled as 8% to gain profit.
The introduction of invoices (qualified invoices) allows for the clear documentation of consumption tax amounts per transaction, offering the benefit of significantly reducing fraud.
For business entities, a reduction in fraud by suppliers may lead to a decrease in their own tax burden.
Operational Efficiency
The introduction of the invoice system promotes the digitalization of transactions with business partners, eliminating the need for traditional invoicing, printing, and mailing processes, which significantly improves operational efficiency.
Difficulty in Accurately Identifying Registration Numbers
Regarding invoice registration numbers, while a list of qualified invoice issuers is publicly available, variations in the notation of names and addresses can make it extremely difficult to link public information with your own customer data without a method to reconcile these discrepancies. If this process ultimately requires manual verification, the workload becomes immense.
It is particularly difficult to accurately identify registration numbers when a single corporation holds multiple registration numbers or when registration numbers are assigned at the office or branch level.
If your company has many transactions with small-to-medium enterprises or at the office/branch level, implementing tools or services specialized in data maintenance may be a practical solution.
Transitional Measures for the Invoice System
The invoice system was implemented on October 1, 2023; however, transitional measures are in place that allow tax-exempt businesses to defer becoming qualified invoice issuers.
Six-Year Transitional Period
There is a six-year transitional period, meaning businesses do not need to rush to become qualified invoice issuers by October 1, 2023.
- October 1, 2023 to September 30, 2026: 80% deduction rate
- October 1, 2026 to September 30, 2029: 50% deduction rate
As shown above, an 80% deduction is allowed for the first three years, followed by a 50% deduction for the subsequent three years. These transitional measures allow businesses to consider whether to become a taxable entity until September 30, 2029.
In other words, tax-exempt businesses can take time to decide whether to register as a qualified invoice issuer within this period rather than rushing to do so by October 1, 2023.
Procurement staff on the ordering side should verify the registration numbers of their business partners within this timeframe.
Withdrawal of Invoice Issuer Registration
Qualified invoice issuers can revoke their registration by submitting a "Notification of Revocation of Registration" to the tax office, which will terminate the validity of their registration at the beginning of the taxable period.
This means that even if a tax-exempt business registers as an invoice issuer, they can subsequently withdraw that registration.
However, after October 1, 2023, the earliest the withdrawal can take effect is the following year (or the following fiscal year for corporations). Additionally, there are regulatory requirements, such as the need to submit the "Notification of Revocation of Registration" at least 30 days in advance.
For those on the ordering side, it may be prudent to re-verify the invoice registration status of suppliers shortly before October 1, even if they have been checked previously.
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