Case Reviews: JCT Services (Japanese Consumption Tax)
- 1. Our company contracts to rent construction equipment from a leasing company on a two-year lease, and the equipment is used at a construction site in India. The construction takes longer than anticipated, so the term of the lease is extended one year. The original agreement is for leasing equipment in Japan. Therefore, Japanese Consumption Tax is included in the leasing fee, and the fee paid is treated as including a tax payment.
- The leased equipment is used overseas in India. Therefore, when it is sent overseas an export statement is prepared with an estimate of normal acquisition price at time of exportation. That price is reflected in the calculation of taxable sale ratio during the taxation period at time of exportation. If there is no change in the initial lease agreement, then for taxation purposes the lease agreement continues as a domestic transaction. The construction equipment is overseas when the lease agreement is extended, so that extension corresponds to an overseas transaction and is not subject to consumption tax.
back to top - 2. Japan Company A registers patent rights in Countries X and Y, but the patent registration has not been completed in Japan. The patent right in Country X is conveyed to Japan Company B, which has a presence in Country X. How is consumption tax handled in Japan?
- This is the conveyance of a patent right registered in at least two countries. For purposes of Japanese Consumption Tax, determination of the country of transaction depends on the addresses of Companies A and B. This exchange will correspond to a domestic transaction when Companies A and B are located in Japan. Further to observe is that the export tax exemption is not applied when a patent right is conveyed by one resident Japan company to another. Accordingly, this transaction will be subject to consumption tax. On the other hand, when there is an agreement made with an overseas branch office of a Japan company having a presence in Country X, such overseas branch office is treated as nonresident by the Japanese tax office. In such case as this, the export tax exemption is applied in view of a conveyance of a patent right to a nonresident company. As such, the transaction will not be subject to consumption tax.
back to top - 3. Our company is involved in international shipping, using vessels that travel overseas. When industry inspectors work aboard the ships at sea, 2,000 yen per day is charged as an expense for their meals. Is Japanese Consumption Tax levied on these charges?
- The provision of work after the ship has left Japanese waters corresponds to the provision of work in an area outside the country, so consumption tax is not levied in such case.
back to top - 4. We are a Japan company involved in the development of game software. We received an order from an American game software company to develop game software. The completed product was recorded on DVD, which an employee took to the United States, and we received a yen-denominated consignment fee totaling 20 million yen. What about the export tax exemption in this case?
- When game software development is handled as an agreement for supplying a run of production, this is method for the provision of services to a nonresident. It corresponds to a case in which direct benefit is not received in Japan, so the export tax exemption can be applied.
back to top - 5. Our Company A in Japan provides expertise we developed to Company B in Country X, and seconds our technicians to Company B. Can the export tax exemption be applied?
- The provision of expertise corresponds to the lending of a copyright, and the determination of the country depends on the address of the provider of the expertise. Therefore, this is considered a domestic transaction. The export tax exemption can be applied, however, because the expertise has been provided to a nonresident.
back to top - 6. Our Company A in Japan has a 50% share in a ship that is used for international transport. That share has become an in-kind contribution to a maritime shipping company, which is newly established through Company B. How about the export tax exemption in such a situation?
- In-kind contributions are treated as the transfer of assets. The transfer of a share in a ship working overseas corresponds to such a transfer to a maritime transport company. Under such definition, the export tax exemption can be applied.
back to top - 7. Our Company A has a subcontracting agreement with Company B, which is engaged in overseas maritime shipment. When a ship from Company B arrives at a Japanese domestic port, we perform work such as pilotage, loading, refueling, and stocking provisions. Can the export tax exemption be applied?
- Such tasking and the related transactions fall under the export tax exemption, since these represent (a) the provision of services corresponding to pilotage for an overseas ship, and (b) assistance for port entry at the request of a maritime transport company.
back to top - 8. We are the Japan branch of an overseas company engaged in air transport for international routes. We receive fees while providing outsourcing services in Japan for overseas aircraft, which include repair and inspection, overseeing takeoff and landing, use of hanger, night illumination, anchorage, use of airport support facilities, airport handling, aircraft guidance, providing water, and removing waste water. These are exempt from export taxes—is this a mistake?
- The provision of these services corresponds to repair and assistance for arrivals and departures of aircraft used for international shipment by an air transport company. Therefore, such services are exempt from export taxes. However, fees for simple inspections that do not fall under checks or repairs, fees for engine repairs only, or security fees are not exempt from export taxes, and correspond to transactions subject to taxation.
back to top - 9. We are a Japan company engaged in domestic air transport business. Overseas airlines use our training facilities and simulation devices. Pilot training is outsourced to us, and we receive fees for that training. Will such fees be exempt from export tax?
- Pilot training conducted in Japan corresponds to the provision of services for which benefits are directly received in Japan. Therefore, even when such training is conducted for nonresidents, the associated fees are not exempt from export tax. Training for pilots is considered as on a parallel with providing services related to language education at a Japanese language school, which are not exempt from export taxes. As such, this training corresponds to the receipt of direct benefits in Japan, and export taxation is applied.
back to top - 10. When a crew member of an overseas ship that docks at a Japanese port becomes ill, the crew member is either taken to a hospital or a doctor is sent to the ship to provide treatment. In this circumstance, how is consumption tax handled for providing medical treatment?
- The medical treatment of a crew member of an overseas ship (a nonresident of Japan) corresponds to a domestic transaction, and is the provision of services for which direct benefits are received in Japan. Therefore, related transactions are subject to consumption tax, and will not result in application of the export tax exemption. Additionally observed is that the crew member of an overseas ship is not an insured party under Japanese law—specifically referencing the National Health Insurance Law of Japan and the Mariners’ Insurance Act of Japan. Therefore, medical treatment under such circumstance does not correspond to nontaxable medical care.
back to top - 11. We are the Japan branch of a company engaged in international air passenger transport. If there is a delay in the Japan departure of an aircraft with causes attributable to our company, then case-by-case we are liable for flight crew meals, flight crew transportation to other airports, and flight crew lodging. Do these expenses correspond to taxable purchases?
- When direct costs are covered for another company, the payments are classified as taxable purchases. On the other hand, such types of costs if covered for passengers are not categorized as taxable purchases, since those are compensations for passenger losses. Notably in this case, perhaps parallel tasks in airline complaint resolution are not subject to taxation—revealing that categorizations of involved expenditure involve both taxable and nontaxable elements. (Also notably, when making a payment using the discount method—for example, when reimbursing air fares—this corresponds to the simple return of the sales price.)
back to top - 12. We are the Japan branch of a company engaged in air transport. For our international transport, we outsource aircraft maintenance, inspection, and airport handling to Company B, which is engaged in air transport business in Japan. The provision of such services, including the airport handling fees, have been handled as subject to taxation—yet specifically exempt from export tax. This distinction appears complicated, although Company B has added calculations for consumption tax on all handling fees as billed to us. In this event, are all the handling fees considered to be purchase tax credits because the payments were made as taxable purchases?
- Transactions that are exempt from export tax do not correspond to taxable purchases. Therefore, such transactions do not qualify for purchase tax credits, even if the other party submits a bill inclusive of taxation. Company B must be asked to submit bills that exclude consumption tax for the portion of the transactions specifically exempt from export tax.
back to top - 13. Our Company A received consulting services from a Norwegian company regarding the design of a computer system. We brought in technicians from Norway and paid a consulting fee. Does the payment of this consulting fee correspond to a taxable purchase?
- When any part of a consulting fee is categorized as general guidance from a technician, it is regarded as the receipt of a service provided domestically. As such, it corresponds to a domestic transaction, is taxable, and is classified as a purchase tax credit for Company A. On the other hand, services categorized as provision of expertise (as opposed to general guidance from a technician) correspond to the transfer or loan of copyrights. Initially regarding provision of expertise, however, a determination of the country of transaction must be made. In this instance, the determination of the country of transaction will be made based on the address of the person making the “transfer or loan.” Therefore, for provision of expertise in a Norway-Japan case such as the one above, this will correspond to an overseas transaction. Such an overseas transaction cannot be classified as a purchase (input) tax credit for Company A.
back to top - 14. Consider the event that a satellite has been launched in Japan at the request of a foreign company and has reached orbit, after which ownership of the satellite is transferred from the foreign company to a domestic company. Will the launch of the satellite be classified as a domestic transaction and receive the exemption from export tax? And will the conveyance of the satellite be classified as an overseas transaction?
- The launch in Japan of a satellite at the request of a nonresident entity corresponds to the provision of a service for which no direct benefit is received in Japan. It is therefore subject to the export tax exemption. The conveyance of a satellite that has reached orbit corresponds to an overseas transaction, as representing the conveyance of an asset located in an area other than Japan.
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