A new invoice system in Japan, which is set to launch on 1 October 2023, is a hot topic that will affect IT freelancers. If you are an IT freelancer currently working in Japan, you may still be unsure about the details, advantages and disadvantages of the system, or may be concerned about how to implement it in the future.
In this article, we will explore the features of the new invoice system, how it impacts IT freelancers, and what is required for IT freelancers, tax-free and taxable businesses respectively.
Contents
- What is the new invoice system?
- Impact of the invoice system on IT freelancers
- Measures IT freelancers should take
What is the new invoice system?
The invoice system, formally called “Qualified Invoice System”, is a requirement for businesses which are legally bound to pay consumption tax to issue an invoice with a specific set of information for every transaction they make. This system will be launched on 1 October 2023. The purpose of the system is to identify the tax rate because there are two different tax rates (8% and 10%) applied for consumption tax depending on the nature of the purchase. The new invoice system enables the buyer to obtain exemption from the purchase tax amount when requested by a business partner who is a taxable enterprise. The buyer is also obliged to deliver an invoice when requested to do so.
Impact of the invoice system on IT freelancers
The impact of the invoice system on IT freelancers depends on whether they work as IT freelancers for tax-free businesses or taxable businesses.
A tax-free business is a business with annual sales less than 10 million yen in a certain period, while a taxable business is a business with annual sales exceeding 10 million yen. If you are an IT freelancer working as a tax-free business, the impact is that you cannot issue a qualifying invoice unless you are a taxable business. This means that clients of tax-free businesses will no longer be able to deduct consumption tax on payments made to taxable businesses, and this creates a risk that the client might switch to another taxable business.
On the other hand, for IT freelancers working as a taxable business, if the business partner is a tax-free business, no deduction will be made in the transaction and the risk of being liable for more than the amount that should have been paid will occur. Therefore, this can lead to that you will have to choose your business partners according to whether they can or cannot issue invoices for tax purposes.
Measures IT freelancers should take
So, what measures should IT freelancers in Japan take to prepare for the invoice system? We’ll explain what to do for tax-free and taxable businesses separately.
IT freelancers working as tax-free businesses
The first decision that IT freelancers working, as tax-free businesses, should take is to either not apply for invoice registration, or to become a taxable business and register for invoice registration. If you choose not to apply for invoice registration, you will be required to take actions such as changing the format of your invoice. Let’s take a look at the detailed steps below.
Not applying for invoice registration
If you don’t register for the invoice registration, you continue to operate as a tax-free IT freelancer. If you’re working as a taxable business that strongly requests you to apply for invoice registration, you can just respond with a price reduction. The administration burden of consumption tax returns is significant, and therefore it’s not a surprise that many tax-free businesses prefer to avoid applying for invoice registration if possible.
Reviewing the indication of consumption tax on invoices
If you continue to operate as a tax-free business and you show a 10% consumption tax separately on your invoices, we recommend that you change the format of your invoices only stating the invoice amount (including tax). Although there are no rules that prohibit stating consumption tax separately, it is not recommended. Especially for tax-free IT freelancers that don't want to emphasize their tax-free too much.
Negotiate a price reduction with your suppliers
Once the invoicing system starts, your suppliers may request you to register for the invoicing system or negotiate a price reduction, as they will have to carry a heavier burden even if the transaction price remains the same. When negotiating a price reduction, consider in advance what your preferred prove is. Unilateral price reductions or suspensions of transactions for the 10% consumption tax can be problematic under the Antimonopoly Law as an abuse of a superior position. Therefore, a price reduction of 1-2% is appropriate, given the purchase tax credit that will be introduced from 2026 onwards. (The tax credit will be reduced to 50% from October 2026, and the tax credit itself will no longer be available from October 2029, so the price reduction is expected to be even higher).
However, a survey conducted by Tokyo Shoko Research in early December 2022 asked companies “How do you plan to deal with tax-free businesses after the introduction of the invoice system?" and only 2.7% of the respondents said that they would reduce transaction prices, and it is highly likely that clients would not mind a loss of around 2% in transactions with tax-free businesses with whom they have built a relationship. Instead of a price of reduction, you can also propose a countermeasure such as adding other services without lowering the price.
Become a taxable business and register for invoicing
There is of course the option to become a taxable business operator. Even if you do not meet the criteria for a taxable business entity, you can voluntarily become a taxable business entity by completing the notification of taxable enterprise status for consumption tax. Becoming a taxable entity enables you to issue qualified invoices, which means that you are eligible for the invoice system. By becoming a taxable business, you can continue your original transactions without any problems and you’re invoicing registration is perceived as an advantage by companies that prefer doing business with taxable businesses.
If you are an IT freelancer for a taxable business
If you are currently working for a taxable business as an IT freelancer, you’re required to register as a qualified invoicing business and follow the invoice formats within invoice system. A strong recommendation is to also review your accounting software and install a new one if necessary.
Installing accounting software and preparing invoice formats
If you are using accounting software for accounting processing, check if it’s compatible with the invoice system. In addition, preparing invoice formats that match the requirements of the invoice system will make the transition smoother once the system starts.
Registering as a qualified invoicing business
If you have not registered as a qualified invoicing business by the start of the invoicing system in October, it will be difficult to issue qualified invoices immediately after the system starts. Don't forget to register before the start of the system.
Are you an IT freelancer working in Japan?
Many companies in the IT industry, and other growing STEM sectors, expect to have an increase in their need of of highly specialized freelancers in the future. Computer Futures has a large number of outsourced projects available for freelancers and sole traders who are currently building their careers. In addition, the Employment Contractor Model (ECM) is a new contracting solution that is in increasing demand globally (read more about ECM here). ECMs allow you to take on contract work in the same way as a freelancer, but at the same time you are treated like a temporary employee, so you don't have to think about the invoicing system as described in this article.
Whether you’re a professional looking for a job or a business seeking highly skilled talent, the team at Computer Futures are here to help. Contact us by submitting the form below to unleash your potential.
