Japan’s VAT Reforms Will Impact Major Digital Platform Operators

The Japanese Cabinet has proposed a new value-added tax regime for cross-border digital transactions through platforms in its 2024 tax reform package bill. Under the proposed reform, submitted to the National Diet in February, intermediary digital platform operators, rather than overseas suppliers, would become liable for Japanese VAT on cross-border digital content and service supplies to Japanese consumers.

Given the relative ease of VAT enforcement against the digital platforms, this new regime would improve VAT enforcement on cross-border transactions and resolve the enforceability gap between domestic and foreign suppliers.

According to government estimates, the reform would eliminate Japanese VAT leakage of 23.1 billion Japanese yen ($154 million) per year—18 billion yen in national consumption tax and 5.1 billion yen in local consumption tax.

Because the new system seeks to strengthen VAT enforcement, it’s designed to apply to major digital platforms with reliable tax compliance and administrative capabilities. Any digital platform operator will be subject to this regime if the total amount of consideration for relevant supplies of digital content or services through that digital platform exceeds 5 billion Japanese yen per taxable year.

For tax certainty, the Japanese tax authorities will specify and make public the affected platform operators. The relevant digital platform operators also must notify foreign suppliers that the Japanese tax authorities have specified them.

Platform operators will need to adjust their settlement flows to non-Japanese suppliers, establish administrative flows for additional tax reporting requirements, and make other arrangements necessary to comply with this new VAT treatment.

Tax Policy Aims

According to the announcement by Japan’s ruling coalition last December, the new regime aims to improve Japanese VAT enforcement on cross-border transactions digitally supplied to consumers.

Under the current Japanese VAT rules, supplies of digital content and services to Japanese consumers will be subject to Japanese VAT regardless of the suppliers’ location. These rules were supposed to ensure a level playing field between domestic and foreign suppliers.

In practice, however, it’s more difficult to enforce Japanese VAT on foreign suppliers than on domestic suppliers, especially because noncompliant foreign suppliers rarely establish an enforceable presence in Japan. Further, according to an expert report posted on the Ministry of Finance website last November, this VAT enforceability gap has become an increasingly serious concern, especially as digital platforms have made it easier for foreign enterprises to reach Japanese consumers without having any local presence.

The Japanese government and the ruling coalition have referred to this VAT reform proposal as the “platform taxation” regime in several statements, including the release from the Ministry of Finance in December. This name is somewhat misleading, as it might suggest a similarity to the digital services taxes imposed on digital enterprises. This new system isn’t similar to digital services taxes and other turnover-based additional taxes: The proposal enhances collection measures for Japanese VAT already levied on cross-border digital commerce.

Impact for Platform Operators

This system covers cases where foreign businesses supply digital services or content to Japanese consumers through digital platforms and then receive consideration for these supplies through digital platforms. When it applies, the digital platform operators are deemed to be suppliers even though they are just intermediaries. As a result, platform operators are solely and fully liable for Japanese VAT on these supplies, and the foreign suppliers no longer pay Japanese VAT.

The actual financial flow would be that the platform operators would only hand over the remaining amount to the foreign suppliers after deducting VAT from the consideration payable. The same economic outcome would be achieved as if the foreign supplier had complied with the Japanese VAT imposed on their supplies.

This regime doesn’t cover cases where domestic businesses supply digital services or content to Japanese consumers through digital platforms. These domestic businesses, as suppliers, will remain liable for VAT themselves.

There are several reasons for this asymmetric treatment of domestic and foreign suppliers. The November report noted that domestic companies’ noncompliance is already effectively curtailed because they’re typically subject to income tax filing obligations, tax audits, and other tax administration. The report also raised the concern that if domestic suppliers were to be covered, they would suffer from an unnecessary compliance burden of distinguishing sales based on whether they were transacted through digital platforms.

This new regime will apply to transactions on or after April 1, 2025, allowing for a one-year preparation period. As a next step, platform operators should pay attention to the relevant regulations and guidance coming out this year and consider the necessary response.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Takato Masuda is an attorney-at-law and associate at Nishimura & Asahi, Tokyo.

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