The due amount of consumption tax stated in the final tax return is the net amount of the consumption tax paid on the purchase (Input Tax) and the consumption tax received upon sales (Output Tax) (Article 30 of the Consumption Tax Act (hereinafter referred as the “Act”)).
If the net amount is negative, it will be refundable from the government (Article 52 of the Act).
As for a taxable period in which the taxable sales is less than 500 million yen and the taxable sales ratio is 95% or more, there is little worry about the tax filing of the consumption tax because your input taxes are fully creditable for such taxable period (Article 30 Para 1 of the Act).
For other taxable periods, i.e. either the taxable sales exceeds 500 million yen or the taxable sales ratio is less than 95%, you have to calculate creditable amount of the input tax applying either one of the following three methodologies (Article 30 Para 2, Article 37 of the Act).
As in the above formula, the 2 principle methods are to calculate the creditable amount based on the taxable sales ratio.
As a result, the payable tax consumption tax amount by final tax return is affected by the taxable sales ratio.
Although the simplified method is not affected by the taxable sales ratio, you cannot select this method any period you like because it is an exception applicable only when taxable sales amount of its base period is not more than 50 million yen, and there is an advance notification to the District Director of the tax office about the application of the simplified method.
Therefore, in many cases, the tax due amount of the taxable business operator is driven the taxable sales ratio of each taxable period.
Even if the business is stable, there may be a change in taxable sales ratio due to an occasional event.
It may be the case that the taxable sales ratio of the taxable period is unknown until a final tax return is finalized.
In some cases, you may feel like you are on a roller coaster being blindfolded.
The input taxes are creditable for tax filing of the taxable period when associated purchases are made.
The same rules apply to not only inventory and services consumed in a relatively short period but also fixed assets and deferred expenses that are expensed over a long period of time. Therefore, influence of the taxable sales ratio of a taxable period in which purchases and expenditures were actually made will last for long time.
There are the following correlations between the taxable sales ratio, method of calculating creditable input tax amount and the use of facilities.
|Use of facilities||Itemized Method||Proportional Method|
|Exclusively for taxable business||Not affected||Affected|
|Exclusively for non-taxable business|
|Other (i.e. common use)||Affected|
I am sure that there will be some business owners contemplating front-loading of capital investment before the tax raise of the October next year. However, it might be better for you to wait and see the situation depending on the usage of fixed assets to be purchased, the calculation method of tax credits, and trends of fluctuation in taxable sales.
I recommend that you implement long-term capital investment, especially for common use by back-office, during a taxable period when the taxable sales ratio is likely to rise.
Conversely, it is also possible to maintain the taxable sales ratio of the tax period during which the capital investment was implemented by refraining from transferring non-taxable assets such as securities and land.
Fluctuation of taxable sales ratio may entail a tax adjustment on the “fixed assets to be adjusted”.
The fixed assets to be adjusted are fixed assets such as buildings, constructions, machinery and equipment, ships, aircraft, vehicles, tools, fixtures and fittings, and mining rights (Article 2 item 16 of the Act, Article 5 of the Enforcement Ordinance of the Act).
As a general rule, the input tax on the purchase of these fixed assets is also creditable for the taxable period in which the purchase is made. However, when such input tax was partially credited based on the taxable sales ratio, and the taxable sales ratio for the following taxable periods changed “remarkably”, the credit for such input tax should be adjusted accordingly (Article 33 of the Act).
For instance, the adjustment will be made as follows.
Assuming that, on 29 October 2018, you acquired a fixed asset to be adjusted.
The taxable period in which the purchase was made is called the “purchase period”.
The purchase period started on April 1, 2018.
A taxable period including the day three years have elapsed (March 31, 2021) is referred to as the “third taxable period” .
The taxable sales ratio for the taxable periods from the purchase period to the third taxable period is referred to as “aggregated taxable sales ratio”.
In the purchase period, domestic sales (taxable sales) and exports (exempted sales) were good, and the taxable sales ratio was 90%.
In the following taxable period, the exports completely slumped to zero due to the extreme protectionism of a certain country,
You sold the securities (non-taxable) to prevent the deterioration of business performance then a taxable sales ratio of that period dropped to 50%.
In the third taxable period, domestic sales were also sluggish, and as a result, you sold idle real estate (land, non-taxable) in order to secure profits, resulting in a taxable sales ratio of 25% in the third taxable period.
The aggregated taxable sales ratio became 55%.
The adjustment of input tax on the fixed assets to be adjusted is necessary when the taxable sales ratio changes “remarkably”.
The judgment of “remarkable” is made by comparing the taxable sales ratio of the purchase period with the aggregated sales ratio.
If the rate of change (Variation Ratio) is 50% or more, and the difference (Variation) between the two is 5% or more, it is “remarkably” changed.
In the above illustration, the Variation Ratio is 50% and the Variation is 45%. Therefore, it is necessary to adjust the input tax on the fixed assets to be adjusted.
In accordance with the Variation, the creditable input tax tax of the fixed assets to be adjusted will be adjusted in the final tax return of the third taxable period.
As the aggregated taxable sales ratio had been remarkably dropped, a part of the input tax amount credited for the purchase period will be reduced from creditable input tax amount for the third taxable period.
For example, if you have credited input tax of 200 on a fixed asset for the purchase period, 45% of the credited input tax, i.e. 90 will be reduced from the creditable input tax for the third taxable period.
Conversely, when the aggregated taxable sales ratio increases remarkably, part of the input tax not credited for the purchase period will be added to the creditable input tax amount for the third taxable period.
[Added June 14, 2020]
The above illustrations have been amended since there were errors in the illustration.
In the previous illustration, the taxable sales ratio of the Purchase Period was 90%, and the aggregated taxable sales ratio was 55%, so the Variation Ratio was 38.88%, and the Variation was 35%; therefore it should not be the case of “remarkable change”.
However, I had misunderstood the Variation Ratio and the Variation as 50% and 45%, respectively. I sincerely apologize for it.
I would say that the Variation Ratio of 50% or more on average for three years is very extreme case although the 5% Variation may be probable.
As a result, it is unlikely that the taxable sales ratio of companies under normal business operation suddenly change “remarkably”.
Nevertheless, there is a strong possibility of a “remarkable” decline of the taxable sales ratio when large amount of non-taxable assets are transferred in a single taxable period due to corporate restructuring or M&A , or there is a considerable drop of taxable sales due to drastic downsizing of the business.
On the contrary, if there is no taxable sales in the first year of business but financial income (interest on deposits or sales proceeds of securities, i.e. non-taxable sales) account for the vast majority of revenue for the year, the taxable sales ratio in the subsequent tax period will “remarkably” increase.
Please be aware that there may be a need to adjust the creditable input tax on the fixed assets to be adjusted when the content and scale of the business change greatly.
It is actually difficult to control taxable sales ratio.
So, practical measure you can take is to be aware of the signs of change earlier.
In this sense, you should have a system that enables you to monitor the current status of taxable sales on a regular basis, such as by month-end closing.
Don’t you think you feel much easier with knowing the direction whether your roller coaster is diving, climbing or turning, with your eyes open?