Small reform of Rule 95% of consumption tax

Wednesday, December 14, 2011. 16:22

Consumption tax payable is equal to Consumption-tax-in less tax credit amount of Consumption-tax-out.

So far, except a company that is qualified to file a consumption tax return under the simplified tax system¸ a company whose proportion rate of taxable sales under 95% has to chose either itemized method or proportional method to calculate the tax credit amount of consumption-tax-out. A company’s proportional rate of taxable sales is equal to or above 95% can deduct all the consumption-tax-out, i.e., all the consumption tax it has paid. This is called rule 95% of consumption tax. However, this rule 95% will be voided for any company that has taxable sales equal to or greater than 500 million yen in its assessment year starting from April 1, 2012.
Under the new rule effective on next April 1, regardless of proportion rate of taxable sales, any company whose taxable sales exceed 500 million yen in its assessment year cannot deduct all its Consumption-tax-out. Instead, it has to calculate the tax credit amount of Consumption-tax-out.

The tax credit amount of Consumption-tax-out is calculated by the following multiplication:

For company who applies Itemized method:
Tax credit amount of Consumption-tax-out = ①　＋　③ x Proportion rate of taxable sales

For company who applies Proportional method:
Tax credit amount of Consumption-tax-out = （　①　＋　②　＋　③　）x Proportion rate of taxable sales

Where:
- Proportion rate of taxable sales = (taxable sales + consumption tax exempt sales) / (taxable sales + consumption tax exempt sales + non-taxable sales)

① Consumption-tax-out relating to the purchase of goods and service such as product/merchandise for sale, warehouse rent, freight in/out, advertisement expense and the likes which support only taxable sales activities.

②　Consumption-tax-out relating to the purchase of goods and service such as the broker income generated from the transfer of land/building or from the lending house for resident use rather than business use, commission income from the sale of marketable securities and the likes which support both only non-taxable sales activities.

③　Consumption-tax-out relating to the purchase of goods and service such as employee benefit, telephone and fax expense, internet expense, entertainment and the likes which support both taxable sales activities and non-taxable sales activities.

Among these two methods, the itemized method is more complicated than the proportional method because it requires to separate the expenses item by item into category ①, ②, and ③. Such work requires a great amount of time and effort if the company has a large amount and a wide variety of expenses. When there is few non-taxable sales (such as the sale of land or marketable securities etc…), there is little difference of the tax credit amount whether it is calculated under itemized method or proportional method. However, if a company anticipates that there will be a large amount of non-taxable sales incurred next year, it is important to consider the selection of applying the itemized method because it may result in a bigger amount of tax credit than using the proportional method. One must notice that although proportional method is less time-and-effort-required than itemized method, once it is chosen, it must be used at least in two consecutive years. Therefore, if the company has chosen proportional method for last business year, then it is wise not to make large amount of non-taxable sales in this year.

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