Consumption tax (消費税) is levied on sales of goods and the provision of services; it is ultimately borne by the consumer, while the selling business collects it and pays it to the state.
Stage (example at a 10% tax rate)
Consumption tax received
Consumption tax paid
Amount paid to the state
A manufacturer sells to a retailer for 2,000 yen before tax
200 yen
0 yen (assume no purchases)
200 yen
The retailer sells to a consumer for 5,000 yen before tax
500 yen
200 yen
500 yen − 200 yen = 300 yen
Consumer
None
500 yen
Does not pay it (only bears it)
Total
—
—
200 yen + 300 yen = 500 yen (same as the consumer's burden)
A tax where the person who bears it differs from the one who files and pays it is an indirect tax (間接税), and consumption tax is the leading example. A business takes the consumption tax it collected from buyers on its sales, subtracts the consumption tax it paid on its own purchases, and pays the remainder; this subtraction is the input tax credit (仕入税額控除). Since each stage of the trade pays only the difference, the payments of all stages add up to the tax the consumer finally bore.
AnalogyIt is like a bucket brigade: each shop along the way hands the state only its own share of the tax added to the price tag. The water comes from the final buyer, and the shops are just the carriers.
How to remember"Indirect" means the tax takes a detour: it travels from the consumer who bears it to the state through the business standing in between.
Exam points
Mix-upIt is the business (事業者) that files and pays consumption tax to the state. Consumers bear the tax along with the price, but never pay it themselves.
Mix-upThe amount a business pays is not the consumption tax it collected on sales itself, but what remains after subtracting the consumption tax it paid on purchases.
Corporate tax (法人税) is a tax levied on the income that a company or other corporation earns from its business.
Ordinary profit
Income before income taxes
Net income
What remains after deducting corporate tax and other taxes on profit is net income.
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The corporation that bears corporate tax files and pays it itself, so it is a direct tax (直接税), where the one who bears the tax and the one who pays it are the same. The taxable income is calculated from accounting profit adjusted under the rules of tax law, so it is not necessarily the same amount as profit. On the income statement, corporate tax and other taxes are deducted from income before income taxes (税引前当期純利益), which is ordinary profit plus extraordinary gains minus extraordinary losses, and the remainder is net income (当期純利益).
AnalogyIt is like a harvest levy based not on the whole crop but on what is left in hand after paying for seed and fertilizer.
How to rememberA "corporation" is an organization the law treats as a person. Link it to the income tax on individuals: corporate tax is the version for corporations.
Exam points
ExamOn the income statement (損益計算書), corporate tax and other taxes are deducted after extraordinary gains and losses have been added and subtracted. What remains after that deduction is net income (当期純利益).
Mix-upCorporate tax is levied on a corporation's income and paid by the corporation that bears it, making it a direct tax (直接税). It falls in a different category from consumption tax (消費税), which is levied on consumption and separates bearing the tax from paying it.
The qualified invoice retention method (適格請求書等保存方式) is the official name of the system that requires keeping qualified invoices (適格請求書) and similar documents as a condition for claiming the consumption tax input tax credit.
Items on a qualified invoice (examples)
What it shows
Registration number
Issued by a registered business
Applicable tax rate
Which tax rate applied to the transaction
Consumption tax amount for each rate
The basis for the tax the buyer deducts
The system began in October 2023 and is commonly called the invoice system (インボイス制度). A qualified invoice shows items such as the issuing business's registration number, the applicable tax rate, and the consumption tax amount for each rate. Only a qualified invoice issuer (適格請求書発行事業者) registered by the head of a tax office can issue one.
How to rememberBreak the name into "qualified", "invoice", "retention" and "method", and the name itself spells out the requirement.
Exam points
Mix-upThe qualified invoice retention method and the invoice system (インボイス制度) are not separate systems but the official and common names of the same one.
Mix-upQualified invoices (適格請求書) can be issued by registered qualified invoice issuers (適格請求書発行事業者). A business that has not registered cannot issue them.
The invoice system (インボイス制度) is the common name for the qualified invoice retention method, a consumption tax system under which buyers who receive and keep qualified invoices can claim the input tax credit.
The seller registers
The seller issues a qualified invoice
The buyer receives and keeps it
The buyer claims the input tax credit
Based on the stored qualified invoice, the buyer subtracts the consumption tax it paid from the amount it owes.
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The Japanese name インボイス comes from the English word "invoice", a bill that tells the other party the details and price of a transaction. When the seller issues a qualified invoice and the buyer keeps it, the buyer can subtract the consumption tax it paid from the amount it owes. Purchases from unregistered businesses come without a qualified invoice, so in principle the buyer cannot claim the input tax credit for them.
AnalogyIt is like a store coupon that is accepted only when it bears an official stamp. Only an invoice with a registration number lets you subtract the tax you paid.
How to rememberインボイス is simply the English word "invoice", matching the "invoice" part of the official name.
Exam points
Mix-upThe invoice system concerns the consumption tax input tax credit (仕入税額控除); it is not a mechanism for calculating corporate tax (法人税).
Mix-upThe seller issues the qualified invoice; the buyer receives it, keeps it and claims the credit.
Key points
Consumption tax is borne by consumers, and the business that sold the goods or services collects it and pays it to the state.
The consumption tax a business pays is the tax collected on sales minus the tax paid on purchases, and this subtraction is the input tax credit.
Corporate tax is levied on a corporation's income; on the income statement it is deducted from income before income taxes, and the remainder is net income.
The qualified invoice retention method is commonly called the invoice system, and claiming the input tax credit in principle requires keeping qualified invoices issued by registered businesses.