Digitalization of Invoicing System in Japan

Japan is currently halfway through the process of developing and implementing the e-invoicing mandate. For the digitalization reform, a dedicated body was established back in July 2020 – the E-Invoice Promotion Association (EIPA). The main objective of the organization is to enable countrywide implementation of the e-Invoicing standard, which all businesses could use. The e-invoicing model forms part of the reform of the Japanese Consumption Tax system and is closely linked to the taxation regulations. The significant tax change expected for the businesses is that the tax credit will be claimed exclusively based on the qualified electronic invoice.

Background

In the existing regulatory environment, businesses are, to an extent, still based on the paper-based exchange of documents (in the past, it would be the standard way of dealing with papers). The already available digitalization (EDI, invoices sent by email, etc.) has brought some ease. However, there is still a mix of analog and digital processes, which does make the situation significantly efficient.

What is worth mentioning is that the e-invoicing reform will completely redefine the meaning of a tax document (invoice). Historically, the invoice was not considered a document that is formally required for tax deduction purposes (which is very uncommon across jurisdictions where VAT applies). It is expected that this will significantly impact the whole invoicing and tax compliance process for Japanese taxpayers.?

Japanese e-Invoicing concept

The efficiency and productivity improvement are the cornerstones of the upcoming digital change in Japan. It is worth noting that EIPA, in its activity, is focused on more than just the digitalization of the invoices. The overall concept is wider and aims “to promote the "digitalization" of the entire back-office operations of business operators through the utilization and popularization of digital invoices (standardized and structured electronic invoices) in Japan.”

Digitalization model in Japan shall not only enable full connection of digital data between invoice issuance and payment process but would go beyond and include the subsequent processes of accounting and taxation, such as reconciliation of deposits. It is also expected that such a comprehensive approach will inevitably result in the further digitalization of related processes such as contracts and orders.

PINT – Japanese e-Invoice specification

From the start, the Japanese government and EIPA have considered the Peppol a standard for e-Invoicing for Japanese businesses. Since January 2021,?they have been developing a Japanese specification meeting Japanese legal/business requirements. As a result, EIPA/OpenPeppol agreed to use PINT (Peppol International Invoicing Model) as the starting point of Japanese specification. PINT is based on the BIS Billing 3.0, which is, on the one hand, a compliant restriction (CIUS) of EN 16931 but, on the other hand, is generalized to accommodate international needs and allows certain deviations.

The Japan e-Invoicing shall be based on a so-called “4 corner” model, which means that?

● The user (Sender) generates invoice data with its machine system (billing management system, etc.),

● Sends it through its access point (Access Point Sender) via the Peppol network

●?The generated invoice data is sent to the buyer's access point (Access Point Receiver),

●?The invoice data is further transferred to the buyer's (Receiver) machine system (purchase management system, etc.).

Graph 1. Four corner model, Peel, https://peppol.com/blog/what-is-peppol/

E-invoicing implementation timelines

According to the plan, in October 2023, the final regulations shall become binding, and the tax deduction for consumption tax will only be allowed based on the qualified e-invoice, i.e., an electronic invoice issued according to a predefined standard. Before this becomes a reality, Japanese businesses continue to use the Traditional Invoice Retention System, which has operated since 2019.?

To obtain certification, businesses can apply to the National Tax Agency as of 1 October 2021.?The last date for application is 31 March 2023 to ensure the process is completed in time for 1 October 2023, after which the National Tax Agency will publish all registered operators with their ID numbers.

The e-invoice service providers, as well as businesses, would now be able to use and test the Peppol e-invoice model before final implementation takes place. EIPA would be encouraged to take this opportunity to take most of the preparation phase.?

Graph 2: EIPA presentation: Current Initiative for E-Invoice in Japan; Hiroyuki Kato (Digital Agency, Government of Japan); 2021.11.30

Get ready for e-invoicing.

The current phase of e-invoice implementation requires actions to be taken by the stakeholders to prepare for the upcoming digitalization. Currently, the e-invoice service providers are obtaining relevant certifications, whereas the businesses shall start preparations regarding accounting systems and internal procedures.

Additionally, the businesses must be registered as a business issuing qualified invoices. This status will enable compliance with the regulations as of 1 October 2023. To obtain that status, the businesses must submit an "Application for Registration of a Qualified Invoicing Business" by 31st March 2023. Before the go-live date, the businesses will also have to adjust their systems so that they will be able to issue electronic invoices in the prescribed format. In particular, there will be several additional information that will constitute mandatory elements of the invoice (e.g., tax registration number, tax rate, tax amount, etc.)

The final transition to e-invoicing in Japan should significantly improve business efficiency. Nevertheless, before the benefits become tangible, the transition means that business operators must do their homework now and prepare their IT infrastructure and internal processes to accommodate the digitalized transaction model.?

For further details, do not hesitate to comment or contact me.

+44 7833 537388 | [email protected]

Ridvan Yigit