Japan considers next steps for VAT on cross-border e-commerce

Takato Masuda
Nishimura & Asahi, Tokyo
t.masuda@nishimura.com

Introduction

Japan continues to adapt its consumption tax (value-added tax, VAT) framework to meet the complexities presented by the digitalised economy, especially the rapidly expanding cross-border e-commerce (EC) sector. Having initially addressed cross-border electronic services by establishing the platform taxation regime, effective from 1 April 2025, attention is now shifting to the more intricate challenges presented by the online sale of goods. The first meeting by the expert panel, a subcommittee of the Tax Commission (an advisory body on tax policy organised by the Japanese government), held on 13 November 2024, kicked off this debate. This article delves into two critical areas deliberated on during this meeting, based on the presentation materials[1] subsequently made public:

• the expansion of the platform taxation regime to cover cross-border business-to-consumer (B2C) sales of goods facilitated by online platforms; and
• the overhaul of the de minimis VAT exemption for low-value imported goods.

These topics were subsequently referenced in the document outlining the FY2025 tax reform[2] announced by the ruling coalition parties in December 2024, which states (author’s translation):

‘In recent years, the market for cross-border EC involving the sale of goods has rapidly expanded. However, challenges have arisen in ensuring the proper imposition of taxes and a level playing field between domestic and foreign businesses due to non-compliant foreign businesses and de minimis exemptions for low-value imported goods. To address these issues, while referencing measures and enforcement in other countries, we will consider possible approaches to consumption tax for cross-border EC, taking into account the level playing field among businesses and the practical impact on customs procedures.’

Thus, while draft legislation has not yet been formulated at this stage, these topics are clearly identified as urgent political priorities for the next VAT reform in Japan.

Background: Japan’s platform taxation regime commencing in 2025

Foreign businesses providing B2C electronic services (such as app distribution, the delivery of electronic books, music) to consumers within Japan are subject to Japanese VAT on these electronic service supplies. From 1 April 2025, the platform taxation regime for electronic services has been introduced, whereby a designated ‘specified platform business’, rather than foreign suppliers, will be solely and fully liable for Japanese VAT on B2C electronic services provided by foreign businesses through their online platforms. The platform taxation regime is designed to enhance VAT compliance and efficient VAT collection by shifting the VAT liability from a large number of uncapturable foreign suppliers to a more identifiable and enforceable group of online platform operators.

Notably, an online platform operator is designated as a ‘specified platform business’ only if the annual total value of the B2C electronic services provided by foreign businesses through its platform exceeds JPY 5bn (approximately $35m). Consequently, Japan’s platform taxation regime only covers the dominant major platform operators that have high compliance capabilities. The Japanese tax authorities have published a list[3] of these operators, which currently is made up of only four online platforms: Apple (App Store, Apple Books, Apple Podcasts), Google (Google Play), Amazon Web Service (AWS Marketplace) and Nintendo (Nintendo eShop).

Setting a high threshold of JPY 5bn to limit the scope of the platform taxation regime to major operators appears to be a Japan-specific approach. The rationale behind selecting the JPY 5bn benchmark has not been clearly articulated. It is possible that the Japanese Ministry of Finance was mindful of the risk that shifting VAT liability to smaller platform operators, particularly those with a limited tax-enforceable presence in Japan and insufficient compliance capabilities, would not lead to improved VAT collection in practice. While some may argue that this threshold deviates from international trends and should be lowered in the future, careful consideration is needed as to whether extending the regime to smaller platforms would actually strengthen Japan’s VAT enforcement.

Expansion of the platform taxation regime to cover the cross-border B2C sale of goods facilitated by online platforms

At its meeting in November 2024, the expert panel signalled serious consideration of expanding the platform taxation regime to cover the B2C sale of goods. This discussion primarily concerns so-called fulfilment transactions, where a foreign seller offers goods to Japanese consumers via an online platform, with the goods pre-stored in and shipped from a warehouse in Japan operated by the platform or its affiliates.

Under current rules, the transfer of goods from abroad to a domestic warehouse prior to actual sale does not constitute a taxable transaction for Japanese VAT purposes. Instead, Japanese VAT liability arises at the point when the foreign seller completes the sale to the Japanese customer.

However, foreign sellers are not always tax compliant, and it remains challenging for the Japanese tax authorities to enforce VAT against offshore sellers. This enforcement gap, where VAT collection is effectively assured for domestic businesses but remains uncertain for foreign businesses, has been highlighted as a serious issue, as it distorts fair competition to the detriment of Japanese businesses.

A potential solution to this issue would be the expansion of the platform taxation regime beyond cross-border electronic services to cover the cross-border sale of goods. Under this proposal, the platform operator, rather than the foreign sellers, would bear sole and full liability for Japanese VAT on the sale of goods made by foreign sellers through their online platform. Extending platform taxation from services to goods would also bring Japan’s VAT rules more in line with international trends.

One point of discussion is whether the same high JPY 5bn threshold, which currently applies to electronic services, would also be adopted if the platform taxation regime were extended to the sale of goods. Although no official position has been announced, it is speculated that only a very limited number of EC platforms, likely only one, or at most two, offering fulfilment services in Japan would meet such a threshold.

It is also important to note that the proposal appears to target specific cases where foreign sellers supply goods from within Japan using fulfilment services. In contrast, direct shipments from foreign sellers to Japanese purchasers, where fulfilment services are not involved, are being addressed separately as part of the ongoing discussions on revising Japan’s de minimis VAT exemption for low-value imported goods.

Overhaul of the de minimis VAT exemption for low-value imported goods

Generally, goods imported into Japan are subject to import VAT, in addition to any applicable customs duties, at the time of importation. Import VAT is collected separately from regular VAT applicable to domestic transactions. Whereas regular VAT is typically collected from the seller, import VAT is paid by the purchaser upon receipt of the goods. In Japan, the cross-border sale of goods via direct shipment is treated as a foreign transaction, given that the goods are shipped from outside Japan. As a result, these transactions fall outside the scope of Japan’s regular VAT regime, and import VAT is applied instead at the time of importation.

Under the de minimis exemption for low-value imported goods, customs duties are waived if the total customs value of the imported goods does not exceed JPY 10,000. The same JPY 10,000 threshold also applies to import VAT, meaning that both customs duties and import VAT are not applicable to goods falling below this value. The total customs value is generally determined on a cost, insurance and freight (CIF) basis. For personal imports, however, the customs value is calculated as 60 per cent of the foreign market price. Applying this 60 per cent calculation, the JPY 10,000 threshold effectively covers goods with a foreign market price of up to JPY 16,666 (= 10,000/0.6), making them exempt from both import VAT and customs duties when imported for personal use.

The expert panel has discussed the need for a sweeping overhaul of Japan’s de minimis exemption for low-value imported goods, as the exemption is deemed to be undermining the country’s ability to effectively tax transactions involving the direct shipment of goods from foreign sellers.

The post-pandemic boom in cross-border EC has raised serious concerns that the exemption is tilting the competitive landscape against Japanese domestic retailers. One often-cited example is the recent rise of emerging low-price EC platforms, such as Shein and Temu. In many cases, foreign sellers are able to offer identical products at VAT-exclusive prices by making use of the de minimis exemption, while domestic sellers must charge VAT-inclusive prices. In addition to the issue of competitive distortion, the sharp increase in cross-border shipments linked to the growth of EC has raised concerns about potential tax leakage. In particular, the under-declaration of the customs value for imported goods, aimed at securing an exemption under the de minimis threshold, is now believed to be occurring on a non-negligible scale.

Japan’s ongoing review of the low-value import exemption is in line with broader international discussions on the issue. The Organisation for Economic Co-operation and Development (OECD) has repeatedly raised concerns that such exemptions distort competition and undermine tax neutrality, most notably in its 2015 report[4] Addressing the Tax Challenges of the Digital Economy, Action 1 and its 2019 report[5] The Role of Digital Platforms in the Collection of VAT/GST on Online Sales. A clear global trend has since emerged, with a number of major economies, including Australia, the EU Member States, New Zealand, Singapore and the UK having already abolished or substantially reduced their VAT/goods and services tax (GST) exemptions for low-value imported goods. According to the OECD’s latest publication,[6] Consumption Tax Trends 2024, only nine OECD member countries still maintain a full VAT exemption for low-value imports.

Referencing international precedents, the expert panel primarily discussed two potential reform models for Japan’s low-value import VAT exemption, as detailed below.

Model 1 - full abolition (EU type): This approach would eliminate the de minimis exemption entirely, making all imported goods subject to Japanese import VAT. Implementing this model would require establishing a robust VAT collection framework to manage the large volume of low-value imports. One possible mechanism would be to mandate that foreign sellers (or online intermediary platforms) register for Japanese VAT and directly remit import VAT on low-value imports. If the seller is unregistered, import VAT on low-value imports would be collected at the border, with the Japanese purchaser being responsible for payment.

Model 2 - conditional abolition (Australian type): Under this model, foreign sellers exceeding a specified annual sales threshold in Japan would be required to register for Japanese VAT and to remit import VAT on low-value imports. The de minimis exemption would not apply to goods purchased from these registered sellers. Small, low-value imports from unregistered sellers would remain eligible for the exemption.

A key consideration in the policy debate is the interaction between a possible overhaul of the de minimis exemption and the proposed expansion of the platform taxation regime. If the platform taxation regime is extended to cover fulfilment-based cross-border sales (ie, where goods are pre-stored in Japan) but the de minimis exemption for direct-shipment sales remains unchanged, foreign sellers may be incentivised to shift from fulfilment models to direct shipment from abroad.

Conclusion

Japan has finally begun to take concrete action to reform its VAT framework to address the challenges posed by the rapid expansion of cross-border e-commerce. The introduction of the platform taxation regime for electronic services, from April 2025, may be a small step, but it is a meaningful move towards addressing the challenges.

The current discussions are centred around two key areas: the potential expansion of the platform taxation regime to cover cross-border B2C sales of goods, particularly transactions involving fulfilment services, and a comprehensive review of the de minimis VAT exemption for low-value imported goods. The proposed expansion of platform taxation aims to enhance VAT enforcement by shifting the tax liability from foreign sellers to major EC platforms. In parallel, the proposed overhaul of the de minimis exemption is intended to create a more level playing field for domestic businesses and mitigate tax leakage risks regarding transactions involving direct shipment.

Taken together, these reforms demonstrate Japan’s commitment to modernising its VAT system in response to the evolving digital economy and ensuring alignment with international trends.