I got into a dispute over Japan’s invoice system. Here is what happened.
I got into a dispute with a client over the invoice system. It’s resolved now, so I’m sharing what happened.
What the dispute was about
- A tax-exempt business can’t charge consumption tax
- Consumption tax must not be shown on the invoiceBottom line: apparently both of the above are true.
But with a tax accountant’s advice, it got resolved. Here is the whole experience in chronological order.
As a tax-exempt business, I was pretty worn out by the invoice system (Japan’s qualified invoice system for consumption tax). So that this kind of trouble doesn’t happen again, I’m sharing the basics and the actual conversations. If you’re a tax-exempt business, I’m writing this so that remembering just what’s in this article keeps you from losing out.
✓ What this article covers
- What you need to know to avoid losing out under the invoice system
- A way for the tax-exempt business and the client to both avoid losing out
- How a tax-exempt business avoids invoice disputes: a template
Note: this is a first-hand account from November 2023. A later tax reform changed the schedule of the transitional measures, so I’ve added the latest information as of July 2026 in the second half of the article.
Key takeaways
- Transitional measures of the invoice system — what it means
- The transitional measures of Japan’s invoice system are a time-limited mechanism that lets the buyer claim an input tax credit for a set portion of the consumption tax equivalent, even on purchases from parties who can’t issue invoices, such as tax-exempt businesses. The rate is 80% until the end of September 2026, then shrinks in stages to 70%, 50% and 30%, ending in October 2031.
Contents
What a Tax-Exempt Business Needs to Know to Avoid Losing Out Under the Invoice System
Here’s what a tax-exempt business needs to know to avoid losing out, explained without jargon. Below, I focus on deals between a registered invoice issuer (the client, who places the order) and a tax-exempt business (the one taking the order). The conclusion fits in these 3 lines.
- Charge the 10% consumption tax as is → the client loses out
- Discount the entire 10% consumption tax → the tax-exempt business loses out
- Discount only 20% of that 10% → neither side loses out (there’s a calculator for this. *During the 80% transitional period)
Let me explain why with 2 patterns.
Pattern 1: Charging the 10% Consumption Tax As Is → the Client Loses Out
Why the client loses out
Under the invoice system, the client can no longer deduct the consumption tax on payments that come without an invoice (a qualified invoice) through the “input tax credit.” A tax-exempt business can’t issue invoices, so the 10% consumption tax the client pays to a tax-exempt business is treated for tax purposes not as “consumption tax” but as part of the price of the goods.
Here’s how I picture it.
- Before the invoice system: price + tax. The client could deduct the tax portion later, so there was no real cost
- After the invoice system: price + tax. Since it can’t be deducted, the tax portion becomes the client’s own cost (*with the transitional measures, only 80% can be deducted)
In other words, if a client pays the full 10% consumption tax in a deal with a tax-exempt business, it’s as if they pay consumption tax twice, once to the tax-exempt business and once to the government. The client loses out by exactly the amount they can’t deduct.
Pattern 2: Discounting the Entire 10% Consumption Tax → the Tax-Exempt Business Loses Out
Why the tax-exempt business loses out and the client comes out ahead
On the flip side, if the entire 10% consumption tax is discounted, now only the tax-exempt business loses out. The reason is the transitional measure for the input tax credit. No need to memorize the term. Here’s a concrete example with goods priced at 10,000 yen.
- Goods: 10,000 yen
- Discount the 10% tax: the invoice is 10,000 yen (effectively, this amount becomes the tax-inclusive price)
- Of the tax-inclusive 10,000 yen, the consumption tax is 909 yen. The client can deduct 80% of it, or 727 yen (transitional measure)
- The client’s actual cost: 9,273 yen
So even though the tax-exempt business supposedly discounted the consumption tax, the client can still deduct consumption tax on top of that. A strange thing happens. A tax accounting firm’s article also puts it this way.
We won’t pay consumption tax to tax-exempt businesses!!
The transitional measures apply for a total of 6 years. For the first 3 years (October 1, Reiwa 5 to September 30, Reiwa 8), 80% of the amount equivalent to the input tax, and for the following 3 years (October 1, Reiwa 8 to September 30, Reiwa 11), 50%.Client Company A can deduct 36,363 yen, which is 80% of the consumption tax equivalent of 45,454 yen, calculated by multiplying the monthly advisory fee of 500,000 yen paid to Yokohama Tax Accountant Corporation by 10/110 (the consumption tax rate including local consumption tax), from the other consumption tax it has collected. (Consumption Tax Act, Supplementary Provisions 22(1), 23(1))
Huh? What is this?! Even though the monthly advisory fee was set at 500,000 yen, Company A shows the fee it paid as 463,637 yen, with 36,363 yen as provisional consumption tax paid. Somehow it has turned into a discount...?
*The periods and percentages in the quote are the schedule as of writing. They changed with the 2026 tax reform (explained in the addendum later in this article).
So when the 10% is discounted, the client’s cost goes down and the tax-exempt business loses out.
Whether “losing out” and “coming out ahead” are the right words aside, depending on whether the 10% consumption tax is there or not, one side or the other ends up carrying the burden. So let’s look at the middle ground where neither side loses out.
Pattern 3: How the Tax-Exempt Business and the Client Both Avoid Losing Out
In the 2 patterns above, one side or the other carried the burden, but while the transitional measures last, it can be adjusted so that neither side loses out. The method is simple: the tax-exempt business discounts only the part of the 10% consumption tax that “the client can’t deduct.” During the 80% transitional period, that’s a discount of 20% of the 10%.
Try the tool below. I built a calculator on this site that reflects the 2026 tax reform (70% deduction).
Invoice transitional-measure calculator (free, updated for the 2026 reform)
Reference: an external discount calculator (as of July 2026, it still uses the pre-reform schedule)
Just enter the transaction amount, and this tool calculates the discounted amount at which “the client’s cost is the same whether they deal with a tax-exempt business or a registered invoice issuer.” Roughly, the idea is this.
- Discount only the extra amount the client can’t deduct when ordering from a tax-exempt business
- The client’s actual cost ends up the same as “a deal with a registered invoice issuer”
The tool above does this somewhat complicated calculation in one shot. I use it to show my clients that “your cost is the same as with a registered invoice issuer.”
I said neither side loses out, but in reality the tax-exempt business earns less than before the invoice system. Right now the burden is 20% of the 10% consumption tax, but each time the transitional measures shrink, the burden grows, and once they end, the burden is the full 10% (= a 10% discount becomes mandatory). So once the transitional measures end, registering as an invoice issuer becomes effectively mandatory, and since the taxes are way too high and it’s a hassle, I’m going to set up an overseas company before then.
(2026 addendum: the overseas company plan was what I had in mind at the time of writing. Today I’m based in Shiogama, Miyagi, doing web production and AI development as Webharu Inc.)
If you’re interested in overseas companies or the nomad life, check out my newsletter. I share everything about how the business grows from here.
The Transitional Measures Change What You Should Do Next
Put simply, the transitional measures are a mechanism that lets the client deduct part of the consumption tax even when ordering from a tax-exempt business.
Example: 10% of 10,000 yen = 1,000 yen. During the 80% deduction period, the client can deduct 80% of 1,000 yen = 800 yen.
At the time of writing (2023), the schedule was “80% until the end of September 2026 → 50% until the end of September 2029 → end.” That schedule changed with the 2026 tax reform. See the next addendum for the latest.
[July 2026 Addendum] The Transitional Measures Now “Run 2 Years Longer, in Finer Steps”
About 3 years after I wrote this article, things have moved, so here’s an update (as of July 2026, based on information published by the National Tax Agency and explanations from various tax accounting firms).
- The 80% deduction lasts until September 30, 2026, as planned. As of this addendum, about two and a half months remain
- It was supposed to be cut in half to 50% from October 1, 2026, but the fiscal Reiwa 8 tax reform eased it to “70%”
- The new schedule: 80% (until September 2026) → 70% (until September 2028) → 50% (until September 2030) → 30% (until September 2031) → end (from October 2031). That’s a 2-year extension over the original plan
- However, purchases from the same tax-exempt business beyond 100 million yen a year are no longer covered by the transitional measures (from October 2026). That’s an amount ordinary freelance deals will almost never reach
Along with this, the size of the “discount where neither side loses out” introduced in this article also changes. From October 2026, the guideline goes from “20% of the 10%” to a discount of “30% of the 10%” (because the portion the client can’t deduct becomes 30%).
To match this, I’ve published a calculator on this site that reflects the 2026 revised schedule. Just enter the tax-inclusive amount, and it automatically calculates the deduction, the added cost, and the discount where neither side loses out. → Invoice transitional-measure calculator (free)
Also, the “20% special rule” for people who switch from tax-exempt to registered invoice issuer (a special rule that lets you pay just 20% of the consumption tax on your sales) is available to sole proprietors through 2026. In its place, a “30% special rule” has been created for 2027 and 2028. If you’re unsure whether to register, these points are worth weighing too.
How a Tax-Exempt Business Avoids Invoice Disputes: A Template
Here’s the message I send every time.
- Please use this invoice. It was prepared under a tax accountant’s supervision so that it costs you no more than the contract amount. Also, while I’ve changed the label “consumption tax” to “technical fee,” this is so that the total amount, the deductible amount, and so on stay the same. For the calculation, I use the tool below and discount the price of the goods so that your cost is the same as in a deal with a registered invoice issuer. >https://www.webharu.com/tools/invoice-calculator
The message above is one I wrote at a tax accountant’s suggestion. Adjust the details and wording to fit your own tone. About one sentence in it in particular.
- Also, while I’ve changed the label “consumption tax” to “technical fee,” this is so that the total amount, the deductible amount, and so on stay the same.
This part drew some pushback on Twitter. The objections were along the lines of “You can charge consumption tax” and “It’s better to state the tax categories, 8% and 10%.” I mostly agree with that. But the tax accountant on the other side of this deal said the method above was better, so I went with it.
By the way, the view that “it’s better to state the tax categories, 8% and 10%” is very much correct. That’s because “showing the tax category” is one of the conditions for applying the transitional measures. But if you don’t show any tax in the first place, it doesn’t matter, and the transitional deduction still applies. That’s what converting it to a technical fee is for.
From the reactions on Twitter, I also learned that tax accountants interpret the invoice system differently. Our company is taking a wait-and-see approach to the invoice system for now. We plan to move the business overseas eventually. If you’re interested, try signing up for the newsletter. I send it out now and then.
(2026 addendum: the plan to move overseas above was what I had in mind at the time of writing. I later changed course and have since incorporated as Webharu Inc. in Shiogama, Miyagi.)
[August 2026 Addendum] The 80% Deduction Period Ends on September 30, 2026
The deduction rate under the invoice transitional measures switches from 80% to 70% on October 1, 2026 (fiscal Reiwa 8 tax reform). For how to adjust the discount and write invoices after the switch, see my article on the October 2026 switch of the invoice transitional measures from 80% to 70%.
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FAQ
Can’t a tax-exempt business charge consumption tax?
Charging it isn’t prohibited as such. But without an invoice, the client can’t take the full input tax credit (only part is deductible under the transitional measures), and charging the 10% as is raises the client’s cost, which is what causes disputes.
How long do the transitional measures last? (as of July 2026)
The 80% deduction lasts until September 30, 2026. From October 2026, under the tax reform, it becomes 70%, then shrinks in stages to 50% (until September 2030) and 30% (until September 2031), ending in October 2031.
How big should the discount be so that neither side loses out?
Discount only the part the client can’t deduct. During the 80% deduction period, the guideline is 20% of the 10% consumption tax, and from October 2026 it’s 30%. This site’s calculator (/tools/invoice-calculator) works it out automatically from the transaction amount.
Is it OK to label the consumption tax on an invoice as a “technical fee”?
That wording follows the policy of the tax accountant on the client’s side in this deal, and it’s meant to keep the total amount and the deductible amount unchanged. The author also mostly agrees with the view that “it’s better to state the tax categories,” so adjust the exact wording to your own tone.
Are there special rules if a tax-exempt business registers as an invoice issuer?
The “20% special rule” (a special rule that lets you pay just 20% of the consumption tax on your sales) is available to sole proprietors through 2026. In its place, a “30% special rule” has been created for 2027 and 2028, which is worth weighing if you’re unsure whether to register.
