Here’s a common example of exporting gone wrong:
A Japanese company is looking to purchase USD $10 million of goods from a foreign company. Tucked away in the fine print of the Japanese company’s request for proposal is an “innocent” requirement that the proposal must be inclusive of “all taxes” and that the goods are to be delivered to the Japanese company’s premises.
The foreign company’s sales team doesn’t think much of it. They submit a proposal for USD $10 million, win the deal, and export the goods to Japan.
Fast forward to one year later and the foreign company has lost USD $1.9 million in unexpected Japanese taxes.
Here are the two key issues where the foreign company got trapped:
1. The Japanese customer requested that the foreign company deliver the goods to their premises.
In Japan, the delivery site of imported goods impacts two things:
- Who is responsible for paying import consumption tax (10% of the value of the goods), and
- Whether or not the sale of goods is subject to Japanese sales consumption tax (10% of the sale price).
If the transfer of ownership of the goods from the seller to the buyer takes place at port, it’s the buyer’s responsibility to pay the import consumption tax. Also, the sale of goods is not subject to Japanese sales consumption tax. Most exporters envision this simple and clean scenario when sending goods to other countries. They don’t have to worry about any consumption taxes.
However…if the foreign company is required to deliver the goods to the customer’s premises, then everything changes.
First, it means that the seller (the foreign exporter) is responsible for paying the import consumption tax – not the buyer. Also, it means that the sale of goods is subject to Japanese sales consumption tax as the transaction is taking place within Japan. The seller is responsible to collect the consumption tax from the buyer. Then, they must remit the tax to the Japanese authorities. In this situation, foreign exporters are required to file consumption tax returns in Japan. Even though they do not have a physical location in Japan.
2. The Japanese customer stipulated that the proposal be inclusive of all taxes.
The foreign company’s sales team simply stated the price of the goods, which is USD $10 million. They weren’t thinking about Japan’s tax regulations – that’s not their area.
The foreign company learned long after the deal was closed that the transaction is subject to Japanese sales consumption tax. And, that they’re responsible to collect and pay it to the tax authorities.
Like most foreign companies that find themselves in this situation, they assumed that they could just add the Japanese sales consumption tax on top of the USD $10 million price since it’s the customer’s responsibility to bear the consumption tax. Right?
The Japanese customer argued that the fine print in the contract stipulates that the price was inclusive of all taxes, including Japanese sales consumption tax. Therefore, the price of the goods in the contract is not USD $10 million. It’s USD $9,090,090 with USD $909,090 in Japanese sales consumption tax.
To make matters worse:
The foreign company used a global freight forwarder like DHL to handle shipping the goods. DHL takes care of everything and the foreign company doesn’t really think about it.
Nestled away in DHL’s invoice is the 10% import consumption tax that DHL paid on the foreign company’s behalf. This import consumption tax was actually refundable, but the foreign company didn’t know this. With inadequate tax advice, it became an additional cost of USD $1,000,000, for a combined total tax hit of USD $1,909,090.
Here’s why we suspect that the foreign company is getting ripped off (and that cases like this are not innocent oversights).
Our experiences have led us to suspect that some Japanese customers knowingly take advantage of a foreign company’s lack of knowledge of Japanese tax regulation.
Japanese customers have a strong incentive to request that goods are delivered to their premises and that prices are tax-inclusive. If the foreign company doesn’t include sales consumption tax, then the Japanese customer is effectively getting a 9% discount.
In the example above, the original USD $10M price tag for the Japanese company became a USD $9,090,909 cost with a refundable US $909,090 consumption tax.
If you are planning to or are already exporting goods to Japan, it’s worth having us take a look at your situation.
- Engage with us before proposing or contracting with your Japan-based customer on your pricing.
- If you already are exporting, have us do a review of your contracts and tax situation to make sure you are not getting taken advantage of and also to make sure you are getting the full refund you deserve.
- If you are getting taken advantage of but it’s too late to change things as you’re locked into a contract, then we can at least make you aware of the situation so when you work with another Japanese customer in the future, you won’t let it happen again.
Want to make sure you’re not getting ripped off? Contact us here to hear how we can help.