Inappropriate Japanese Consumption Tax treatment by offshore online game developers

An offshore online game developer providing online games to users worldwide, including Japan, was found to have failed to collect and pay the proper amount of Japanese consumption tax (JCT). The game developer paid the highest amount of additional JCT and penalty taxes ever paid by an offshore company.

Under the JCT Act, certain services provided via electronic and telecommunication networks are defined as “Electronic Services”. Electronic Services provided by offshore service providers to Japanese users are subject to JCT (destination principle).

In this case, an offshore online game developer providing online games to users in Japan, (the “Developer”), was normally obliged to collect JCT from its customers and pay the tax to the Japanese tax authorities under the JCT Act. However, the Developer failed to comply with this obligation.

This was identified by the Japanese tax authorities through the audit of some platform operators that distribute the Developer’s online games.

The recent perception is that offshore online game developers do not follow the JCT rules, and the Japanese tax authorities have been strengthening JCT’s enforcement.

The Developer was hit with the highest amount of additional JCT and penalty taxes ever paid by an offshore game developer.

Key takeaway

As a countermeasure against non-compliance with the JCT rules by offshore game developers, demonstrated by the case above, new JCT collection rules are expected to be introduced in the 2024 tax reform plan where digital platform operators will become responsible for collecting and paying the JCT on behalf of offshore game developers. Both digital platform operators and offshore online game developers should stay abreast of future legislative developments and assess how these changes may impact their business model and operations. The concepts here will be familiar to those readers accustomed to the EU B2C rules for supplies of cross-border electronic services