Review of the JCT rules applicable to sales of social/smartphone Game Apps

Under the JCT Act, certain services provided via electronic and telecommunication networks are defined as the provision of electronic services (Electronic Service). Electronic Services provided by offshore service providers to Japanese users (Cross-Border Electronic Service) are subject to JCT (destination principle).

While Game Apps are usually sold to Japanese users via digital platforms, such as App Store (for iOS apps) and Google Play (for Android apps) - since contents of Game Apps are normally provided by the developer to the end-users directly - the developers are normally required to collect the applicable JCT from the Japanese users and pay the collected JCT to the Japanese tax authorities.

However, it is often seen that offshore game app developers do not comply with the JCT rules, and some of them do not collect the applicable JCT from Japanese users nor do they pay it to the Japanese tax authorities. Therefore, the government of Japan is considering introducing new JCT collection measures, under which the digital platformers will be responsible for collecting and payment of the JCT for Game Apps on behalf of the offshore game app developers.

The details of the new collection rules are being examined and should be included in the 2024 tax reform plan. The new regime is expected to be similar to the one already in place in the EU and some other countries.

Key takeaway

The new system will substantially shift the JCT collection obligations for Game Apps from the developers to the digital platformers. Both digital platformers and offshore game app developers should stay abreast of the future legislative changes and assess how these changes may impact their business operation.