Hong Kong Freight Company Penalized for Fraudulent Consumption Tax Refund Claim

Tax authorities have taken action against a freight company based in Hong Kong for filing a fraudulent claim for a refund on consumption tax. This case is notable as it is the first of its kind to be identified, coinciding with a notable increase in the number of foreign companies now obligated to pay this tax.

According to reports, the involved freight company engaged a Japanese logistics firm to handle the delivery of goods and, after paying the necessary charge which included the consumption tax, sought a refund claiming that the taxable amount was negative. The execution of this claim was managed by a tax accounting firm in Osaka that acted as the company's tax representative. However, upon investigation, the Tokyo Regional Taxation Bureau uncovered that the company might have falsified a required bill for the refund and exaggerated the payment figures, leading to consequences in the form of approximately 30 million yen (around $200,000) in back taxes and penalties.

Foreign companies generally aren't required to pay corporate taxes in Japan unless they have a physical presence in the country. Nevertheless, consumption tax applies to transactions involving the sale of goods or services within Japan, where even overseas companies are responsible for this tax by offsetting the tax on their purchases against the tax collected from sales. If they end up with a negative result, they can apply for a refund. According to records from the Tokyo Regional Taxation Bureau, there were 8,148 foreign companies that needed to pay consumption tax in 2024, a sharp rise from the figures of the previous years.

A contributing factor to this increase is the implementation of a new invoice system that started in 2023, which requires qualified invoices that contain registration numbers, transaction specifics, and tax details. This requirement means that Japanese companies engaging with foreign partners must obtain these invoices to properly pay consumption tax, prompting more foreign businesses to register with the National Tax Agency to issue them. Since 2021, tax authorities have heightened scrutiny over foreign companies, especially those in the gaming and app distribution sectors, suspected of evading consumption tax. However, the investigative capacity is limited, with only about 50 out of approximately 56,000 tax officials in Japan dedicated to overseeing foreign firms.

As noted by Shigeru Ino, a tax law professor at Asia University, reinforcing the consumption tax collection is crucial since it represents a significant portion of tax income. He emphasizes the necessity for enhanced oversight of foreign companies and greater accountability for tax agents managing these processes.