Withholding Tax & Consumption Tax

[UBear]

Not sure what questions to ask.

I have been contracted to a sole client for many years. They pay me like an employee for a fixed regular amount but do not pay my pension or other insurances. Every month, I issue an invoice that includes a withholding tax amount. I am paid the difference.

Every year, I go into the tax office, seek assistance and guidance to submit my blue tax form from the staff and do as advised. After completing my tax return, I am usually faced with a very minor tax adjustment. Most years the adjustment is approx 30-100k.

This year, I was sent a notice advising I had not submitted for consumption tax and have an additional tax bill of around 10% plus a yet to be determined penalty. Several accountants (including 3 client side company) advised I would only need to make an adjustment and that additional filing that would not be necessary. This has never been raised by the tax office in person or by notification.

Tax office stated if I can show how I was employed, ie was I a salaried the perhaps they would waive the consumption tax. I showed a contract that stated exactly that. But that was considered insufficent.

Could anyone kindly explain what likely has been missed and if there is any recourse?

[adamu]

Every month, I issue an invoice that includes a withholding tax amount. I am paid the difference.

Sorry I'm no expert, but my understanding is that your client should pay you the consumption tax, which you then declare on the tax return. If you've been paid the difference, what happened to the tax they didn't pay you?

[Teflon]

Sounds like you are "gyomu itaku" which is a contractor category of employment. A normal salaried employee would have everything withheld automatically from their salary and wouldn't need to file an invoice for services. Since you are a contractor, you will need to pay your own nenkin and health insurance premiums in addition to the residence tax. As you mentioned, you already have the national income tax withheld so that part is covered.

As for the consumption tax, since you are providing a service, you should include a 10% consumption tax every time you bill your client (who is really a customer purchasing your services). The client would pay the 10% consumption tax on top of your agreed upon salary and you would set it aside to pay the tax office.

Even though you are receiving a "salary" it is not really a salaried position. It's more of a B2B relationship with a fixed monthly cost that your client pays when you send them your invoice. As mentioned, you should also be billing them for the 10% consumption tax. Everything else is on you.

[UBear]

Thanks, I did not expect to see an answer, let alone so soon.

I provide a service. I invoice them X + 10% withholding tax. I get paid X and the company has been paying the withholding tax on my behalf to the tax department. I have only ever had to pay a nominal difference at the end of each year after tax return is completed.

Should I have been charging them 10% withholding AND 10% consumption tax?

[adamu]

As I said , I'm not an expert, I'm just looking this up now.

But I think that what you are calling "witholding tax" is actually consumption tax, and the company does not pay it on your behalf. You are collecting it from the company, and it's your duty to pay it. If you earned over 10M yen the year before last, you need to declare it and pay it to the tax office. Because there is no "two years ago" for the first two years, you get to keep it for the first two years, but after that, you have to pay.

I could be completely misunderstanding, though. As you said, if your tax return wasn't resulting in a big difference, your income tax at least must have been getting paid somehow. Hopefully somebody who knows better will come along...

[UBear]

Thanks.. My invoice total included a withholding tax amount. I received the invoice amount minus the withholding tax amount. The company paid the withholding tax.

[Teflon]

Thanks, I did not expect to see an answer, let alone so soon.

I provide a service. I invoice them X + 10% withholding tax. I get paid X and the company has been paying the withholding tax on my behalf to the tax department. I have only ever had to pay a nominal difference at the end of each year after tax return is completed.

Should I have been charging them 10% withholding AND 10% consumption tax?

You shouldn't be "charging them" for the withholding tax. Your invoice should list a 10.21% withholding tax deduction from the amount they owe you. So that would not be "X + 10%", it should be "X - 10.21%". The company will then deduct that tax from what they owe you and pay it to the government on your behalf. You can and should charge them for consumption tax as well. For example:

Let's say you make 200,000 yen for some services. You would create an invoice for 200,000 yen minus the withholding tax of 10.21%, plus the 10% consumption tax. So that would be:

200,000 x 0.1021 = 20,420 income tax.
200,000 x 0.1 = 20,000 consumption tax.

In that case, you will receive 200,000 - 20,420 + 20,000. So your net payment would be 199,760 yen.

Some examples on the web:
https://www.dayonetax.com/information/withholding-tax/
https://www.gabateachinginjapan.com/taxes/

[UBear]

Sorry for the explanation. "X - 10.21%", is correct and how I invoiced.

However, I was not aware, and at no time did I invoice for consumption tax as well.