Understanding the Benefits of an Electronic Invoicing System ~Digital invoices become legally standardized in 2023~

An electronic invoicing legal framework will come into force in Japan from October 1, 2023.

An “e-invoice” will become an electronic version of an “eligible invoice” that must be saved under the invoice system.

The introduction of an electronic invoicing system has already been mandated, but many people have questions about its implementation.  This article will attempt to answer some of these questions.  

We will explain the current structure of invoices from an accounting and tax view point, and the merits of introducing electronic invoices in an easy-to-understand manner. If you are a business owner who does not understand the current invoicing system, or are a sole proprietor who used to be a tax exempt business, this overview should help you. 

What is the current invoicing system that is being updated to electronic invoices?

An electronic invoice is simply an electronic version of a paper invoice. To understand electronic invoices, it is essential to understand the basic, paper based, invoice system.

What is the current invoice system in Japan ?

The current invoice system allows for receiving a “purchase tax credit” in a consumption tax calculation, and current laws and regulations require an individual or business to save a physical copy of this invoice – called a “qualified invoice” issued by the “registered business operator” that they received the invoice from for goods or services. 

The basic method of calculating consumption tax is to subtract the consumption tax paid at the time of purchase from the consumption tax received. The amount of “consumption tax paid at the time of purchase” will be confirmed on the invoice issued by the supplier.

Previously, consumption tax paid at the time of purchase could be deducted from any invoice issued by any vendor.

However, when the invoice system was introduced, it was not possible to deduct the “consumption tax on purchases” unless it was a “qualified invoice” issued by a certified “qualified business operator.” If you purchase from a business other than a qualified business, you may not be able to deduct the consumption tax, so the tax amount in many cases increased.

However, if you are certified as a “qualified business operator,” you will be obligated to pay consumption tax. Even tax-exempt businesses with sales of less than 10 million yen must be certified as “eligible businesses” in order to issue qualified invoices. In this case, even if a company’s sales are less than 10 million yen a year, it is necessary to pay consumption tax.

In summary, under the current system of invoicing, consumption tax paid at the time of purchase cannot be deducted unless a “qualified invoice” by a “qualified business operator” is saved.

What is the electronic invoice system?

The electronic invoice system is an invoice system that uses electronic “qualified” invoices.

Electronic invoices are scheduled to become a unified standard in Japan in 2023, and currently the EIPA (Electronic Invoice Promotion Association) is working to finalize an electronic invoice system that will promote digitization in the economy.

The EIPA is planning on introducing a system called “Peppol”.

What is Peppol

Peppol is an acronym for “Pan-European Public Procurement Online” an international standard for exchanging of electronic data. It has been introduced and used in more than 30 countries around the world, mainly in Europe.

Peppol has the following advantages, making it a strong candidate for the introduction of the e-invoicing system in Japan.

・ Electronic data other than qualified invoices can also be exchanged・ Smooth transactions with government agencies and other companies that also use the Peppol network・ There are many cases of introduction overseas, providing a number of successful global references・ The operation method is easy to understand Advantages of digitizing invoices In order to introduce electronic invoices, it is necessary to digitize invoices. Let’s take a look at the benefits of going digital.

Automate journal entries and input tax credit calculations

When calculating consumption tax, you have to journalize the received invoice and calculate the purchase tax credit, which can take a lot of time and effort. As e-invoicing is scheduled to become a unified standard in Japan, it is expected that it will be possible to automatically import the billing information of each company when using electronic systems, thus saving time. There is also a high possibility that journal entries and purchase tax credits can be automatically calculated by digital systems, and if transaction information and accounting systems in sales management are linked, it may be possible to eliminate the need to constantly reconcile different sets of books. Most users should expect major benefits in improved business efficiency and productivity.

Electronic signatures (e-seal) can reduce the risk of falsification

After a business has introduced an e-invoicing system, an electronic signature (e-seal) will be introduced to show that you are a qualified invoicing business. Since the “eligible invoice” will have a verifiable electronic signature accompanying it, this will prove that it has been “issued by an eligible business operator.”

Complying with Peppol makes it easier to do business with overseas companies

Peppol has been introduced in many overseas countries, and it is expected that the number of countries using it will continue to expand. It can be used not only for electronic invoices, but also for other business documents, making it easier to complete overseas transactions.

Easy to store and manage invoice management

Invoices must be kept for 7 years. Paper invoices require storage space, and are time-consuming and costly to manage. Electronic data saves storage costs and is convenient because it can be searched easily on a computer.

Disadvantages of receiving electronic invoices

Recipients of electronic invoices have certain disadvantages that need to be overcome.

First, you must “save invoices received as electronic data as electronic data.” In the future, it has been decided that the method of printing and saving electronic invoices will not be permitted due to the revision of the Electronic Book Preservation Law. In the case of electronic storage, it will be important to have a robust “search function,” as it will be a requirement to be able to download documents at the request of a tax inspector.  

Many companies have not yet introduced digitization of invoices, and the use of electronic invoices may cause issues for companies that have not.

Although there are some minor disadvantages, the digitization of invoices and contracts is expected to progress quickly in the future. If you are currently in charge of processing invoices on a paper basis, get in touch and we can help you begin digital processing and offer you a free trial.  

Summary

・Digital invoice systems are scheduled to start on October 1, 2023

・Peppol is an international standard for electronic data, and Japanese electronic invoices are expected to comply with this standard

・By digitizing invoices, it is possible to improve operational efficiency and simplify storage/management of invoices.