Recently, we've been hearing a lot of people saying they are busy dealing with the invoice system, but are they fully prepared?
If you leave it to your tax accountant, you may end up incurring losses in unexpected places.
This time, we will introduce the impact that the invoice system will have on rental property owners, along with specific ways to deal with it.

What is the invoice system?

The invoice system is a new system regarding consumption tax that will start in October 2023.
Although consumption tax is a familiar tax, its mechanism is somewhat complicated.
The new invoice system was established to accurately determine the consumption tax rate and amount by issuing invoices in a set format.
To understand the invoice system, let's first review how consumption tax works.

How consumption tax works

For ordinary consumers, consumption tax is simply 8% or 10% of the purchase price paid to the store, but the businesses that receive the tax file it and pay it on their behalf.
However, businesses do not only receive consumption tax from customers; they also pay it when they pay for procurement costs, subcontracting fees, etc.
Businesses report and pay the tax amount that is the consumption tax they have received minus the consumption tax they have paid. This is called input tax credit.
Another important distinction regarding consumption tax is between taxable businesses and tax-exempt businesses.
Sole proprietors or corporations with sales revenue exceeding 10 million yen in the fiscal year before last are taxable businesses and are required to pay consumption tax.
Other businesses are exempt from tax unless they file a notification to become taxable businesses.

Overview of the invoice system

The invoice system is officially called the "Qualified Invoice Storage Method."
With some exceptions, this system allows input tax deduction only if you save invoices (qualified invoices) issued in accordance with a prescribed format.
This qualified invoice can only be issued by a taxable business that is registered under the invoice system. The registered business number is printed on the invoice to indicate that the business is a registered business.

How the invoice system impacts rental property owners

Transactions that are significantly affected by the invoice system are those in which consumption tax is incurred and where the recipient of the consumption tax is a tax-exempt business.
In this case, the tax-exempt business cannot issue qualified invoices in accordance with the invoice system.
The party that pays the consumption tax cannot claim input tax credit because it is unable to receive and keep the qualified invoice. As a result, it will end up with a loss on the payment of consumption tax.
Let's look at some specific examples.

Impact on Tenant Relationships

There is no particular problem as consumption tax is not levied when renting residential properties or land.
This becomes an issue in cases such as rent for a commercial building or leasing an entire accommodation facility, because the rent is subject to consumption tax.
In this case, the rental owner is the recipient of the consumption tax in relation to the tenant.
In other words, if the rental owner is a tax-exempt business and cannot issue qualified invoices, the tenant will not be able to receive input tax credit.
In such cases, landlords will likely negotiate for a reduction in rent, as the introduction of the invoice system will mean that tenants will have to pay an increased consumption tax burden on their landlords.
In the worst case scenario, it could lead to eviction.

Impact on relationships with business partners

In most cases, rental property owners outsource services such as property management, cleaning, equipment collection, and garbage collection.
In relation to the business partner, the rental owner is the party paying the consumption tax.
In this case, if the business partner is a tax-exempt business and cannot issue qualified invoices, the rental owner will not be able to apply input tax credit for the consumption tax paid.
If the rental owner is a tax-exempt business, there will be no impact since they are not required to pay consumption tax in the first place. However, if the owner is a taxable business, they will have to bear an increased burden because they cannot deduct input tax on outsourcing expenses (there is a special provision that allows them to deduct a certain percentage for a certain period of time).

Impact on purchasing property

When a rental owner purchases a property, consumption tax is levied on the building portion of the property.
In the year in which you purchase the property, the amount of consumption tax paid will be greater than the amount of consumption tax received, and if you are a taxable person, you will be able to receive a consumption tax refund.
As of 2020, consumption tax refunds are no longer available for residential rental properties, but consumption tax refunds are still available for business properties such as commercial buildings.
However, if the seller is a tax-exempt business and is unable to issue a qualified invoice, a consumption tax refund on the business property will not be granted.

Measures for the invoice system

We learned that the invoice system affects rental property owners in various ways. We want to avoid situations where tenants move out or we end up losing money on consumption tax.
Countermeasures for the invoice system vary depending on whether the property owner is a taxable business operator or a tax-exempt business operator, and whether the property they own is a residential property or land where rent is non-taxable or a commercial property where rent is subject to consumption tax.

If the property owner is a taxable business

If the rental owner is a taxable business, there will be no problem in terms of their relationship with the tenant as long as they register as an invoice-registered business and have a system in place to issue qualified invoices.
In the case of residential real estate and land rentals, there are no problems with the invoice system because they are not subject to consumption tax in the first place, and in the case of commercial real estate, tenants can apply input tax deductions to the rent by issuing qualified invoices.
The problem arises when the company outsources services such as rental management and cleaning to a tax-exempt business.
In this case, you will not be able to claim input tax credit for the outsourcing fee.
Therefore, rental property owners will likely need to negotiate with their contractors to become taxable businesses and invoice-registered businesses, or negotiate a reduction in contractor fees.
If the negotiations do not go well, changing the contractor may be considered.

If the property owner is a tax-exempt business

If the rental owner is a tax-exempt business, the main issue concerns the relationship with the tenant.
If the property is a commercial property, the tenant will likely request that you issue a qualified invoice. Discuss this with the tenant before it develops into a problem, and consult with your tax accountant about the impact of becoming a taxable business and an invoice-registered business.
If there appear to be few problems, it would be safe to proceed with the procedures to become a taxable business and invoice registered business.

Complete the process before the system starts

The invoice system will start on October 1, 2023, but in order to avoid confusion at the start, a certain percentage of input tax deduction will be allowed even if you do not have a qualified invoice.
However, since this will increase the burden on parties who are unable to receive qualified invoices, it is essential that tax-exempt businesses consult with their business partners in advance regarding transactions involving such businesses.
If the rental property owner is a tax-exempt business owner, they should consult with their tax accountant to see whether remaining a tax-exempt business would be disadvantageous to them.
In any case, we recommend that you take some time to clarify what impact this will have on your relationships with tenants and business partners.