Revenue is one of the most important indicators of a company’s performance, and how revenue is recognized affects a company’s financial figures. Japanese revenue recognition standards were revised based on IFRS and U.S. GAAP, and they are now very close to them. However, for tax purposes, some revenue recognition differs in Japan. This article explains some examples of these differences.
Company-issued loyalty point programs
For companies operating in the B2C business that award customers points under their loyalty programs, accounting revenue may differ from taxable sales for Japanese consumption tax purposes.
If the points provide a material right, part of the transaction price is allocated to the points based on their estimated stand-alone selling price, including the expected redemption rate. This amount is recorded as a contract liability and recognized as revenue as the points are redeemed (Paragraph 139 and 140 of Implementation Guidance on Accounting Standard for Revenue Recognition, ASBJ Guidance No. 30).
For consumption tax purposes, however, the full consideration for the initial sale is generally recognized as taxable sales at that time (Article 28 of the Consumption Tax Act). Accordingly, accounting revenue and taxable sales may be recognized on different bases.
For example, if the company recognizes revenue of JPY7,600 and a contract liability of JPY400 for the points in December and subsequently reclassifies JPY100 from the contract liability due to the partial usage of points in January, taxable sales for Japanese consumption tax purposes are JPY8,000 in December and zero in January.
When a company receives a non-refundable payment from a customer
When a company receives a non-refundable payment from a customer, it shall assess whether the payment relates to the transfer of a promised good or service, or whether it is an advance payment for the future transfer of goods or services.
If the payment does not relate to the transfer of a promised good or service, the company shall recognize revenue when those future goods or services are provided.
If the non-refundable payment from the customer relates to the transfer of a promised good or service, the company shall assess whether to account for the transfer of that good or service as a distinct performance obligation (Paragraph 57-59 of Implementation Guidance on Accounting Standard for Revenue Recognition, ASBJ Guidance No. 30). Therefore, it depends on how and when the performance obligation is satisfied.
On the other hand, for tax purposes, if a company receives a payment from a counterparty upon commencing a transaction involving the sale of assets, etc., that is non-refundable from the inception of the transaction regardless of early termination, such payment shall, as a general rule, be included in gross income for the business year in which the commencement date of the transaction falls.
However, if the non-refundable payment is recognized as the advance receipt of consideration for the provision of services to be provided over a specific period of a contract, and if the corporation consistently includes the amount of revenue in gross income over that specific period as consideration for the provision of such services, the tax treatment will follow the accounting treatment.
Examples of “non-refundable payments” include the following:
- Lump-sum payments received as consideration for granting licensing rights to industrial property rights, etc.
- Lump-sum payments or down payments received upon entering into contracts to grant know-how.
- Preparation fees, upfront fees, or similar payments received from a counterparty to cover initial expenses in connection with contracts for the provision of technical services, excluding those that are to be refunded if a surplus remains after subsequent settlement.
- Enrollment fees, etc., received upon entering into membership contracts for sports clubs (Corporation Tax Basic Circular 2-1-40-2).
Therefore, revenue recognized for accounting purposes is not necessarily treated the same way for tax purposes, so it is necessary to determine which tax treatment should be applied.
Granting a license
If a promise to grant a license is not distinct from other promises to transfer goods or services in a contract with a customer, a company shall account for both the promise to grant a license and the promise to transfer those other goods or services together as a single performance obligation, and determine whether the performance obligation is satisfied over time or satisfied at a point in time.
If a promise to grant a license is distinct from other promises to transfer goods or services in a contract with a customer and constitutes a separate performance obligation, a company shall determine whether the nature of its promise in granting the license is to provide the customer with either (1) or (2) below:
- A right to access the company's intellectual property as it exists throughout the license period. Revenue is usually [ss(1] recognized over time.
- A right to use the company's intellectual property as it exists at the point in time at which the license is granted. Revenue is recognized at the point in time when the license is granted (Paragraph 61 and 62 of Implementation Guidance on Accounting Standard for Revenue Recognition, ASBJ Guidance No. 30).
For Japanese corporate tax purposes, the timing of income recognition for the grant of a license generally follows the same principle as the accounting standards, determining whether the license provides a right to access or a right to use the intellectual property.
On the other hand, for tax purposes if a company recognizes revenue on any of the following dates with respect to the amount of consideration (excluding royalties) received from the establishment of a license for industrial property rights, etc., such date is deemed to fall under a date close to the date on which services related to the establishment of the license are provided, and the amount is permitted to be included in gross income on that date:
- The effective date of the contract concerning the establishment.
- The date of registration, in cases where the establishment takes effect upon registration (Corporation Tax Basic Circular 2-1-30-2).
In this case, even if the Japanese subsidiary applies an accounting treatment that differs from the revenue recognition accounting standards, it is acceptable for tax purposes.
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