Photo/Illutration The Tokyo Regional Taxation Bureau (Asahi Shimbun file photo)

Tax authorities have penalized a Hong Kong-based freight company for submitting a fraudulent refund claim on the consumption tax, the first such case to come to light.

As the number of foreign companies required to pay the consumption tax is rapidly increasing, tax authorities have been struggling to keep track of dubious filings.

According to sources, the international freight company hired a Japanese logistics firm to deliver goods, paid the charge, including the consumption tax, and claimed a refund on the grounds that the taxable amount was negative.

The procedure was handled by a tax accountant firm in Osaka, which acted as the company’s “tax agent,” the sources said.

However, an investigation by the Tokyo Regional Taxation Bureau found suspicions that the Chinese company had falsified a bill required for the refund and inflated the payment amount.

The company was hit with about 30 million yen ($200,000) in back taxes and penalties in 2023.

In principle, foreign companies are not obligated to pay corporate taxes unless they have a base in Japan.

However, if they sell goods or provide services in Japan, the consumption tax is levied based on transaction amounts.

Even if companies are based overseas, they must pay the consumption tax by subtracting the tax amount paid on purchases from the amount received on sales.

If the resulting amount is negative, they are eligible for a refund.

According to Tokyo Regional Taxation Bureau documents, 8,148 foreign companies were required to pay only the consumption tax in 2024, including those eligible for refunds, a sharp increase from 4,086 companies in 2023 and 1,538 in 2022.

A factor behind the increase is the invoice system introduced in 2023.

The “qualified invoice” contains the company’s registration number, transaction details, tax amounts and other data.

Japanese firms doing business with foreign companies in Japan need an invoice issued by the latter when paying the consumption tax.

As a result, a growing number of foreign companies are registering with the National Tax Agency for issuing invoices.

Tax authorities have increased surveillance of foreign companies suspected of failing to pay the consumption tax, such as game and app distributors, since around 2021.

The monitoring system is far from robust, however.

Of about 56,000 officials in charge of national taxes across Japan, only 50 or so at the Tokyo Regional Taxation Bureau are responsible for investigating foreign companies.

“We simply do not have the resources to investigate every foreign company,” a tax official said.

Shigeru Ino, a professor of tax law at Asia University, said enhancing the collection of the consumption tax, which accounts for the largest share of tax revenue, is essential.

“We need to improve the monitoring system for foreign companies and strengthen the accountability of tax agents who handle procedures on their behalf,” said Ino, a former regional commissioner of the Sapporo Regional Taxation Bureau.

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