Home Japan's Consumption Tax Changes Pose Potentially Devastating Risk to Anime and Entertainment Industry

Japan's Consumption Tax Changes Pose Potentially Devastating Risk to Anime and Entertainment Industry

An update to the Japanese consumption tax could see a huge exodus of animators and voice actors from the industry, sources claim. On October 1, 2023, a change to how businesses and freelancers pay Japan’s consumption tax (JCT) was finally enacted, confirming many people’s worst fears since it was announced in 2016.

JCT taxpayers are seen as businesses that provide goods and services that are deemed taxable. PWC details a list of taxable goods. Most goods/services are considered taxable. Like VAT, governments legally require JCT taxpayers to mark up the price of goods/services they supply to other businesses by some value added to the original price – either 8% or 10% — Hence, this is a value-added tax (VAT), or JCT. Businesses are expected to hold onto this JCT until they pass it on to the government at the end of the tax year on March 31st, or 2 months before the end of the fiscal year for corporations.

How the old JCT rules were a positive to businesses

Instead of passing the JCT onto the government, the law allowed small businesses and freelancers with less than ¥10mn of taxable sales to hold onto it permanently, providing a treasured source of extra income. The reason was to offset the costs of accounting. This wasn’t a loophole, but rather a grant from the Japanese government to help people meet their day-to-day operating costs. These businesses and freelancers are known as JCT-exempt.

Businesses with taxable sales greater than ¥10mn are generally known as JCT taxpayers since they are expected to forward the consumption tax to the government. However, even they were allowed to keep some of the tax. An example is if Studio X bought goods/services from another business and was issued an invoice for 1,100 yen (1000 yen plus 100 consumption tax), Studio X could use this invoice and retain 10% of that 100 yen, and so keep 10 yen when it came time to file their tax returns at the end of the financial year. While they still forwarded some, it wasn’t all.

What is the consumption tax rule change?

The rules have been changed such that all entities exempted from paying any JCT (JCT-exempt businesses) can’t issue the invoices that would allow a JCT taxpayer to claim back any money. That directly affects small businesses and freelancers, as before, the taxpayers could transact with them and claim back money at the end of the year. Now, taxpayers lose a major reason to seek services from these now-unqualified issuers of invoices, since they can’t use the unqualified issuer’s invoice to reduce their JCT contributions.

How will this affect the industry, including voice actors, animators, translators, and more?

Naturally, this creates a dilemma for many small businesses and the self-employed. The only way to be able to issue invoices that would help JCT taxpayers retain more money is to waive their own JCT exemption status. That means that they must give up on a treasured source of income just to be able to continue business with their clients. Smaller entities like freelancers, voice actors, and translators must decide between higher taxation and higher chances of being hired/doing business. What’s worse, is that if a freelancer keeps their JCT exemption, businesses may demand that they lower their prices to offset the now increased cost of doing business. This undercuts their pricing strategy. People who may have gone on to revolutionize industries may find that there is no financial viability.

However, this rule change also affects bigger businesses. Now that there is no longer a tax incentive to work with JCT-exempt freelancers, this means that continuing these business relations means forwarding more money to the government, harming their revenues. These businesses may be forced to close down, downsize, or have their talent plucked by those able to handle this increased financial burden. These changes may already be foreshadowed. As reported by Full Frontal, MAPPA graciously decided to pay its freelancers more in exchange for these freelancers waiving their JCT exemption, however, smaller businesses cannot do this. Not only does this widen the gap between richer and poorer companies, stifling competition, but recent reports of MAPPA’s poor working conditions demonstrate the need for a wider range of companies, not less.

The change also affects foreign businesses that provide taxable goods and services in Japan. EU-Japan Centre reports that while most import-export operations remain exempt from JCT, therefore including most freelance services, a business that has a branch in Japan may be asked by their Japanese partners to waive their JCT exemption to continue business relations. Furthermore, the process must be done by paper if this business is not based in Japan; it cannot be completed online.

One of the most controversial changes in the new change is the threat to privacy and anonymity. If a freelancer/small business waives their right to JCT exemption and is now able to issue qualified invoices, they must first register with the government and receive a government ID. Under the new rules, this freelancer is legally compelled to provide an invoice if a JCT taxpayer requests one after receiving services from them. For an anonymous streamer, for example, this invoice may have previously only had their stage name for privacy purposes, however, the government ID can then be used in order to link this to their real name. While proponents of the tax change argue that most anonymous workers, like an author using a pen name, entrust their business partners with their real identity, this change certainly narrows the pool that these freelancers can work with. Freelancers may put a representative’s name on the invoice, but this is not an option for everyone.

Why was the JCT change seen as necessary and positive?

Proponents of the rule change state that the government will be able to collect more tax which is necessary to improve the economy. Waiving the JCT exemption is also optional even if disadvantageous to some, and the penalty to businesses who choose to waive their JCT exemption is limited to “only” 10%. HJS Global Japan reports that there is also a transitional period until 2029.

Using the earlier example of Studio X: Previously, if Studio X was issued an invoice for 1,100 yen (1000 yen plus 100 consumption tax), they would get back 10 yen. From October 1st to September 30, 2026, this amount is 8 yen. From October 2026 to September 2029, it will be 5 yen, before becoming 0 from 2029 onwards. This means the changes are not immediate.

There are real faces behind the statistics

While it will take a few years for the impacts of this change to be truly understood, many people, from actors to Uber drivers have voiced their concerns. A petition decrying the changes, #STOPInvoice, has achieved over 550k signatures, with two surveys already illustrating the impending damage of the JCT rule change. As Full Frontal visually explains, a survey from the volunteer group VOICTION found that voice actors overwhelmingly expected lower income as a result. The second survey from Freelance Group Thinking About Invoice Systems, represented by NAFCA’s Masuo Ueda (producer: Inuyasha, Cowboy Bebop: The Movie) surveyed 1132 freelancers working in the anime industry. 97% of them fall under would-be JCT-exempt businesses, 80% reported being between 20-40 years old, and 20% of them believe that they will go out of business, showcasing the wide-ranging implications of this update.

The translations can be viewed in the ALT text

With the animators affected mostly aged between 20 and 40, recent findings from the Nippon Anime & Film Culture Association (NAFCA) are put into harrowing perspective. This association was formed to represent the interests of creatives, who according to Ueda, “are pushed beyond their limits but still work hard because they ‘love this job.'”

The decline of skilled animators can be partly attributed to struggling finances within the industry. It’s expensive to retain permanent staff, which is a reason behind the large freelancing market. Younger animators move from production to production to make ends meet, meaning techniques and processes failed to be properly passed on. Despite anime being one of Japan’s biggest cultural exports, the JCT rule serves to compound an already struggling pipeline.

For more on the topic check out Full Frontal, Deloitte
Featured image: New Game!! © Shotaro Tokuno, Hobunsha / New Game!! Project

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