Cross border transactions by consignment sale – Consumption tax
Case 18
<Question>
We have a consignment sales contract with company A in Canada, and we sell frozen salmon produced by A on a consignment basis. Since they are consignment sales we do not take any inventory risks from the transactions though we would like to know points to consider regarding tax matters.
<Answer>
Profits from consignment sales are lower than from a buy-sell business for assignees though they bring solid profits to the extent that the assignees do not take any inventory risks. Especially, when the market price or foreign currency rate fluctuates a lot, imported inventories are exposed to large risks. The consignment sale does not produce such risks though paying attention to consumption tax and agency permanent establishment is necessary.
Tax payers
Based upon the consumption tax law taxpayers are defined as follows;
1. An enterprise which transfers property or provides services in Japan in return for payment or
2. Any person who removes foreign goods from a bonded area.
These tax payers do not need to have a residence or domicile in Japan.
It means even non-residents have to pay the consumption tax as long as the transactions meet the above requirements.
<Business flow>
In the case of consignment sales, the following is the business flow.
- Assignors export goods.
- Consigners pick up the goods at the bonded area, and pay the import consumption tax. Ownership of the goods is still allotted to the assignors.
- Consigners sell the goods. Ownership of the goods is transferred to buyers (it is not transferred to the consigners)
- The commission fee is settled based upon the number of sold goods.
<Who are the tax payers>
- Assignors
Based upon the consumption tax rule, as long as property is transferred or services are provided in Japan, the consumption tax is supposed to be imposed regardless of whether they are non-residents. Therefore,
the assignors have to file and pay the consumption tax return in Japan. - Consigner
All property removed from bonded areas is subject to the consumption tax. This includes items used for personal consumption by the importer. This rule is necessary to maintain the tax balance between foreign and
domestic goods. Therefore, consigners have to pay the consumption tax when they pick up the goods even though ownership is not transferred to them. - Commission fee
The services are performed in Japan though the assignors are non-residents of Japan therefore the commission fee is exempted from the consumption tax.
By Certified Public Accountant, Koji Takahashi,
Tokyo & Yokohama
