TT-741 -- Taxing Cross-border eCommerce, Ebiz news from Japan

An Insider's comments on Japan's high tech business world
* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, Jan 26, 2014, Issue No. 741


- What's New -- Taxing Cross-border eCommerce
- News -- Stiglitz warns on Japan recovery
- Web Content/Tech Job Vacancies
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Blind museum in Shibuya, Retro in Miyagi
- News Credits

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While the second increase in consumption tax in October 2015 will
collectively add an extra 5% on to physical things and digital goods
we buy in Japan today, related legislation which will kick in around
the same time (2015) will add an extra 10% (up from zero) on digital
contents/services that are purchased by consumers (versus businesses)
from suppliers abroad. This new tax will probably become known as the
"Rakuten Tax" because the loop hole came to public attention after
Rakuten started selling tax-free Japanese titles through the Kobo
ebooks/ereader company in Canada, so as to avoid local taxes.

Currently, consumption tax is only charged on goods bought in Japan,
and for imported physical goods. Actually, on imported physical goods,
the tax regime is surprisingly lenient and is usually waived on
personal orders of less than roughly JPY14,000 and which are shipped
via courier. Unfortunately, with the new rules, consumption tax will
be charged for ALL international sales made to consumers in Japan, and
so we presume the relaxed attitude on small orders will disappear as
well... Darn! We have gotten used to the idea of tax-free groceries
and bathroom consumables from and

The framework on which the new taxes will work is not yet specified,
but regular references to the EU system by the authorities make us
think that Japan will try a similar approach. In that case, for B2C
transactions there is likely to be an online tax declaration form to
be completed by the foreign vendor when they sell to Japan-based
consumers. The foreign vendor will deduct the required taxes when the
transaction is done, and remit the cash to the Japanese Tax Office
shortly after.

It's not surprising that the government wants to hit international
eCommerce, the Daiwa Institute of Research calculated that in 2012,
while the tax rate was still 5%, that Japan lost approximately JPY25bn
in taxes on music downloads, advertising, reports, subscriptions, and
other digital transactions. The remarkable thing about the EU system
and therefore the incoming Japanese one, is that it is honesty based,
and will depend both consumers and vendors doing the right thing in
order for the government to get paid. Given that Japan is the second
largest consumer (per capita spending) of online porn in the world,
not a sector that lends itself to forthright actions, we see the
enforcement of this new system to be a major challenge.

[Continued below...]

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[...Article continues]

Firstly the vendors. The EU rules require the vendor to establish that
the consumer is in the EU, and if so, then to charge the appropriate
rate of tax. Actually, at the moment they have a system whereby the
tax can be paid in any one of the member nations, and so apparently
most vendors try to pay their taxes in Luxembourg where the VAT is
15%, versus Denmark, where it is 25%. Not surprisingly, this rather
messy arrangement will change in the future and vendors will be
required to pay the exact country tax rate for the consumer's

However, it doesn't take much to see that:
1. While there is only one tax form for the 28 members of the EU and
so the system currently isn't that onerous, if Japan and other
countries around the world start following suit and imposing their own
rates and systems, then being a multinational online vendor will
become an incredible headache. Companies will have to deduce/prove
each place of consumption, track rule changes, and be prepared to be
targetted by legal challenges from territories they have no presence
in. We imagine that this will be an ideal opportunity for Visa and
Mastercard to offer a value-added tax-tracking/reporting service based
on purchases by their card users (who are verified residents of each
destination), thus encouraging vendors to only take these major forms
of payment.
2. Setting up an online shop front and running ads to get customers
has never been easier. Now, with the incentive of charging customers
for their taxes, shipping products so as to stay in business for a
while, then skipping town before making the tax payments -- this seems
a perfect opportunity for shady operators. Who is to know whether
online Shopfront B was Company A last week? How will foreign tax
offices enforce foreign court action against a defaulted and vanished
3. Then, if you factor in virtual market places, like,
for example, the ability for someone to register and start delivering
software development projects as an individual, then to deregister and
disappear into anonymity, makes it highly likely that not paying taxes
will become a kind of underground "sport". Indeed, tax avoiders are
likely to take the moral stance that since the taxes are going to
another country, why should the supplier be forced to collect them?
They receive no benefit in return so the tax must be immoral.
4. According to OECD figures, the avoidance rate for taxes for online
transactions is already 10% to 30%, and with these changes is likely
to grow significantly. The only way to reduce avoidance will be for
tax offices around the world to share data and for related law
enforcement agencies to agree to support foreign tax office claims
against local corporations. Given that the Japanese tax office is only
just now signing cooperation agreements to get foreign information on
its own citizens and companies in Japan, it seems that it will be
decades before they can take action against foreign corporations in a
foreign country.
5. Thus, the cross-border digital consumption tax will probably come
down to being compulsory for those companies big enough to not want to
get caught not paying it, and optional for anyone else with a smallish
operation. Perhaps in a twisted sort of way, the tax will encourage
people to buy from small operators, since they will be at least 10%

Then there is fraud by the customers. The most obvious example is
where the customer uses an IP proxy service and Bitcoin payments, to
disguise their real location. An automated vendor, which is just about
every eCommerce site on the web, is not going to challenge a customer
who digitally appears to be in the next state over, or in a
low-tax/no-tax foreign jurisdiction. They certainly won't try to prove
that the customer is in a hard-to-deal-with location like Japan or
Denmark or wherever.

Then you have to consider the nature of the digital contents business.
You have porn sites, marketplaces for moonlighting programmers,
underage teen artists, underemployed writers, indie rock groups, etc.,
and in practically every instance the customers are secretive about
their actions and thus even more likely to try to bend the rules than
to pay the extra. It will be difficult for the tax authorities to go
after people at this level. Maybe they will try to make an example of
a few, as we have seen similar examples of in the music downloads
business. But, as we've also seen, none of these legal actions has
slowed down music downloads particularly.

Lastly, if the tax charging and collection system is too difficult,
then merchants may just decide that shipping to Japan is too hard to
do -- basically killing the golden eCommerce goose that the Tax
authorities want to milk. We have already seen this all-or-none
reaction from foreign vendors in the securities sector. Ten years ago,
you could as a non-US citizen hold a stock trading account in the USA
without any major headaches, other than to fill out a tax form
annually. However, with the introduction of FATCA, securities firms in
the USA have largely decided to eliminate their non-resident,
foreigner customers rather than be bothered with meeting the onerous
reporting requirements. So now there is nothing left to tax and the
customers have gone elsewhere.

...The information janitors/


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+++ NEWS

- Sake exports booming
- Metro real estate showing signs of recovery
- IPOs to hit JPY1trn in 2014?
- Stiglitz warns on Japan recovery
- Travel surge pushes up hotel room prices

=> Sake exports booming

Things are looking up for Japan's 1,700+ sake brewers. Data from the
Ministry of Agriculture shows that exports of sake hit JPY8.5bn in the
10 months through to October 31st, which according to industry experts
means that shipments will exceed the 14.1m liters shipped in 2012.
Sake exports have almost doubled from the 7.5m liters back in 2002,
and are a reflection in the boom in Japanese restaurants operating
overseas. The Japanese Culinary Academy in Kyoto reckons that there
are now about 55,000 Japanese cuisine restaurants outside of Japan.
(Source: TT commentary from, Jan 23, 2014)

=> Metro real estate showing signs of recovery

Although overall land prices in Japan continue to fall, albeit less
rapidly than in the past, data from the Nomura Research Institute
(NRI) shows that prices are recovering in major urban centers, and
that this may be the start of an overall recovery. From June 2012
through 2013, land prices in Tokyo grew 5.2%, while in Osaka prices
were up 2.3%. Within Tokyo sales of new condos were up 31% between May
and December last year, compared to the same period in 2012. Osaka
condo prices also rose 8.8% in June 2013, compared with June 2012.
***Ed: Of course this pick up could be a natural buying wave prior to
the consumption tax increase, so no one is forecasting an outright
recovery yet.** (Source:, Jan 23, 2014)

=> IPOs to hit JPY1trn in 2014?

While the case for Abenonmics is still being made, its impact on the
Japanese stock market is undeniable, and more action is expected for
at least the first 4-6 months of this year. Japan's largest securities
firm, Nomura Holdings, thinks that 2014 will be a strong year for
companies to go public, and says that IPO share sales will double to
around JPY1trn this year. If they are right, it will be the first time
since 2010 that the market has hit that number, sputtering as it did
to just JPY571bn on the back of 58 IPOs in 2013. Nomura is bullish
because two big listings are expected: restaurant company Skylark and
property/transport company Seibu Holdings. Both companies have foreign
funds as shareholders and thus are likely to want to cash-out as early
as they can (i.e., while Abenomics is still doing OK). (Source: TT
commentary from, Jan 23, 2014)

=> Stiglitz warns on Japan recovery

PM Abe is doing a great job touting at Davos, Switzerland, the biggest
financial experiment in recent history, however, he is also getting
some warnings from financial heavyweights while he is there.
Apparently Nobel economist Joseph Stiglitz has stated that Abe's
government is implementing the rise in consumption tax too early and
that there is a significant risk that the nation's nascent growth will
"sputter". Stiglitz reckons that most of the core inflation that Abe
has been trumpeting is actually just a reflection of rising import
prices due to the 25% devaluation of the yen over the last year.
***Ed: We pointed this out in an earlier Take. Numbers indicate that
almost all the inflation to date can be accounted for by the more
expensive energy imports Japan is dealing with.** (Source: TT
commentary from, Jan 23, 2014)

=> Travel surge pushes up hotel room prices

Rising prices for hotel rooms due to increased inbound foreign
tourists is providing a nice boost for web reservations companies that
don't actually service the foreign market. Competition with foreigners
means that Japanese tourists are paying more, and this has reflected
in the earnings of Ikyu, one of Japan's largest domestic travel
booking firms. Ikyu says its profits are running 20% over last year,
at around JPY1.6bn in the 9 months through to December 2013. Sales
were up by 10%. The average price per room is now JPY25,000, up 5%
over last year. (Source: TT commentary from, Jan 23,

NOTE: Broken links
Some online news sources remove their articles after just a few days
of posting them, thus breaking our links -- we apologize for the



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International Gift Show Spring 2014", and features personal gifts,
consumer goods, and decorative accessories, and it opens soon! With
the motto "Let's meet at the Gift Show," the industry professional
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=> No feedback this week.



=> Gallery TOM (Touch Our Museum), Tokyo
A gallery for the blind in Shibuya

Those interested in architecture may have stumbled upon the gallery
while browsing through books on modern architecture in Japan. Gallery
TOM (Touch our Museum) is small but impressive, designed by Hiroshi
Naito and Associates. It is a concrete 3-storey house on a corner of a
street in the middle of a quiet residential neighborhood in Shibuya.
The building structure shouldn't be the only reason to take an
interest in TOM though. It also houses a private museum where blind
and visually impaired people can experience an art exhibition through
touching the sculptures and statuaries. The museum was commissioned in
1984 by the director of the gallery Mr. Harue Murayama for his blind

The building is amazing, consisting of concrete and glass, through
which rays of sunlight come in highlighting different angles of the
interior. The museum also houses a small book collection on the newest
developments on architecture and art. The books are mainly from France
and Italy and are written in braille. The current exhibition
(Boku-tachi no Tsukuta Mono "The things we made") shows a collection
of amazing sculptures made by high school students from various blind
schools over the course of 30 years. Where my first reaction is not to
touch nor photograph the art pieces, TOM gallery stimulates you to do
both. The building space is not very big, with the second and third
floors used as gallery spaces.

=> Matsushima Retro Museum, Miyagi-ken
A pop culture timeline for vintage Japan

Matsushima Retro Museum, located in Matsushima (40 minutes from Sendai
station), is a short 8 minute walk from Matsushimakaigan station. This
little museum is located on the second floor of the Original Omiyage
shop on the main street (National Route 45). Open year round, it
houses a large collection of mementos from Japan as well as a few from
other countries that became popular in Japan. This museum is an
assembly of vintage children's games, music and movie posters, sports
memorabilia, and antique artifacts from decades past.

At this modest attraction in the heart of Matsushima, visitors can
immerse themselves in an atmosphere of a bygone age. All exhibits are
hands on, allowing visitors to interact and touch. The museum
comprises of several exhibit areas that are themed around children
toys, movie and music collectibles, sports and associated memorabilia,
old mechanical games including some ancient pachinko games, a matchbox
car collection, and an exhibit of early video game consoles and
cartridge games. Each area provides an interesting look into times now
past and would interest visitors of all ages.



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