Apple and Google will be responsible for paying Japanese sales tax on foreign apps

In a significant policy change, the Japanese government will require Apple and Google to be responsible for paying sales tax on apps and in-app content developed by organizations outside the country.

This adjustment aims to rectify an anomaly in Japan’s sales tax system, where the responsibility for levying taxes on app purchases lies with the developer, not the platform provider.

Typically, in most countries, retailers add sales taxes to the total bill before the consumer pays, subsequently passing on the tax component to the government. However, in Japan, the burden falls on the developer, creating complications for foreign developers, particularly those without a business presence in Japan.

According to a Finance Ministry report detailed by Nikkei Asia, the new policy seeks to make app store operators, such as Apple and Google, responsible for paying consumption taxes on content sold by foreign developers. This change is envisioned to facilitate a more equitable environment for Japan-based content creators, ensuring that levies can be collected effectively, even from small companies without a physical presence in Japan.

Apple and Google have two options to comply with this new requirement. Firstly, they can increase app prices by adding the sales tax, paying the sum to the government, while the net revenue received by developers remains unchanged. Alternatively, they can maintain current app prices, treating them as inclusive of sales tax, and deduct the tax percentage before taking their own share, resulting in smaller net revenue for developers.

The specific approach taken by each company remains uncertain at this point. The change is a strategic move aimed at harmonizing tax practices and fostering fair taxation for content creators within the Japanese app market.

According to a white paper released by the communications ministry, Japan’s mobile app market is anticipated to achieve $29.2 billion this year, marking a roughly 50% increase from 2018. Projections indicate further growth, reaching an estimated $30.6 billion by the year 2025.

The implementation of this change is slated for the earliest in fiscal 2025, allowing companies ample time to familiarize themselves with the new structure and make necessary updates to their systems. Specifics, such as the sales threshold and the transition timeline, are anticipated to be part of the ruling coalition’s annual package of proposed revisions to the tax system, set to be disclosed in December.

Apple and Google are also having to prepare to make changes in different parts of the world regarding sideloading. Bloomberg’s Mark Gurman wrote for Power On newsletter subscribers recently that in the coming year, iOS users in the EU will have the capability to download apps from sources beyond Apple’s official App Store, aligning with regulatory requirements in Europe.