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Japan wants Apple, Google to collect and pay tax on behalf of app developers

Following up on whether small developers located abroad are paying their fair share of tax is difficult for Japanese tax authorities, and thus they want the onus to be on the middlemen between app developers and consumers— the app store operators.

We missed this earlier: The Japanese government is looking to make Apple and Google responsible for collecting and paying consumption tax on content sold by foreign apps listed on the App Store and Play Store in Japan, Nikkei Asia reported on November 15.

This proposal by Japan’s Finance Ministry is an attempt to more effectively recover taxes from companies that might be avoiding paying consumption tax and have no physical presence in Japan, the report said.

The OECD guidelines state that digital content should be taxed in the country where the content is consumed regardless of where the company producing them is located. In 2015, Japan revised its tax policy to require foreign companies to pay consumption tax on digital goods and services. But following up on whether small developers located abroad are paying their fair share of tax is difficult for Japanese tax authorities. This is why the government is now looking to put this responsibility on app store operators who are the middlemen between app developers and consumers, the report explained.

The current consumption tax rate in Japan is 10 percent. Apple and Google will likely calculate and withhold this tax from the revenues earned by apps that fall under the ambit of the new law keeping the prices unchanged for consumers. This would mean Apple and Google will collect 10 percent on top of the 15 to 30 percent commission they charge app developers. Alternatively, Apple and Google could decide to stack the 10 percent on top of the existing prices for in-app content, thus increasing the price paid by consumers.

The Asahi Shimbun reported that this law will only target foreign apps and not domestic apps since the latter already pay consumption tax and other taxes as required. The report also claimed that 30 to 40 percent of the top-selling online games in Japan are overseas titles. Since gaming apps are among the highest revenue generators, it makes sense that the government is looking to get its share of tax from these apps.

More details about the proposed plan and the timeline are expected to come out in December.

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This issue of how to tax digital goods and services offered by foreign companies has been around for a while. Here is an op-ed written for MediaNama in 2011 that talks about the complexities of taxing digital goods and services that apply to date.

India has also been worried that foreign companies are not paying their fair share of tax for revenues earned from Indian users. “When technology-driven companies are not brooking any physical borders, money is being made from one territory, but they are registered elsewhere. So how does taxation work? Does the country from where the revenues are generated benefit from it,” India’s Finance Minister Nirmala Sitharaman asked in September at the Global Fintech Fest.

Notably, Google and Apple do collect and remit tax in India. For instance, Google collects Goods and Services Tax (GST) and Equalisation Levy on behalf of foreign app developers and remits the same to the government. But with local developers, it is the responsibility of the developers (not Google) to collect and remit the necessary tax.

In addition to the new taxation rules, Japan is also expected to introduce rules that will force Apple and Google to open up their smartphone operating systems to app downloads from external sources as well as third-party billing systems for in-app purchases, The Asahi Shimbun reported in June. The new rules were proposed by a government panel named Headquarters for Digital Market Competition. You can read more about the proposed rules here.

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