Japan Business Law: The Cost of Revenue Stamps

Contracts are documents for settling agreements. In principle, contracts designated as taxable documents require to affix a revenue stamp set at a specified amount.

When it comes to figuring out the amount for the revenue stamp, outsourcing contracts are particularly confusing.

This is because the stamp duty amount differs depending on the terms listed in the agreement. In some instances, the difference is over 10-fold.

Difference Between Turn-Key Contracts and Time and Material Contracts

In many cases, contracts that consign work to a third party are referred to as “outsourcing contracts.” The word “outsourcing” is not a term in the Civil Code. The Civil Code broadly separates contracts into Turn-Key Contracts and Time and Material Contracts depending on the specific work being outsourced, and the outsource method.

Turn-Key Contracts are settled through completion of the work. The contractor has a duty to complete the work. Generally, a lump-sum remuneration will be paid once the contractee certifies the deliverables provided by the contractor. In addition, if the contractee discovers an issue (defect) with the deliverables, the contractor must correct this issue free of charge.

On the other hand, Time and Material Contracts are agreements where the contractor is responsible for the work process.

During the period of work, the task is carried out in accordance with the terms of the director (acting in good will), and the contract is concluded once the work period has expired. The contractor has no obligation to complete the job or provide deliverables. In general, remuneration is paid over a fixed period of time.

Relation Between Contracts and Stamp Duty Tax

Now, let’s take a look at these contracts (those that list monetary amounts) from the perspective of stamp duties.

As published in the Stamp Duty Tax Amount Table by the National Tax Agency, contracts with fixed monetary amounts are designated as “Type 2 documents.” Other contracts such as Construction Turn-Key Contracts, Construction Order Contracts, Product Processing Order Contracts, and Advertising Contracts are also designed as “Type 2 documents.” A revenue stamp with the specified duty tax amount (that corresponds to the listed monetary amount in the contract) must be adhered to the contract.

On the other hand, with Time and Material Contracts, contracts stipulating continuous transactions, such as Basic Transaction Contracts for Buying and Selling, Agency Contracts, Sole Agent Contracts, and Banking Transaction Contracts are designated as “Type 7 documents.” “Type 7 documents” require a flat rate revenue stamp of 4,000 yen regardless of the monetary amount listed in the contract.

Furthermore, contracts that neither fall into Type 2 nor 7 documents, such as software license agreements, sales contracts (specifying units or time period) are non-taxable documents, so a revenue stamp is not required.

For a 500 million yen contract, “Type 2 documents” incur a 100,000 yen fee, while “Type 7 documents” incur only 4,000 yen!?

As seen in the Stamp Duty Tax Amount Table, the stamp duty amount differs between Turn-Key Contracts (Type 2 documents) and Time and Material Contracts (Type 7 documents).

For example, if the listed amount on the contract is 500 million yen, the stamp duty amount for Type 2 contracts will be 100,000 yen, while it will be 4,000 yen for Type 7 contracts—25times difference.

A Gray Zone Delineating Turn-Key Contracts with Time and Material Contracts

One big difference between these two contracts is whether or not there are tangible deliverables. To put it simply, contracts that ensure the completion of a deliverable qualify as “Type 2 documents”, while contracts do not ensure the completion of a deliverable qualify as” Type 7 documents”.

The scope of the “Type 2 document” is full of ambiguities,  and it have to say that it can be difficult to judge if a contract qualifies as a “Type 7 document”, or whether it qualifies as non-taxable document.

For example, if a machine maintenance contract includes an assurance that the equipment will always be completely maintained, it qualifies as a Type 2 contract.

However, if the machine maintenance contract includes a contract duration period and establishes a monthly maintenance fee, then it qualifies as a Type 7 contract.

Rechecking the Contracts.

Even if you forgot to adhere a revenue stamp, this does not affect the validity of the contract. However, please note that if you are audited you will be penalized for back taxes with double the corresponding unpaid stamp duty (in other words, three times the original fee).

The amount of the stamp duty is determined not only by the name and title of the contract, but by the contents written within the document. Consider consulting with a specialist to give a final check in determining whether your company’s contracts qualify as Type 2 or Type 7 documents.

For details, get in touch with the tax accounting specialists.