We are Murata Sogo Tax Accounting Office, with an office in Miyakojima-ku, Osaka City, specializing in inheritance tax and international taxation.
This time, we summarize the treatment of consumption tax when a payment is made to Chat GPT, which is a hot topic nowadays.

１．What is Chat GPT?

Chat GPT is an artificial intelligence tool developed by OpenAI, an artificial intelligence research and development organization, which can generate original AI text. Since its release in November 2022, the high accuracy of the answers has become a topic of conversation, and the number of users has been increasing. In addition to having users answer the questions they input, they can also write poems, songs, essays, short stories, and codes. 

２．Consumption Taxation When Royalty Fees are Paid to Chat GPT

(1) Consumption taxsation

Consumption tax is imposed on "the transfer, etc. of assets and the receipt of foreign goods (import transactions) conducted by a business in Japan for consideration as a business. In particular, regarding "in Japan" requirement, this transaction is supposed as the provision of electronic communication services (provision of services such as distribution of electronic books and advertisements to domestic businesses and consumers via the Internet, etc.). Since October 1, 2015, consumption tax has been imposed on such services provided from outside Japan, such as Chat GPT.
Therefore, payments to Chat GPT, such as the one in this case, are treated as transactions subject to consumption tax.

(2) Telecommunications Service for a Business or for Consumers?

If the transaction falls into the category of provision of telecommunications services for businesses, the domestic business that receives such servicesis required to file a tax return and pay the tax as a "specified taxable purchase", which is known as a "reverse charge". 
On the flip side, if the services fall into the category of provision of telecommunications services to consumers, the entity that provided the services is responsible for reporting and paying taxes. However, if a domestic entity receives telecommunications user services for consumers from a foreign entity, the tax credit for purchases related to the provision of such services will be restricted for the time being. However, the tax credit is allowed for the provision of telecommunications services for consumers from a foreign businesses registered with the Commissioner of the National Tax Agency.

The Chat GPT usage fee falls under the category of provision of telecommunication service for consumers, since the contract does not specifically bind the business purpose of the service.

(3) Concrete consumption taxation

Open AI, which operates Chat GPT, is not a registered foreign business operator as of April 3, 2023 (https://www.nta.go.jp/publication/pamph/shohi/cross/touroku.pdf). Therefore, the usage fee for Chat GPT is not subject to consumption tax. Therefore, the usage fee for Chat GPT is not deductible for consumption tax purposes. 

３．Treatment of Consumption Tax After the Introduction of the Invoice System

The invoice system will be introduced on October 1, 2023. With the introduction of the invoice system, the registered foreign business system will be abolished.
Those who were registered foreign businesses as of September 1, 2023 will be deemed to be registered as qualified invoicing businesses.
As stated in 2, Open AI is not registered as a registered foreign business. Therefore, if Open AI does not register as a registered foreign business entity and does not become a registered invoicing business entity, the fees paid after October 1, 2023 will not be deductible for consumption tax purposes.
However, there is a possibility that AI may become a registered invoice provider in the future, so it is necessary to continue to monitor the situation closely.

In addition, according to the 2023 tax reform, small and medium-sized businesses are allowed to deduct consumption tax on expenses of less than 10,000 yen by simply keeping books and records, even if they do not keep invoices. The above is a recent topic of discussion.

４．Consumption tax will be added to the invoice amount from January 1, 2025.

On November 25, 2024, Open AI sent the following notice to users.

We would like to inform you of the introduction of consumption tax on invoices, which will be introduced on January 1, 2025. Based on the Japanese Consumption Tax Law, a 10% consumption tax must be charged and collected on invoices, where applicable.”

Currently, there are no plans to revise the consumption tax with an effective date of January 1, 2025.

Conceivably, Open AI has incurred a Japanese consumption tax liability. Since Open AI has been providing services to Japan for about two years, we believe that Open AI will be obliged to pay consumption tax from next year onward, and accordingly, 10% consumption tax will be added to the invoice amount.

Translated with DeepL.com (free version)

 

The above is an introduction of the consumption tax treatment of Chat GPT, which has become a hot topic recently.
Consumption tax is a complicated tax system, including this case and the invoice system. If you have any questions, please contact Murata Sogo Tax & Accounting Office.