Navigating Japan's Electronic Bookkeeping Act: An Easy Guide

Japan is notoriously known for requiring physical paper documentation. And it wasn't until the end of January 2024 that they stopped using floppy discs. 

However, as Japan shifts to a more digital-friendly business model, they’ve begun to revise their regulations around how electronic record keeping works. 

This article provides an easy-to-understand guide on Japan’s Electronic Bookkeeping Act.

What is Japan’s Electronic Bookkeeping Act?

Japan’s Electronic Bookkeeping Act is part of Japan’s ERRL (Electronic Record Retention Law), which allows tax-relaxed papers, invoices, and ledgers to be stored in an electronic format for all businesses and sole proprietors. More specifically, tax-related books and tax-related documents can now be stored solely electronically. 

Some documents, such as handwritten ledgers and invoices, do not fall under this act, so original copies of those must be preserved.

Prior to the establishment of this act, all tax-related items needed to be kept in their original paper form.

An Overview of Japan’s Electronic Bookkeeping Reform

From January 1st, 2022, Japan’s Electronic Bookkeeping Act mandated that the physical copies of financial documents were no longer required.

The purpose of the reform was to encourage modernizing finance and tax reporting practices to streamline business operations. 

The Act specified specific electronic storage requirements that companies must adhere to in order to meet requirements.

Companies in Japan had time to prepare until the end of December 2023.

Before, all electronically stored documents needed physical paper backups.

But now, Japan has broader digital storage standards for bookkeeping.

Mandates for 3 types of electronic storage 

Three types of electronic storage are affected by this law:

1. Electronic ledger and document storage

This type of storage refers to any created and stored digital data on the computer or cloud for easy access and maintenance, including physical media storage like DVDs and hard disks.

Two types of tax-related categories fall under this storage:

• Tax-related books: such as journals, general ledgers, and cash books.

• Tax-related documents: these include financial settlements (balance sheets, profit and loss statements, and inventory) and copies of transactions (receipts, invoices, and purchase orders). 

2. Scanner-based document storage

This type of storage refers to documents that were previously in physical format but are preserved as digital storage.

In terms of tax-related documents, all transaction evidence is scanned, such as receipts, invoices, and purchase orders.

Once scanned, these documents should be in a storage system that prevents tampering and includes timestamps and modifications history.

3. Electronic transaction data storage

Any documents and transactions received and electronically saved fall under this type of storage, such as electronic payment, email data, and EDI (Electronic Data Interchange) transactions. 

As long as these saved files are in a tamper-proof storage system, there is no need for timestamp history.

Additionally, any invoice storage system, also known as electronic invoices, must comply with the Electronic Bookkeeping Act in Japan.

Tamper proof

The new amendments emphasize tampering-proof measures, including detailed records with timestamps to ensure all documents can not be altered without them being tracked.

Searchability

All electronic records must be searchable.

Businesses need to organize their digital records based on transaction dates, amounts, and other relevant details, for example, 2024-03-15_Inv#1234_K-Corporation.pdf.

Audits

The new reform introduces electronic submission of reports and documents to any tax authorities for more streamlined audit and compliance checks.

Penalties for non-compliance

Additional payments 

There are higher penalties when businesses do not complete these new electronic storage requirements.

It can include higher taxes for underreporting due to being unable to present electronic records during the audits.

Loss of tax benefits

Not complying can also result in loss of tax benefits, such as deductions or credits.

Frequently asked question

What is Japan’s Electronic Record Retention Law?

The Electronic Record Retention Law (ERRL) in Japan allows businesses to convert and retain paper documents into an electronic or digital format.

This law has standards and requirements to ensure integrity, reliability, and accessibility over time.

The key focus is that all business documents are tamper-proof and verifiable.

In closing

The Electronic Bookkeeping Reform represents the shift towards digitization in Japan. 

These new requirements are a way to improve efficiency, reduce paperwork, and enhance accurate reporting.