 |
 |
| Court Judgments |
| |
| There are a lot of important court judgments in Japan. |
| |
| Please click the following title to see for detail. |
|
|
| |
| |
| Geographical Limits of Japanese taxes (added 10/30/2011) |
|
Summary of Facts:
X SA is a Panama corporation which objective is to drill and develop marine
petroleum and gas well. X SA made 8 drillings between 1971 and 1973 at
continental shelves outside of Japanese Territorial Waters around Shimane
Prefecture and other areas based on an agreement with N KK. X SA also made
5 drillings at the continental shelves outside of Japanese Territoiral
Waters around Fukushima Prefecture based on a agreement with T KK between
1973 and.1974.
Tokyo Regional Tax Bureau advised X to file Corporate Income Tax Returns
for the income earned from the drillings at the Continental Shelves, but
X denied. Shiba Tax Office assessed X's Corporate Income tax and non-filing
penalty.
X initiated a legal action to request to revoke the assessment. X insisted
that because the income earned from the drillings are sourced from the
activities outside of Japanese Territory, these income are not Japan source
income under Corporate Income Tax Section 138, and therefore these are
not subject to Japanese Corporate Income Tax.
Corporate Income Tax Law says that "Foreign Corporations are subject
to Corporate Income Tax when they have Japan Source Income." Japan
Source Income includes "Income derived from business activities perrormed
in the country". And "in the country" is defined as "the
place where this law is enforced".
Tokyo District Court turned down X's claim, and X appealed to Tokyo High
Court. X insisted that the income earned from the activiites on the continental
shelves is not Japan souce income under the Corporate Income Tax because
continental shelves are not the place where Corporate Income is enforced.
Court Judgment:
Tokyo High Courts rejected the appeal as follows and no more appeal was
made by the taxpayer, thus the judgment became final.
Although Japan did not participate in any of the Convention on the Continental
Shelf at the time of this case, because of the established international
customary law, for the objective and within the extent to explore and develop
mineral resorsces on the bottom of and below the sea, the Continental Shelves
around Japan are under Japanese Sovereign Rights, that are extension of
Japanese Territorial Sovereignty. Activities to explore and develop mineral
resources on Continental Shelves and related activities are naturally under
Japanese jurisdiction and control, and taxation rights to the income derived
from these activities are within the reach of these Sovereign Rights. Therefore,
because of the establishment of the International Customary Law of this
kind, Continental Shelves around Japan are the place where "this law
is enforced". |
 |
| |
| |
| Closely Held Corporation (updated 11/10/2011) |
| In Japan, a Closely Held Corporation (in Japanese language, referred
as a “Douzoku Kaisha”) is taxed differently in 3 major points from other
regular corporations. The detail definition of a Closely Held Company is
stipulated in Corporate Income Tax Law. Roughly, this is a corporation
in which more than half of the shares are held by equal to or fewer than
3 persons. Usually, a subsidiary of a foreign corporation falls into this
category. One of the differences from other corporations is that the tax
authority can deny the acts or calculations of the corporation. |
| |
Summary of Facts:
X YK is a corporation controlled by Representative Director K and his family. In 1962, X leased land from K and his family, and built a building. In 1967, X sold the building and K sold the land to T. All the money derived from these transactions was received by K only. On the tax return of X, X reported small amount as a revenue for selling the land only.
The head of the Tax Office in charge (“Y”) assessed that X had income for selling “lease tenant right” although there was no such a written agreement, in addition to the sale of land. In the area where X YK is located, it is very common that a big amount of Key Money is received when a lease agreement of land is entered or terminated. Therefore, Y deemed that X sold the “lease tenant right”, that is almost equal to 25 % of land in the area, in addition to the building. Y insisted that “X is a domestic closely held corporation, and if the transactions were to be accepted, X’s burden of corporate income tax would have been unreasonably low, and this is the reason why Y made this assessment.”
X insisted that Corporate Income Tax Law Section 132 is not concrete, and gives comprehensive, general and blank powers to a head of Tax Office, and therefore, is void in violation of Constitution Section 84.”
Court Judgment:
Sapporo High Court
Appeal Rejected (Appealed to the Supreme Court)
“”In general, although it is desirable that law sentences should be legislated concretely, specifically and unambiguously, it is extremely difficult to prepare such sentences that can cope with complicated, diverse and drastically changing economic events, therefore, it is unavoidable that the Corporate Income Tax Law was legislated as it is. This is not in violation of Constitution Section 84, which declares so called “No Tax without Law Principle” and stipulates that the tax can be imposed or demolished only by a law and that taxpayer, tax base and procedures to pay tax needs to be based on a law.””
X appealed to the Supreme Court, but the Supreme Court judged as follows and X’s appeal was rejected.
In light of the intent and purpose of Corporate Income Tax Law Section 132, it can be interpreted that this law sentence gives a Head of Tax Office a power to deny closely held corporation’s acts or calculations in accordance with an objective and reasonable standard as the High Court judged,. Therefore, X’s
|
| |
| |
| Utilization of Excess Limit of FTC for a third party (added 11/05/2011) |
| |
Foreign Tax Credit is a tool to eliminate international double taxation
among countries. However, there is a limit to the credit amount.
Summary of Facts:
X KK is a banking corporation and paid foreign taxes, but the total amount of the foreign tax was less than the limit amount (“Excess Limit”). In order to utilize the Excess Limit and to make profit, X entered into a series of complicated agreements with a third party. X claimed foreign tax credit, but the Head of the Tax Office in charge Y denied the transaction, and X initiated legal actions. The first court and the appeal court admitted X’s position, and Y appealed to the Supreme Court.
Court Judgment:
Supreme Court
Appeal rejected.
The high court accepted X’s position as follows:
(a) The economic benefit of X from these transactions is to make a profit by using the Excess Limit of the Foreign Tax Credit. It cannot be judged that these transactions are sham acts because the legal relations chosen by the parties based on such economic purpose are not the real legal relations.
(b) It can be understood that X, as one of the business of a financial institution, by using X’s Excess Limit of foreign tax credit, tried to provide lower cost financing and entered into transactions to receive remuneration, and it cannot be judged that these are unnatural transactions without a business purpose. Therefore, it cannot be said that these transactions are abuse of foreign tax credit system.
However, the Supreme Court cannot agree with these judgments because of the following reasons.
(1) Foreign tax credit system stipulated under Corporate Income Tax Law Section 69 is a system to deduct a foreign tax with certain limit from Japanese Corporate Income Tax when a domestic corporation pays foreign tax. This is in order to eliminate international double taxation from profit, and based on a government policy goal to provide tax neutrality to business activities.
(2) However, these transactions in total can be summarized that, foreign
tax that should have been burdened by a foreign corporation was assumed
by a Japanese bank X with a fee, and the burden was avoided by reducing
the corporate income tax that should have been paid in Japan through the
use of X’s Excess Limit of the foreign income tax, and to make a profit
ultimately. This means to avoid tax by using Japanese foreign tax credit
system in a way that deviates largely from original intent and purpose.
This is the same as to make a profit at Japan and Japanese taxpayers’ expenses.
To treat the foreign tax derived from these transactions eligible for foreign
tax credit under Corporate Income Tax Section 69 is an abuse of foreign
tax credit system and cannot be accepted because this severely harms the
equity of tax burden. |
| |
| |
| |
| |
|
|
