IBM Wins JPY400 Billion Tax Litigation Brought By The National Tax Agency (IBM事件／税務訴訟)

(自己株式取得について租税回避が争われたIBM事案の最高裁判決に関するブログ記事、LinkedInから再掲)

Another big tax dispute ends: On February 19, 2016, the Japanese Supreme Court (“SC”) did not accept the National Tax Agency (“NTA”)'s claim - that resulted that the accumulated loss of JPY400 billion of IBM, Japan Limited (“IBMJ”)’s parent company in Japan (“IBMP”), was legitimate – additional taxation of JPY120 billion was denied. NTA lost in Tokyo District Court, Tokyo High Court (“THC”) and the SC, all in a row.

In connection with US IBM group providing additional finance to IBM group companies in Japan, IBMP (a taxpayer in the litigation) was loaned from US IBM group company (“WT”), and purchased shares in IBMJ and other related entities from WT. IBMJ had purchased its shares that IBMP held at almost the same price at which IBMP purchased (and IBMP paid back the loan to WT). In this case IBMP’s share sales price for tax purposes was allowed to be reduced because of recognition of dividend profits for tax purposes under Corporate Tax Law (“CTL”) and such reduction resulted in capital losses to IBMP. Based on IBMP’s sequential share sales in 2002, 2003 and 2005, it accumulated a JPY400 billion loss. In 2008 IBMP started a consolidated tax filing in Japan including IBMJ which allowed these significant losses to set off IBMJ’s sufficient business profit. This reduced tax payments by IBM group in Japan for several business years.

The National Tax Agency negated the loss under Article 132 of CTL, which negates the tax consequences of private holding companies (typically family-held companies) when it is “unfair”. Similar to the Yahoo case (see previous post), that had been argued simultaneously, the definition of “unfair” had been discussed, as IBMP claimed their main motivation was business purpose although they analyzed tax consequences.

NTA lost in the lower courts because they could not provide sufficient evidence to prove that the loss was “unfair” in this case. THC ruled as a general interpretation that “unfair” indicates an unreasonable transaction for an economic entity, and it can be satisfied if an argued transaction is “different from ordinary transactions”. Compared to the “extraordinary and irregular transaction” standard that has been used by private practitioners and academics based on earlier court precedents, THC’s standard above is broader – similar to the transfer pricing rule. SC did not accept NTA's claim to commence discussion - that resulted THC’s conclusion sustained, although the SC did not provide original reasoning.

The next question is: how will these rulings change tax structuring and treatment? NTA will, of course, use THC’s standard (“different from ordinary transactions”) for tax litigation, but it may investigate and decide more conservatively under the previous stricter standards (“extraordinary and irregular transaction”) in order to satisfy meticulous analysis and the burden of sufficient evidence in most cases. However, in very aggressive tax structures, NTA still wants to rely THC’s standard. Let’s see what response academics and private practitioners will have.

(Special thanks to Sibyl Kane for editorial support.)

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