Japanese Court Strikes Down Bank Tax

by Mary Swire, Tax-News.com, Hong Kong

27 March 2002

A Japanese court has ruled that a tax on banks' gross operating profits is unlawful, saying that conventional corporate income is the benchmark upon which the tax-paying ability of banks must be assessed.

The Tokyo District Court has handed down a ruling that the Tokyo metropolitan government tax, levied exclusively on banks operating in Tokyo, violates the Local Tax Law and should therefore be nullified. The new bank tax is levied at 3% on the banks' gross operating profits - their earnings minus basic operating expenses such as interest payments to depositors - and applies to banks with deposits and other funds exceeding 5 trillion yen

The idea for the tax emerged two years ago as a response to public distrust of financial institutions, but the court ruled that, "Ensuring that the banking industry acts responsibly should be achieved through proper, legal means. This decision has nothing to do with whether there should be a taxation system for banks or not."

In the ruling, the court ordered the metropolitan government to return about 72.5 billion yen - the tax already levied for fiscal 2000 - to the banks and to pay them about 1.8 billion yen in compensation.

The metropolitan government immediately decided to file an appeal to the Tokyo High Court, and plans to continue collecting the taxes, which total about 100 billion yen annually. It has said it will take the case to the Supreme Court if necessary. But if the metropolitan government loses its appeal, it will have to return the tax collected plus interest on that money at a penal 4% rate.

The banks can now refuse to pay the tax, but will have to bear the consequences if the Supreme Court later rules in favor of the government. The taxation bureau had moved ahead with implementing the tax, despite being warned that the banks would win if they contested its legality in court. While most banks are relieved that the tax was invalidated by the court in its ruling, an official at one major bank in the city said: "Essentially, we should be increasing profits and paying corporate taxes. This is really embarrassing."

There is a similar tax in Japan's second city, Osaka, which is currently facing a serious financial crisis. The Osaka government, which has been in the red for three consecutive years, included revenues from the bank tax for the first time in its fiscal 2002 budget, but must now decide whether the revenues should be left unused in case the Tokyo government's defeat is finalized, in which case Osaka's revenues would eventually have to be returned. Osaka expects to collect 44.6 billion yen in revenues from the tax in the first fiscal year. Drawing up a budget would have been difficult without the bank tax, a senior governmental official said.

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