Case studies

Q&A regarding Tax Disputes

Deloitte Tohmatsu Tax Co. provides an overview of the tax dispute resolution mechanism in form of questions and answers.

Q: Difference between filing amended tax returns and correction determination

Q: What is the difference between filing amended tax returns and correction determination?

A: In general, when tax examiners determine, as the result of tax audits, that the declared income has been underreported, they ask for the submission of an amended return to collect unpaid taxes. The taxpayer may elect not to submit an amended tax return but in that case, a correction determination would be issued by the tax authorities based on their authority to do so.

If the taxpayer disagrees with the correction determination, they may seek remedies such as requesting reinvestigation and/or reconsideration (these administrative procedures are collectively referred to as “appeal”). Once an amended tax return is submitted, the right to file an appeal is lost. When the tax examiners propose ways to imposes taxes, the taxpayer should carefully review the advantages and disadvantages of the options of either filing amended returns, filing an appeal after receiving the correction determination, or filing an appeal with the view of ultimately filing a lawsuit.
 

Q: Issues to consider in cases of taxes imposed on international transactions

Q: Are there issues to consider in cases of taxes imposed on international transactions?

A: If the correction determination is made on transactions involving tax treaty benefits, remedies by way of mutual agreement procedures under tax treaties may also be simultaneously available while the appeal is filed. A typical example of transactions involving tax treaty benefits is transfer pricing taxation. In transfer pricing transactions, provided that the mutual agreement procedures are carried out when a correction determination is made, a grace period will be given on the payment of the additional taxes and penalties until the result of the mutual agreement procedures is available. Tax issues regarding certain international transactions, such as transactions where the CFC rules are applicable, may not be covered by treaty benefits. On the other hand, there are cases where the treaty benefits do not seem to be available but it is possible to treat the issue for the purpose of the tax treaty. With regard to international transaction tax issues, taxpayers should carefully consider what solution should be pursued after determining the applicability of treaty benefits or mutual agreement procedures and taking into account the remedies offered under domestic laws as well as the advantages and disadvantages, including cost, of the procedures. 

Q: Remedies for the correction determination which are dissatisfied

Q: What remedies are available if taxpayers are dissatisfied with the correction determination issued by the tax authorities?

A: There are two tiers of remedies available under Japanese laws to taxpayers who have been issued with a correction determination: administrative appeal procedures and tax lawsuit. Apart from these, mutual agreement procedures are available if tax treaties are applicable.
There are two types of administrative appeal procedures: request for reinvestigation to the head of the administrative authority that has made the correction determination and request for reconsideration to the Director-General of the National Tax Tribunal. Tax lawsuits are legal proceedings. If a correction determination is issued, taxpayers cannot immediately file a tax lawsuit. Instead, administrative appeal procedures must be taken first. This is referred to as the “appeal first principle.” Details of each procedure are as follows:

1. Request for reinvestigation
A taxpayer may file a request for reinvestigation with the Tax Office District Director, etc., up to two months after the day the correction determination is made. As the result of a thorough examination, the Tax Office District Director, etc., will provide the reinvestigation decision in the form of either dismissal, rejection, rescission of full or partial amount, or amendment. The reinvestigation decisions will always be accompanied by a reason.

2. Request for reconsideration
When a taxpayer disagrees with the reinvestigation decision, they may file a request for reconsideration to the National Tax Tribunal up to one month after the day after the delivery of the certified copy of the reinvestigation decision. The subject of the reconsideration request is the original determination and not the reinvestigation decision.
With respect to the correction determinations of blue tax returns, a taxpayer may make a request for reconsideration without first filing a request for reinvestigation. Taxpayers may also make a request for reconsideration if the reinvestigation determination is not available after three months from the date following the day of filing a request for reinvestigation.
The conclusion reached by the Tribunal on the request for reconsideration is the Tribunal’s decision. The Tribunal’s decision is given in the form of either dismissal, rejection, rescission of full or partial amount, or amendment. The Tribunal’s decisions will always be accompanied by a reason. The Tribunal’s decision to rescind the full or partial amount of the original determination shall bind the administrative authorities and thus a downward tax correction shall be made.

3. Lawsuit
A taxpayer may file a lawsuit in court if they disagree with the Tribunal’s decision. A taxpayer may also file a lawsuit if the Tribunal’s decision is not available three months after the day following the date of filing the request for reconsideration.
In general, the type of lawsuit would be the rescission suit to rescind the original determination.
If a taxpayer wishes to file a lawsuit, they would file a complaint to the court of first instance. This is usually the district court. The complaint is then sent to the defendant. The defendant would then prepare litigation briefs. In tax suits, claims and the presentation of evidence are generally made by way of submitting the litigation briefs. In practice, oral proceedings consist of just answering “yes” to the question, “Do you claim as written in the litigation brief?” asked by the judge. The court decision in the tax rescission suit is provided in the form of either dismissal or rejection or allowance of claim. If the court decision to allow the claim is made, the original determination will be rescinded before the downward correction determination is made by the administrative authority.
If the taxpayer disagrees with the decision of the court of the first instance, they may appeal to a higher court, up to even the supreme court. 

Q: Legal basis for conducting tax audits?

Q: What is the legal basis for conducting tax audits?

A: National Tax Agency examiners have the authority to question a company and investigate the company’s properties including its books and records to the extent necessary for conducting a corporate tax audit (CTL Article 153). If the company does not provide answers or provides false answers to the questions or refuses, interferes, or avoids investigation, the company will face a maximum of one year imprisonment or a fine of up to JPY 200,000 (CTL Article 162-1-3).

Q: Points in dealing with the tax audits when filing an appeal/a lawsuit

Q: If the taxpayer would like to file an appeal/file a lawsuit. Are there points to keep in mind in dealing with the tax audits?

A: Even in a regular tax audit, it is necessary to prepare for possible future disputes and record, organize, and keep details of documents submitted and responses to questions asked by the tax examiners from the first day of the audit. If the taxpayer is going to file an appeal or a lawsuit, these records may become extremely important as evidence and therefore require careful handling. These records may be very useful when what communication was made at the time of audit becomes an issue. Detailed notes are kept by National Tax Agency examiners and when a dispute arises, the taxpayer may be in an unfavorable position just because their record keeping was inadequate. It is essential that during the tax audit, records as detailed as possible are kept on a daily basis. 

Q: Percentage of taxpayers’ arguments being accepted

Q: What is the percentage of taxpayers’ arguments being accepted in the case of appeal or lawsuit?

A:
FY2011
In FY 2011 (from Apr. 2, 2011 to Mar. 31, 2012), the percentage of appeals or lawsuits which resulted in the rescission of the full or partial amount of the original determination was as follows:
Regarding assessment cases, the percentage of requests for reinvestigation decided in favor of the taxpayer was 9.1% (373 cases out of 4,118 cases) a decrease from 12.0% in the previous year. The percentage of requests for reconsideration decided in favor of the taxpayer rose slightly to 15.8% (403 cases out of 2,546 cases) from 14.3% in the previous year. The percentage of lawsuits won by taxpayers rose substantially to 15.4% (48 cases out of 311 cases) from 8.2% in the previous year.
The percentage of lawsuits won by taxpayers peaked at 19.7% in FY 2006, the rate has, however, gradually decreased since then. It was 15.9% in FY 2007 and 12.9% in FY 2008. It has fallen further over the past two years, standing at 6.0% in FY 2009 and 8.2% in FY 2010. In FY 2011 it rose substantially to 15.4%, however, 32 out of the 48 cases that taxpayers won were concerning US LPS cases. Excluding those cases, the taxpayers’ winning rate was only 5.4%. Therefore, the percentage of cases that are won by taxpayers is still low.

(1) Tax disputes (all tax items, but not including tax collection disputes)


FY2011


Total number of cases handled

The number of cases which resulted in the rescission of the full or partial amount of the original determination
Of the above, the number of cases which resulted in the rescission of the full amount of the original determination


Request for reinvestigation


4118


373(9.1%)

42


Request for reconsideration


2546


403(15.8%)

119


Lawsuit


311


48(15.4%)

30

 

(2) Corporate tax disputes

 

Total number of cases handled

The number of cases which resulted in the rescission of the full or partial amount of the original determination
Of the above, the number of cases which resulted in the rescission of the full amount of the original determination

Request for reinvestigation

640

39(6.1%)

0

Request for reconsideration

424

94(22.2%)

38

Lawsuit

61

2(3.3%)

1

 

 

 

Tax disputes(FY2006 - FY2011)

Tax disputes(FY2006 - FY2011)

・Tax disputes (all tax items, but not including tax collection disputes)
・Corporate tax disputes

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