Blue form filing status is important for an individual or corporation through its conferring on them certain important tax benefits, such as the ability to carry forward tax losses. Please see this link for more details of the benefits of “blue form filing” for a corporation.
“Unlawful” vs “unjust”
The decision of the Tax Tribunal in this case was unusual in that it found that the revocation of blue-form filing status by the tax authorities as result of their audit was not unlawful (in Japanese ‘ihou’ or 違法’ – this would be the usual outcome of a successful tax appeal) but rather was “unjust” or “unreasonable” (in Japanese ‘futou’ or ‘不当’).
This outcome arose from a finding by the Tribunal that, while the taxpayer had not maintained the records to the precise standards required in the relevant tax legislation, the deficiencies in the keeping of financial records responsible for the revocation of blue-form filing status were clearly very minor,.
This case represents the first time that the Tokyo Tax Tribunal has found in favor of a taxpayer on the grounds that the actions of the tax authority were “unjust”. It will be interesting to see if any further cases are decided on similar grounds.
In the tribunal hearing the taxpayer asserted that all of the transactions he had been involved in had been recorded on appropriate vouchers, revenues had been aggregated and recorded and these items were always available for audit. Accordingly, there were no grounds for blue form filing status to be revoked.
Comprehensive consideration of the state of the accounting records
The Tribunal found that, when deciding whether or not revocation of blue form filing status was appropriate, regard should be paid to the type of business concerned, the scale of the business and the state of the related accounting records. All of such relevant factors should be comprehensively considered and blue-form filing status should be revoked only when the maintenance of appropriate records is not anticipated.
Record keeping in the prescribed manner
In the case the taxpayer’s accounting vouchers were arranged simply in order of occurrence of transactions, but each voucher recorded the facts of each transaction. They were arranged by account item but not aggregated The ledger was also not divided into separate proscribed items of cash receipts and outflow, expense items and revenues. Based on these facts, the tax authorities found that the taxpayer’s accounting records were not collated and organized in a systematic manner.
Given that the taxpayer’s record keeping and preservation was not carried out in accordance with the relevant orders under the tax law it was not unlawful for the tax authorities to revoke their permission to apply blue form status under Japanese Income Tax Law Article 150(1)-1.
While finding that revocation of blue form filing status was not unlawful in that it did not meet the strict requirements of the legislation, the Tribunal also addressed whether or not such revocation was unjust.
The Tribunal pointed out that the taxpayer had been maintaining their accounting records according to the simplified method allowed under Article 56-1 of the Income Tax Enforcement Order Rules. Vouchers had been differentiated between the revenues, expenses, cash inflows and outflows, totaled and the balance recorded. If records are organized and kept in a clear condition, this should fulfill the conditions required under the Cabinet Orders.
Correctness of calculation of income
In this case, the level of errors in the keeping of accounting records and recording of transactions in them was clearly very low. Furthermore the correctness of the calculation of the amounts of income was sufficiently accurate. Accordingly it could not be concluded that the level of error was simply not appropriate for the continuation of blue form filing status. Therefore revocation of such status was unjust and the Tribunal awarded the taxpayer victory in the case.
It is encouraging to see a tax tribunal taking a comprehensive view of factors relevant to the granting of a tax preferment, such as blue form filing status, rather than focusing on small technical errors. However, given that the case is very fact specific it will remain to be seen how widely such an approach will be adopted.