Two leading banks are being sued by the Tokyo Regional Taxation Bureau over a revolving mortgage registered in June 2017 on an office building owned by a company that had been slapped with a tax penalty of about 10.4 billion yen over an illicit application for a consumption tax refund.
The banks, which had signed loan contracts with the company worth up to about 5 billion yen combined, were allegedly attempting to protect their liability. However, tax authorities have concluded that the mortgage move resulted in a loss of more than 700 million yen in tax revenue, and they brought a case before the Tokyo District Court, seeking nullification of the registration on the basis of the right to invalidate a fraudulent act under the Civil Code.
The two banks in question are Mizuho Bank and Sumitomo Mitsui Banking Corp., both based in Tokyo.
It is quite unusual for national tax authorities to sue leading banks in connection with a claim on a company slapped with a penalty tax. The illicit tax refund application is considered a pernicious act of defrauding the central government of tax revenue. Although it was deemed difficult for the two banks to have understood the company's illicit act back then, the way these banks carried out extending their loans and collecting debts could be called into question.
According to the petition, Takarada Musen Denki, which operates a tax-free shop in Chiyoda Ward, Tokyo, claimed that it had sold articles made of gold to foreign tourists. The items, the company claimed, were laid-in stock from a gold-processing company obtained between April 2016 and February 2017. Takarada Musen applied for a consumption tax refund totaling about 8.8 billion yen, which it asserted to have shouldered when it laid in the articles.
The two banks concluded contracts with the company to extend a combined total of up to 5 billion yen in March 2016, counting the expected tax refund as collateral.
When foreign visitors purchase tax-free goods in Japan, the consumption tax is exempted. For the business operator, if it files a tax return, the consumption tax added to the costs of articles it has stocked are refunded in full.
The regional bureau withheld the refund to the company in August 2016, on the grounds of a suspected illicit act. Through inspections conducted later, the bureau discovered that the sales claims were bogus and some of the listed foreign customers could not even have visited the shop in light of their travel itineraries. Further, the bureau concluded that the company and the gold-processing firm allegedly rotated the gold products between themselves to create the appearance of transactions.
The bureau then recognized that about 7.7 billion yen out of about 8.8 billion yen the company had sought to be refunded was illicit, and imposed a penalty tax totaling about 10.4 billion yen, including a heavy additional tax, on June 30, 2017.
Following the tax inspections by the bureau, the two banks in March 2017 had additionally concluded loan contracts with the firm in which a provision was added stipulating that the banks would place a revolving mortgage on the company's head office building and other assets at the end of August the same year, should the tax refund come up short of 5 billion yen.
On this basis, the banks registered -- on the same day that the tax penalty was imposed -- their right for the revolving mortgage on the properties, which the creditors could forcibly sell if the debtor became unable to pay the debts. The revolving mortgage included the nine-story head office building, which is located in front of JR Akihabara Station.
About two months after the registration by the banks, the tax authorities placed the head office building under distraint. But under a provision of the National Tax Collection Law, the proceeds from selling an asset used as collateral give preference to creditors who registered their mortgage rights earlier than the attachment made by tax authorities.
According to a calculation by the regional tax bureau, these properties, including the head office building, are expected to be sold for about 4 billion yen. As the tax amount in arrears stood at about 2.1 billion yen as of May 2019, tax authorities expected to see the expected revenue – excluding amounts collected by other financial institutions -- drop from about 760 million yen to about 33 million yen, due to the mortgage registration made by the two banks.
In the lawsuit, the tax authorities claim that the two banks "intentionally obstructed the tax-collecting right of the national taxation side so that they could make their debt collection with priority." The two banks counter-argued that they "have no intention to harm the interests of others, including the national taxation authorities, and the act was a legitimate one taken to secure our liabilities."
The two banks declined to respond to an inquiry from The Yomiuri Shimbun on the grounds that the case is in dispute.
Takarada Musen, dissatisfied with the regional bureau's decision, filed a formal objection with the National Tax Tribunal over the administrative disposition in July 2017. As its objection was turned down in July 2018, the company filed a lawsuit with the Tokyo District Court, seeking the nullification of the tax imposed on the company, which was also turned down earlier this month.
Read more from The Japan News at https://japannews.yomiuri.co.jp/
