The Supreme Court ruled Monday that tax authorities were correct in 1995 by imposing additional taxes on interest earned by Daiwa Bank in overseas deals, overturning lower court rulings.
Presiding Justice Isao Imai supported the tax authorities' claim that the bank, now Resona Bank, abused a system under which Japanese companies and individuals can avoid double taxation on overseas earnings in connection with loans extended to a foreign firm.
According to the ruling, an overseas branch of Daiwa loaned money to a Daiwa subsidiary in the Cook Islands, a dominion of New Zealand, at low interest rates between 1989 and 1994.
In the transaction, the bank effectively took over the lender's tax obligations for earned interest by paying such a tax to the government where the subsidiary is located, it says.
The bank then filed for a tax deduction in Japan, using the system that enables firms paying taxes in foreign countries to have the amount deducted from domestic tax payments.
The Japanese tax authorities imposed 250 million yen in additional taxes in September 1995, claiming Daiwa was abusing the tax deduction system.
"The bank abused the system by shouldering the tax that should have been levied on a foreign firm and filing for deduction in Japan," the justice said.
The top court decision reversed the December 2001 ruling by the Osaka District Court and the May 2003 ruling by the Osaka High Court.