The Tokyo High Court on Thursday supported a lower court decision invalidating a controversial tax imposed by the Tokyo Metropolitan Government on major banks, ordering Tokyo to return 162.87 billion yen collected from 17 banks in fiscal 2000 and 2001.

Unlike the lower court ruling, the high court acknowledged the local government’s right to levy taxes based on the banks’ gross profits, turning down the banks’ demand for payment of 2.1 billion yen in damages.

However, it concluded that the tax increase on each of the banks under the new system was too high in light of the Local Tax Law.

Tokyo Gov. Shintaro Ishihara, who introduced the tax in fiscal 2000, indicated that he would appeal the ruling to the Supreme Court.

Presiding Judge Masaru Moriwaki said that while it is up to each local government’s discretion to judge whether it is reasonable to impose such a tax, the metropolitan government failed to explain fully to the banks why such a large increase in their tax burden was reasonable.

“It is each local government’s responsibility to prove the legitimacy of introducing a tax on a gross income basis on objective evidence,” the judge said. “The metropolitan government failed to do so.”

The tax burden on banks under the new system increased in some cases more than 3,000 times compared with the burden under the income-based tax, Moriwaki said, and such an increase is disproportionately high.

Last March, the Tokyo District Court ruled that the levy on the gross profits of banks and other financial business violates the local tax law, which in principle mandates income-based taxes.

The metropolitan government had levied a 2 percent to 3 percent tax on gross profits of financial institutions, calculated before subtracting personnel, operating and bad-loan disposal costs, beginning in April 2000. The banks hit by the tax filed a suit in October with the Tokyo District Court, calling for nullification of the new tax, which they claim unfairly targets banks.

The high court ruling confirmed local governments’ right to impose tax based on gross profit. It also said the criteria used by the metropolitan government in selecting banks to be targeted by the new tax, such as targeting those with 5 trillion yen or more in funds available for lending, were “appropriate.”

It ruled that the introduction of the bank tax did not involve procedural errors that can be judged as illegal, turning down the banks’ request for compensation.

Since April 2000, local governments have been given greater freedom to introduce independent taxation, and Tokyo’s bank tax case drew widespread public attention, particularly among other local governments that considered imposing similar taxes amid shrinking tax revenues under the slumping economy.

Following Tokyo’s defeat in the district court, the Osaka Prefectural Government has put on hold its plan to impose a similar tax.

In a news conference after the ruling, the banks’ lawyers said they consider the decision a full victory.

“Today’s ruling made it clear to everyone’s eyes that the Tokyo Metropolitan Government’s decision (to tax banks) has far deviated from the requirements stipulated in the Local Tax Law. The metropolitan government should take the ruling seriously,” one of the lawyers said.

The lawyer added that while the plight of local governments suffering from sluggish tax revenue under the economic slump is understandable, it is their responsibility to deal with their own fiscal woes.

The metropolitan government argued that a tax based on gross profits was needed because banks generated big profits paying dividends while being exempted from paying taxes, due to losses from disposal of bad loans, which were their own fault to begin with.

When the tax was first introduced by Ishihara, it enjoyed wide public support as it was viewed as a challenge against major banks, which had come under criticism for their irresponsible management during the bubble economy.

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