Tax controversy update vol. 16 - Insights from Supreme Court precedents on the input tax credit - Part 2

Our previous issue examined two cases in which the topic of input tax credits was taken to the Supreme Court, and we approached the cases from the angle of “the purpose categories of taxable purchases”. In this issue, we will take a closer look at the same cases, but this time from the angle of “the change in the tax authority’s position”.

In our previous issue we noted that the cases of company A and M were similar in nature, but the rulings of the lower court differed for each case. The appellate high court's ruling for the case of company M was decided first, and company M’s petition regarding the “additional charge for deficient return” was upheld, with a portion of the corrections imposed by the authorities being rescinded on the grounds that there was a “due cause” for company M’s tax treatment. The reasoning for this partial ruling can be attributed to a series of incidents that began with a similar court case in 1997. In this court case, which also discussed the purpose category of condominium purchases, the authorities took a position that the "required only for taxable sales" purpose category would apply to purchases of condominiums in which tenants were already residing. However, the authorities later changed their mind and decided that such purchases should be categorized as "required for both taxable and non-taxable sales" – a fact they failed to make public at the time.

With that said, the high court found there was no “due cause” in the case of company A. The Supreme Court's rulings for both cases followed suit and found no "due cause" in either company's case. As of 2005, or most likely even earlier, the tax authorities had clearly adopted the position that taxable purchases similar to those being argued in these cases should be categorized to the "required for both taxable and non-taxable sales" purpose category, and this became the underlying reason for the Supreme Court's decisions. Additionally, the Supreme Court evaluated that the authority’s 1997 response did not represent their general stance towards their treatment of such issue, and moreover, such response was not made public to start with. In other words, the court’s judgment was that while the current position taken by the authorities regarding the application of the “required for both taxable and non-taxable sales” purpose category is abundantly clear, the former position taken in which the authorities accepted the “required only for taxable sales” purpose category was not commonly known or applied, and therefore the ruling found the authorities were not required to make this change in their position public.

Some taxpayers can't help but feel disgruntled by how the tax authorities can reprimand taxpayers on certain tax treatments while relying on reasonings that are inconsistent with their stances in the past. The expectation that the authorities will responsibly announce such changes in a position is indeed understandable, though we must note that the self-assessment system employed by the NTA leaves the obligation to properly report taxes to the taxpayer. We can surmise from the ruling of these two cases that the court’s value judgment centers on taxpayers being responsible for their own tax treatments.

In order to still petition that the authorities neglected to announce their change of position, it would be essential to quantify how abundantly clear the authority’s current position is compared to their former position, while also taking into consideration all of the circumstances explained above. For example, if the authority’s current position has been made abundantly clear within their assertions in other court cases or within lectures and information provided by their employees, and provided that their former treatments which differ have not been made similarly clear, then the likelihood of asserting the necessity for the authority to publicly announce such stance becomes increasingly low. On the other hand, if their former position had been widely put into practice, then regardless of the authority's position on recognizing that treatment, the likelihood of asserting the same necessity for making such a position public becomes considerably higher in the event the authority attempts to change its current position.

As for whether the former tax authority's position was “abundantly clear”, it will be necessary to carefully examine what aspects actually make such a position “abundantly clear”. If stipulated in a tax circular or the commissioner's directive, the evaluation would be that the authority’s position was “abundantly clear”. However, in most instances, decisions on whether the authority’s position is “abundantly clear” is made based on a comprehensive evaluation of relevant documents and lecture records, which requires know-how of fact checking. Moreover, even if there is a likelihood to assert that authorities are required to publicly announce a change in their position, whether the new position adopted by the authorities is in accordance with current legislation is another matter.

As set out above, assuming a taxpayer wishes to argue the position change of the authorities in court, an elaborate and detailed level of research, including relevant precedents would be critical. Regardless of the preparation required for such an undertaking, our firm has successfully handled cases in which the authorities have changed their positions after admitting to their prior guidance being incorrect, resulting in the additional taxes assessed on the taxpayer being waived. It is always best to confer with specialists when it comes to such technical matters.

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