Rule of Law and Japanese Tax LawHiroshi Kaneko, Professor Emeritus, The University of Tokyo Preface
It is an honor and pleasure to speak at the Annual Conference of AOTCA.
The title of my speech is “Rule of Law and Japanese Tax Law.”
The most important element of rule of law in taxation is the principle of“no-taxation-without-representation”: that taxpayers are not required to pay taxes
which lack a statutory basis. Historically, the principle that taxes cannot be imposed
without the consent of those who would be taxed can be traced back to the Magna Cartaof 1215. With the development of Parliament, this principle was transformed into
no-taxation without the consent of Parliament (the Petition of Rights of 1629), andfinally established in the Bill of Rights of 1689 in England. The French Declaration of
Citizens Rights of 1789 also adopted this principle. No-taxation-without-representation
was of course the slogan of the Boston Tea Party.
I.

Introduction

1. Pre-War Trends
The first modern constitution of Japan (hereafter referred to as the Meiji
Constitution), was enacted in 1889 under the reign of the Meiji Emperor. The Meiji
Constitution adopted the separation of powers, and accordingly implied the“Rechtsstaatsidee" (an idea similar to rule of law) of European continental nations.
Under the Meiji Constitution, German books on public law including Otto Mayer’s“Deutsches Verwaltungsrecht” were widely read by legal scholars in Japan, and suchThis paper is an updated version with some supplements and additions of my article titled“The Principle of Statute-based Taxation in Japan—Trends in Scholars’ Opinion and Case Law”
which I dedicated to late Professor Klaus Vogel to celebrate his seventieth birthday, and was
published on “International and Comparative Tax Law —Essays in Honor of Klaus Vogel”,
edited by Professor Kees van Raad and published by Kluwer Law International in 2000.

The writer is deeply indebted to the kind assistance of Professor Kees van Raad of the
University of Leiden, Ms. Yuko Miyazaki, Partner of Nagashima Ohno and Tsunematsu andProfessor J. Mark Ramseyer of Harvard Law School. Professor van Raad arranged to get
permission of the publisher to use the article mentioned above. Ms. Miyazaki translated p.1-18 of theabove-mentioned article into Japanese, Professor Ramseyer translated p.19-26 which I added to thispaper this time into English.
1concepts as “rechtssatzschaffende Kraft”, “Vorrang des Gesetzes” and “Vorbehalt desGesetzes” were well known to them.1
The Meiji Constitution contained two articles on taxation: Article 21 provided
that Japanese people were subject to tax according to statutes. Article 62 prohibitedthe imposition of new taxes, or the modification of existing tax rates, unless laid down
in a statute. These articles, and Article 62 in particular, were apparently expressions of
the Western idea of the “rule of law” and the “Rechtsstaatsidee”. Count Hirobumi Ito,the central figure behind the Constitution and Chairman of the Privy Council, wrote
about the article: “It is a great and beautiful fruit of the constitutional government andpromotes directly the happiness of the people to require the consent of the Diet in
imposing new taxes, and not to leave the matter to the arbitrary decision of theexecutive.”2
Scholars expressed similar opinions. For instance, Tatsukichi Minobe wrote,in essence, as follows in 1923:3
Taxes should be governed by statutes. This is provided explicitly by
Article 62 of the Constitution. The article shows that taxes cannot merely bebased upon executive orders but requires the enactment of a statute containing
the object of the tax, the tax base, the tax rate, and the taxpayer. In other fieldsof administration, it is not unusual for statutes to delegate the matters to beprovided by statutes to the executive, but in taxation it is usual that statutes
refrain from delegation and contain all the above-mentioned elements
themselves.
Academic research in tax law in pre-war times started with the work of the late
Shozaburo Sugimura. In 1931, he translated the second edition of Albert Hensel’s“Steuerrecht” into Japanese,4 and published a systematic book entitled “Tax Law” in1939. 5
By these works, the principle of sozei-horitsu-shugi (literally,
tax-statute-principle; identical to the principle of “Gesetzmäßige Besteuerung”;
hereafter referred to as the principle of statute-based taxation) and the concept ofkazeiyoken (Steuertatbestand; hereafter referred to as tax-liability prerequisite) were
Otto Mayer’s “Deutsches Verwaltungsrecht” was translated into Japanese by Professor Tatsukichi
Minobe in 1903. As a systematic research of Otto Mayer’s administrative law theory, cf, Hiroshi
Shiono, The Structure of Administrative Law Theory of Otto Mayer (1962).
2
Hirobumi Ito, Commentaries on Constitution (1889).
3
Cf. Tatsukichi Minobe, System of Administrative Law, Book Two, p.353 et seq (1924).
4
Shozaburo Sugimura, Theory of German Tax Law (1931). Professor Sugimura was Professor of
Administrative Law at the University of Tokyo, and extended his research to tax law.
5
Shozaburo Sugimura, Tax Law (1939)
12

introduced, analyzed and clarified in Japan for the first time.
However, since courts were not entitled to review the constitutionality ofstatutes under the Meiji Constitution, theoretical research and analysis of Article 62 andthe principle of statute-based taxation were not subject to further development.
Also, since Japan embarked on her modernization much later than Western
nations, she had to rely heavily on a strong and stable bureaucracy in order to promote
modernization, i.e., to catch up to Western nations quickly and to develop industry
efficiently. Therefore, one characteristic element of Japan’s modernization was thatwithin the three branches of the government, the executive gained the strongest power,and decision-making was almost entirely monopolized by bureaucrats.
This
development resulted in the fact that usually statutes were rather simple and covered
basic matters, and many important decisions were delegated to executive order.
Despite Minobe’s claim to the contrary, the field of tax law was no exception. Tax
statutes, too, usually covered basic matters, and delegated many important matters to
Cabinet Orders and Ministerial Orders.
2. Post-War Trends
Things have changed after World War II. The current Constitution of Japanwas enacted in 1946 and promulgated in 1947. Again, it contains two articles on
taxation: Article 30 provides that the people have a duty to pay tax according tostatutory provisions; and Article 84 prevents the government from imposing new taxes,
or modifying existing ones, unless permitted by statute or under such conditions as a
statute may prescribe. These two articles are similar to the two Meiji Constitution
articles mentioned above. The basic difference between the two constitutions is that
under the current Constitution, the courts are empowered to review the constitutionalityof the provisions of statutes, executive orders and administrative actions (Article 81).
Moreover, Article 41 of the Constitution provides that the Diet is the supreme branch of
the Government and the sole legislative body.
Taxpayers soon started to dispute the constitutionality of various tax provisions
in court. Various issues have been raised concerning different provisions of theConstitution, and court decisions have accumulated concerning the conformity of amultitude of tax provisions with different constitutional provisions.
One of the most disputed issues was whether the provisions of tax law
complied with Article 84 of the Constitution. On this issue, the Supreme Court
repeatedly suggested in dicta that the principle of statute-based taxation required
legislators to lay down clearly the prerequisites for tax liability, and the procedure of tax
3

assessment and tax collection in Acts of Parliament.6
Incidentally, tax law education and research as an independent field ofjurisprudence developed in Japan in the 1950s. This was directly due to the “Reporton Japanese Taxation” by the Shoup Mission of 1949-50 which recommended that tax
law should be taught at the law faculties of universities and that chairs of tax law shouldbe created for that purpose.7 Since then, the number of scholars specializing in tax law
has gradually increased. Consequently, the analysis of Article 84 of the Constitution(and the principles embodied in it) has gained more and more importance.8
For instance, I have published two articles, entitled “Citizens and Tax” and“Basic Principles of Tax Law”, respectively.9 In these articles, I traced the history of
the principle of statute-based taxation in England and examined the contents andsignificance of that principle.
Likewise, I examined the contents and significance ofthe principle of statute-based taxation and related matters. I concluded that the
principle of statute-based taxation originated in two different but related values andtherefore should serve these two values at the same time. The first was the traditional
constitutional value of “no taxation without representation”. This value demands thesupreme role of Parliament in tax legislation. The second was the need for legal
stability and predictability (“Brechenbarkeit”) in taxation. Since taxes are imposed
today on virtually all economic activity and the actual liability is substantial, it isindispensable for a reasonable person making any economic decision to take into
account its tax effects. Accordingly, legal stability and predictability in taxation iswhat Adam Smith called “certainty” in his “Wealth of Nations10.”
With regard to these two values, and basically in accordance with German andAnglo-American theories, I divided the principle of statute-based taxation into the

For instance, Decision of March 23, 1965, Supreme Court Civil Cases Reporter, vol.9, no.3, p.336
Decision of March 27, 1985, id., vol.39, no.2, p.247
7
Cf. Shoup Mission, Report on Japanese Taxation, vol.4 p.D-67 (1949); id., Second Report on
Japanese Taxation, p.79 (1950).
8
As examples of systematic work by administrative law professors, cf. Shozaburo Sugiyama An
Outline of Tax Law (1950); Jiro Tanaka, Tax Law (1st edition 1968). As examples of systematic
work by tax law professors, cf. Ichiro Nakagawa, System of Tax Law Theory (1968); Keiji kiyonaga,
Tax Law (1st edition 1970); Hiroshi Kaneko, Tax Law (1st edition 1976); Ryuichi Arai, Basic
Theory of Tax Law (1st edition 1974); Hiroshi Kaneko, Lectures on Tax Law (1st edition 1970);
Takemichi Hatakeyama, Tax Law (1st edition 1977).
9
Hiroshi Kaneko, Citizen and Tax, in “Iwanami Lectures on Modern Law”, vol.8, edited by Ichiro
Kato, p.307 (1967); id., Basic Principles of Tax Law, in “Lectures on Tax Law”, vol. I, edited by
Hiroshi Kaneko et al., p.195 (1974).
10
Cf. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations vol.Ⅱ, p.424(London 1776).
64

following six sub-principles:11
(1)

(2)

(3)
(4)
(5)
(6)

the principle that the prerequisites for tax liability (“Steuertatbestand”)
and the procedure of assessment and collection of tax should be specifiedin statutes (principle of reservation to statutes);
the principle that the prerequisites for tax liability and the procedure forthe assessment and collection of taxes should be precisely provided(principle of preciseness);the principle of prohibition of retroactive legislation (principle ofnon-retroactivity);
the principle that tax statutes should be strictly enforced (principle oflegality);
the principle of due process in taxation; andthe principle that the right of taxpayers should be protected by a formal
litigation system (principle of judicial protection of the taxpayers’ right).

Today, I would like to introduce to my foreign audience the present situation
concerning the rule of law in Japanese taxation. Toward that end, I will introduce andexamine both court decisions and scholarly opinion concerning the first three
sub-principles, and briefly explain the last three sub-principles.
II.

Present situation of sub-principles

1. Principle of Reservation to Statutes(1) General Observations
Article 73 (vi) of the present Constitution provides that the provisions
necessary for the enforcement of statutes can be laid down in orders of the executive
branch without any statutory delegation. On the other hand, it is also the legal
consensus that Article 84 requires that the prerequisites for tax liability and theprocedure for the assessment and collection of tax be provided by statutes. As
mentioned above, the Supreme Court has upheld this interpretation repeatedly.12
The most disputed subject concerning this principle has been the relation
Cf. Hiroshi Kaneko, Citizen and Tax, op. cit., p.316 et seq.; id., Basic Principles of Tax Law, op.
cit., p.204 et seq.; id., Tax Law (20th rev. ed. (2015), p.73)
12
Cf. note 6.
115

between statutes and executive orders (Cabinet and Ministerial Orders). It is clear thatthe executive may not specify the prerequisites for tax liability and the procedures forassessing and collecting the tax unless Parliament has delegated that authority to it(Vorbehalt des Gesetzes). Also, it is apparent that provisions in orders violating orcontrary to statutory provisions are not valid (Vorrang des Gesetzes).
It is the consensus among constitutional law scholars that delegation to the
executive is implicitly permitted by the present Constitution.13 Also, as a matter offact, it is difficult completely to deny the necessity for delegation. Needless to say,with regard to Article 41 and 84 of the Constitution, the delegation should not be
general and blanket, but concrete and precise. 14 Therefore, the problem was to what
extent and under what conditions statutes can delegate to executive order theprerequisites for tax liability and rules regarding the procedures for assessment andcollection. This point was disputed very much because in spite of Articles 84 and 41of the Constitution the traditional pattern of legislation continued even after theenactment of the Constitution; that is, tax statutes specified only basic matters anddelegated other (sometimes very important) matters to Cabinet and Ministerial orders.
The following paragraphs aim at examining some important cases.
(2) Some Court Decisions(a) Musical Instruments Case
Decision of the Supreme Court of June 18, 1964, Supreme Court
Criminal Cases Reporter, vol.18, no.5, p.20915
In a famous criminal case, a piano and organ manufacturing corporation and its
chief executive were prosecuted for the evasion of the commodity tax. On its
commodity tax return, the corporation omitted a substantial part of the revenue from thesale of organs. The commodity tax was a signal-stage selective sales tax. The
Commodity Tax Act listed musical instruments as taxable objects in general but
delegated to Cabinet Order the scope of taxable musical instruments. Based on this13

Cf. Toshiyoshi Miyazawa, Commentaries on the Constitution of Japan, p.574 et seq. (1978); Jiro
Tanaka, Theory of Administrative Law-General Part, p.364 (1957); Masami Ito, Constitutional Law,
p.412 (new ed. 1990); Nobuyoshi Ashibe, Constitutional Law, p.265 (rev. ed. 1999); Koji Sato,
Constitutional Law, p.147 (3d ed. 1995).
14
Cf. T.Miyazawa, op. cit., p.577; J.Tanaka, op.cit.; p.367; M.Ito, op.cit., p.662; N. Ashibe, op. cit,
p.265 et. seq.
15
As a short comment on this case, cf. Setsuo Kinashi, Bar Journal, vol.16, no.8, p.1190. Cf. also
Hiroshi Kaneko, Basic Principles of Tax Law, op. cit., p.208 et seq.
6

delegation, the Cabinet Order listed organs as taxable items. The accused asserted that
this delegation violated Article 84 of the Constitution and the principle of statute-based
taxation embodied in it, and therefore, that the provision of delegation and the provisionof the Cabinet Order under it were invalid. Based on this argument, they asserted thatthese provisions could not be applied to them and, consequently, that their behavior did
not constitute tax evasion.
The decision of the Supreme Court of June 18, 1964 flatly rejected theseassertions, holding that because the Commodity Tax Act enumerates the taxable
commodities concretely, and clarifies the scope of taxable commodities, the relevant
provisions of the Act and the Order are not unconstitutional. Because an organ is amusical instrument, and because the delegation in this case was neither general nor
blanket, no objection was expressed by constitutional law scholars to this decision.
One problem with this decision was that it did not explore further the limits topermissible and impermissible delegation.
(b) Bonus for Executive-Employees Case
Decision of the Osaka High Court of June 28, 1968; Administrative
Cases Reporter, vol.19, no.6 p.1130)16
1st Instance Court: Decision of the Osaka District Court of May 30,
1966; Administrative Cases Reporter, vol.17, no.5, p.591)17
This interesting decision by the Osaka High Court concerns the case of a family
company, i.e., a corporation where 50% or more of the outstanding shares are owned bythree shareholders and their specially related persons (hereafter referred to as dominant
shareholders and specially related persons). From 1958 to 1961, the corporation paidbonuses to four dominant shareholders and their specially related persons, who had dual
status as executives and employees, for their service as employees. On its corporate
income tax return, the corporation deducted the bonus to the specially related persons as
expense. The District Tax Office director assessed a deficiency. He reasoned thatbonuses paid to the executive-employees of a family corporation could not be deducted
16

As the comments on this decision, cf. Ichiro Nakagawa, Steuer, no.77, p.6; Hiroshi Kaneko,
Research of Local Autonomy, vol.46, no.4, p.138; Kazuo Yamanouchi, Studies on One Hundred Tax
Law Cases (2ed edition), edited by Hiroshi Kaneko, p.14; Yoshinobu Kitamura, Studies on Hundred
Tax Law Cases (3rd edition), edited by Hiroshi Kaneko, Tadatsune Mizuno, and Minoru Nakazato,p.8.
17
For comments on this decision, cf. Tadashi Murai, Studies on One Hundred Tax Law Cases (1stedition), edited by Ichiro Ogawa and Hiroshi Kaneko, p.14; Ichiro Nakagawa, Steuer, no.52, p.1;
and the comments listed up at the end of Murai’s comment.
7

as expenses, according to Corporate Tax Cabinet Order (hereafter referred to as CTCO)
at that time.
Until the comprehensive amendment of 1965, the Corporation Tax Act (hereafterreferred to as CTA) was rather simple as far as the substantive rules were concerned.
Article 9(1) of the CTA provided that the amount of income of a corporation equaled theamount of total revenue less total expense. Article 9(2)-(7) and several other articles
specified a few other basic items of revenue and expense. Then Article 9(8) provided
that matters not provided by the CTA were to be specified in the CTCO.
Under this delegation, various items of revenue and expense were provided by
the CTCO. One group of provisions covered the treatment of bonuses to executives.
First, Article 10-4 provided that bonuses paid to executives were not deductible,
whereas bonuses paid to executive-employees could be deducted as expenses, as far as
the part allocable to their service as employees was concerned. Already before WorldWar II, both the Japanese Corporation Law and the Corporation Tax Act started to treat
bonuses paid to executives as the disposition of profits rather than an expense. This
categorization has not changed since (however, by amendment to the CTA in 2006,
bonuses paid to executives are now deductible under certain conditions). Therefore, it
could be said that this provision was a restatement of an established and reasonableinterpretation and did not require explicit delegation in the CTA.
Second, Article 10-3(6)(iv) excluded from the scope of executive-employees“the executive-employees of family companies, who are the dominant shareholders or
their specially related persons.”
The deficiency assessment was based on these provisions. The corporation
brought suit in Osaka District Court against the District Tax Office Director, claiming
invalidation of the assessment, and asserted that the assessment was illegal because
Article 10-3(6)(iv) violated Article 84 of the Constitution as well as Article 9(1) of the
CTA, and that it exceeded the scope of the delegation in Article 9(8) of the CTA.
The Osaka District Court sustained the claim of the corporation and invalidated
the deficiency assessment except the part of the bonus which the Court thought was
attributable to the services of these executive-employees as executives (Decision of
May 30, 1966). The essence of the Court’s decision was as follows:(i)
Dominant shareholders, and their specially related persons, of a family
company can be employees of that company.
(ii) For the calculation of the company’s income, bonuses paid to these
persons in their capacity as employees are deductible.
(iii) Article 10-3(6)(iv) of the CTCO denies the dual status of the executive
8

(iv)

(v)
(vi)

employees who are the dominant shareholders or their specially related
persons, of a family company. Accordingly, bonuses paid to them fortheir service as employees are not deductible. This is the same as
imposing a corporation tax on the amount of bonuses paid to employees,
and consequently the same as creating a new tax liability.
If it was necessary to adopt this treatment for policy reasons, it shouldhave been specified by statute. This follows from the principle ofstatute-based taxation.
Such a basic provision cannot be provided in the CTCO, based on Article
9(8) of the CTA.
Therefore, Article 10-3(6)(iv) of the CTCO violates the principle ofstatute-based taxation, and cannot be applied.

The director of the District Tax Office appealed to the Osaka High Court, but the
court sustained the corporation's claim and dismissed the appeal. However, thereasoning differed from that given by the District Court (Decision of June 28, 1968).
After rejecting the director's assertion that Article 10-3(6)(iv) of the CTCO wasan interpretative provision, on the ground that the article seriously affected the rights
and duties of taxpayers, the High Court held that the relevant CTCO provisions should
be understood as based on the delegation of Article 9(8) of the CTA. Then, the High
Court held:“From the viewpoint of the principle of statute-based taxation, legislativedelegation provisions should specify the purpose, content, and scope of any
delegation. The legislature may not delegate through general and blanket
provisions regarding such prerequisites for tax liability as items of revenue andexpense. Accordingly, Article 9(8) of the CTA should not be interpreted ashaving granted the CTCO broad discretion to determine the prerequisites for tax
liability. Anyway, it is impossible for the CTCO to deny the deductibility of
expenditures which have the nature of expenses and have been treated as
deductible expenses in both theory and practice.”
Because the District Tax Office Director did not appeal to the Supreme Court,
the case ended with the decision of the High Court.
Incidentally, after the decision of the District Court appeared, I published an
9article entitled “Citizens and Tax” in 1966.18 After having researched German theory
on delegation of legislation, I argued that under the Japanese Constitution too, the test
for the distinction between permissible concrete and precise delegation andimpermissible general and blanket delegation should be whether the purpose (Zweck),content (Inhalt) and scope (Ausmaß) of the delegation are clear in the delegating statuteitself. 19 I would count it an honor if this article had any influence on the Osaka High
Court and bridged German and Japanese theory.
The decision of both the Osaka District Court and the Osaka High Court areinteresting and can be appreciated from the viewpoint of the principle of statute-based
taxation. I suspect that the High Court's holding has had a bigger effect in moving theweight of policy-making from the executive branch to the Diet.
Having been influenced by this and other cases in which the validity of CTCO
provisions was disputed from the viewpoint of the statute-based taxation, the legislature
amended the CTA extensively in 1965. Many CTCO provisions, including that on thebonuses for executives and executive- employees, were transferred to the CTA.
(c) Registration Tax Refund Case
Decision of the Tokyo High Court of November 28, 1995; Monthly
Litigation Reporter, vol.42, no.11, p.278920
1st Instance Court: Decision of the Chiba District Court of
February 22, 1995,. Monthly Litigation Reporter, vol.42, no.11,
p.2801The plaintiff in this case was a small timber corporation and the member of a
trade association. The association’s purpose was to gather medium-and small-sized
timber enterprises in an industrial zone near the Kisarazu port in Chiba Prefecture.
The plaintiff purchased land and a building on it in the zone from the association
and registered the purchase at the relevant registration office. It paid the registration
tax to the office. The amount of tax was calculated according to the Registration Tax
Act. About two months later, the corporation learned about Article 78-3 of the Special
Tax Treatments Act which provided for a reduced tax rate on the registration of thepurchase of real estate located in a zone for gathering medium-and small-sizedenterprises. If the reduced rate had been applied, the amount of tax would have been18

Cf. supra foot note 9.
Cf. Hiroshi Kaneko, Citizen and Tax, op. cit,, p.316. Cf. Decision of German Constitutional Court
on Firma Salamander Case. Urteil des Zweiten Senats vom 5 März 1958, BVerfGE 7.2.82
20
As a comment on this decision, cf. Tutomu Nunoda, Juristo, no.1113, p.25.
19

10

about 7.7 million yen less than the amount the plaintiff actually paid. The plaintiff
demanded that the registration office refund the overpaid tax. However, the office
rejected the claim. It argued that at the time the plaintiff applied for the registration, it
had not attached a certificate from the prefectural governor as specified by Ministerial
Order. The corporation quickly obtained the certificate from the governor andsubmitted it to the registration office. It asked the office director to send a formal
notice of refund to the district tax office director. Nevertheless, for the reasons above,the director rejected the request. The corporation then sued in Chiba District Court,
claiming that the Japanese government should refund the amount of the over-paid tax
with interest.
At the time, Article 78-3(1) of the Special Tax Treatments Act provided that incases like this, instead of the tax rate of 44/1000 laid down in the Registration Tax Act,the reduced rates of 12/1000 (for land) and 10/1000 (for buildings) should apply“according to the provisions of Cabinet Order”. Under this provision, Article 42-9(3)of the Special Tax Treatments Cabinet Order provided that the reduced rates would
apply only when registration was made within a month after purchase of real estate“according to the provisions of ministerial order”. Under this provision, Article 29(1)of the Special Tax Treatments Ministerial Order provided that for the application of the
reduced rates, taxpayers should attach the certificate of the governor to the application
form for registration.
The government denied that it owed a refund. The corporation had notsatisfied the requirement that it attach the governor's certificate to its application form, it
explained. Accordingly, the reduced rates did not apply and the firm was not entitledto a refund. Against this assertion, the corporation raised several grounds. Most
importantly, it argued that the delegation provision of Article 78-3(1) of the Special Tax
Treatment Act was extremely general and broad. Had the legislature intended todelegate to the Cabinet Order the task of imposing requirements other than those
provided in the statute itself, such delegation would have violated the principle ofstatute-based taxation. Accordingly, the procedural requirement in the Ministerial
Order was invalid and inapplicable.
The Chiba District Court sustained the corporation's claim, and ordered thegovernment to refund the over-paid tax with interest (Decision of February 22, 1995).
The important points of the holding of the Court were:(i)

The principle of statute-based taxation also applies to preferential tax
treatments.
11

(ii)

(iii)

Article 78-3 says nothing about procedural requirements. Other
provisions of the Special Tax Treatments Act usually contain the words“so long as taxpayers follow the procedures provided by ministerial
order”. Therefore, it is difficult to say that Article 78-3 requires
taxpayers to follow some procedure as the condition for receiving the
reduced rates. Those parts of the cabinet and ministerial orders
imposing the additional procedural requirement thus have no legal effectand are inapplicable.
Even if Article 78-3 did require a certain procedure, provisions like“according to the provisions of cabinet order” would constitute a blanket
delegation in violation of the principle of statute-based taxation.

The Government appealed to the Tokyo High Court. The High Court
sustained the claim of the corporation and dismissed the appeal (Decision ofNovember 28, 1995). The holding of the High Court was substantially similar
to, but different in some respects from, that of the District Court. The essential
part of the holding of the High Court was as follows: In view of Article 84 of
the Constitution, statutory delegations to orders are permissible only when thedelegations do not violate the principle of statute-based taxation. Under thisprinciple, a delegation of the details of tax collection procedure is permitted, andconcrete and precise delegations are permitted. However, if procedural
requirements are delegated, the statute itself must state something about it andexplicitly delegate the procedural details to an order. Under the principle ofstatute-based taxation, additional requirements cannot be created byinterpretation without a clear statutory delegation. Consequently, the abstractand unlimited delegation of Article 78-3(1) providing "according to theprovisions of cabinet order" should be interpreted narrowly. It must not be
construed to imply any authority to add procedural requirements to theapplication of reduced rates. Therefore, Article 29(1) of the Special Tax
Treatments Ministerial Order is invalid insofar as it imposes additional
procedural requirements.
The Government did not appeal to the Supreme Court. Therefore, the case
ended with the decision of the High Court. Incidentally, Article 79-3 of the Special
Tax Treatments Act was amended in 1996 in accord with the holdings of the courts.

12

2.

Principle of PrecisenessThis principle is a corollary to the principle of reservation to statutes. This isbecause if a statutory provision were so vague as to give discretion to tax authorities, itwould generate the same result as a general and blanket delegation.21
As in other countries, Japanese tax statutes often use unclear or vague
expressions or concepts (“unbestimmte Rechtsbegriff”). Among scholars, the opinion
prevails that these expressions and concepts do not violate the principle of precisenessand are not unconstitutional if three tests are satisfied.22 The first is that they are notso unclear or vague as to give discretion to tax officers in effect. The second is that
their meaning can be made clear by interpretation. This is the other side of the coin to
the first test. The third is that the unclear or vague expressions result from the need tomaintain equity between taxpayers or to realize other reasonable policy objectives.
Two examples will be introduced here -- one from the substantive law, and theother from procedural law.
Example 1: Article 132(1)(i) of the Corporation Tax Act provides that thedirector of a district tax office may disregard the acts or accounts of family
companies, if these acts or accounts “unduly” reduce their corporate tax burden.
“Unduly” is an imprecise term. However, family companies are dominated bya few shareholders, and they can sometimes take actions that substantiallyreduce the firm's tax burden. Therefore, this kind of provision is necessary andreasonable to keep equal the tax burdens among corporations.
It isunderstandable that the Supreme Court held that this provision was not vague,
did not violate the principle of preciseness, and therefore was notunconstitutional (Decision of April 21, 1978). 23 This does not mean that
“unduly” could be loosely interpreted, of course. Rather, to prevent any abuseof power, it should be interpreted rigidly. 24
Example 2: Article 234 of the Individual Income Tax Act (at present article74-2(1)(2) of the General Tax Procedure Act) provided that, “when necessary,”
tax officers may audit taxpayers and examine their books and records. Allother tax statutes (at present, article 74-2~74-6 of General Tax Procedure Act)21

Cf. Hiroshi Kaneko, Tax Law (20th rev. ed. (2015)), p.79; id., Basic Principles of Tax Law , op.
cit., p.218 et seq.
22
Cf. Hiroshi Kaneko, Tax Law (20th rev. ed. (2015)), p.79 et seq.; id., Basic Principles of Tax Law ,op. cit., p.218 et seq.
23
Monthly Litigation Reporter, vol.24, no.8, p.1694.
24
Concerning this provision, cf. Hiroshi Kaneko, Tax Law (20th rev. ed. (2015)), p.470 et seq.
13contained similar provisions. The Supreme Court held that because theexpression “when necessary” does not give discretion to tax officers, and its
meaning can be clarified by interpretation, it did not violate the principle ofpreciseness and was not unconstitutional (Decision of July 10, 1973).25
In almost all cases in which the issue of preciseness was disputed, court
decisions have held that the provisions at issue did not violate the principle ofpreciseness.
3.

Principle of Non-Retroactivity(1) General observations
Concerning the problem of whether retroactive legislation in the field of

administrative law is permissible under the Japanese Constitution, a prominent scholar
wrote in the late 1950s that retroactive legislation was not unconstitutional if it
appropriately promoted legislative policy. 26 However, tax law scholars started toassert around the middle of the 1960s that retroactive tax legislation was
unconstitutional to the extent that it adversely affected the interests of taxpayers.
For instance, in 1966 I wrote:27“The prohibition of retroactive legislation should be recognized as anelement of the principle of statute-based taxation. Although it is permissible tochange the content of tax liability through ex-post legislation to the advantage oftaxpayers, it is not permissible to change it to their disadvantage. When people
engage in various economic transactions or make decisions, they refer to the tax
statutes at the time of their activities to check their tax consequences. In doing
so, they trust that taxes will be imposed according to the statutes at the time.
To betray their trust through ex-post legislation seriously injures thepredictability and legal stability (certainty) that are the very objective of the ruleof law. There is the position that, because the Constitution does not clearlyprohibit retroactive tax legislation similar to "nulla poena sine lege," theprohibition of retroactive legislation is not a constitutional principle but merely a25

Supreme Court Criminal Cases Reporter, vol.26, no.9, p.554. As examples of the comments ofthis decision, cf. Yoriaki Narita, Studies on One Hundred Tax Law Cases(3rd edition), p.168;
Hiroshi Kaneko, Journal of Court Decisions, no.172, p.151.
26
Cf. Jiro Tanaka, Theory of Administrative Law-General Part, p. 164 et seq. (1957).
27
Hiroshi Kaneko, Citizen and Tax, op. cit. p. 317; id., Basic Principles of Tax Law, op. cit,. p. 225
et seq.; id., Tax Law (20th rev. ed. (2015)) p.110.
14

principle of legislative policy. However, in view of the economic function andsignificance of the principle of statute-based taxation, it should be recognizedthat Article 84 of the Constitution implies the prohibition of retroactive tax
legislation.”
Modern tax scholars generally believe that retroactive legislation violates theprinciple of statute-based taxation. The case to be described in the following section isan interesting example. However, concerning periodic taxes like corporate andindividual income taxes, scholars and court decisions tend to suggest that the
government may apply statutes or ordinances amended during the period retroactively
to the beginning of that period.
(2) Some Court Decisions(a) Okinawa Commodity Tax Case
Decision of the Fukuoka High Court, Naha Branch of October 31,
1973; Monthly Litigation Reporter, vol.19, no.13, p220
1st Instance Court: Decision of the Naha District Court of April 2,
1969; Monthly Litigation Reporter, vol.19, no.13, p231
The case concerned the Okinawa commodity tax at the time when Okinawa wasstill occupied by the United States. The plaintiffs were trading companies thatimported certain kinds of fish into Okinawa. At the time, the Okinawa Commodity
Tax Act (Order No.17 of the United States Chief Commander, issued on November 27,1958) listed “raw fish” as a taxable commodity. Under this category, various speciesof fish were enumerated but the species which these corporations imported were notincluded. Nevertheless, the firms paid the commodity tax on the fish they imported.
The facts are not clear, but they asserted that they paid it only because the tax
authorities demanded that they do so, not because of any misjudgment.
In 1964, the Commodity Tax Act was amended (Third Amendment to OrderNo.17) and the species of fish the corporations imported and paid tax on were added to
the list of taxable fish. At the same time, the amendment provided that it did notchange the law: the commodity tax had been properly imposed on these species in thepast even though they had not appeared on taxable list.
The corporations sued in Naha District Court, demanding that the Japanese
government refund the commodity tax they had paid on the fish. They asserted thatthe 1964 amendment imposing the tax on commodities that had not been listed earlier
15amounted to retroactive legislation. It violated the Executive Order of the U.S.
President protecting the property of the people of Okinawa.
The government asserted that (1) the enumerated fish were just examples, andthat the fish which the corporations imported were also included, and (2) since thecorporations shifted forward the burden of tax by including it in the sales price of thefish, they actually did not have any loss to recover.
The District Court sustained the second assertion of the government anddismissed the claim of the corporations. The corporations appealed to the Fukuoka
High Court and again asserted that the amendment of 1964 was retroactive legislation
violating the Presidential Order. The High Court granted the appeal, and ordered thegovernment to refund the taxes paid. The Court held that the fish enumerated in the1958 Act were not simply examples. Rather, the list limited the scope of taxable fish.
The Court also held that the 1964 amendment constituted retroactive legislation, .
Given the principle of statute-based taxation, the government could enact retroactive
taxation only when an amendment of the law was scheduled and the taxpayer could
predict the amendment at the time of he undertook his activities. Only then, the Court
explained, would legal certainty not be seriously compromised. Here, however, thelegislation aimed to legalize retroactively the imposition of tax on non-taxable
commodities for several years. This exceeded the permissible bounds.
Concerning the assertion of the government that there was no loss for the
corporations to recover, the Court held that, although the commodity tax was an indirect
tax and the burden thereof was usually shifted to consumers, this did not justify any
denial of a taxpayer’s right to a refund of the tax he paid erroneously. After all,commodity sales prices were decided by market competition. Since the government
did not appeal to the Supreme Court, the litigation ended with the decision of the High
Court.
This decision was widely lauded for establishing and developing the principle ofstatute-based taxation. However, there is one published court decision which held that
retroactive legislation in taxation was not unconstitutional (see below).
(b) Special Land-Holding Tax Case
Decision of the Osaka High Court of August 30, 1977, High Court
Civil Cases Reporter, vol.30, no.3, p.21728
In 1969, the income tax on capital gains on the sale of land by individual28

As a comment on this case, cf. Yoshikazu Miki, Zeikeitsuushin, vol.39, no.15, p.376.
16

landowners was drastically reduced, in order to increase the supply of land and to lower
its price. However, because of the speculative purchase of land by corporations andindividual real estate entrepreneurs, the price of land substantially rose (which
obviously was opposite to the stated policy purpose). To solve this problem, theso-called Special Land-Holding Tax (the SLHT) was introduced in 1973 as a municipal
tax imposed on land owned by corporations and individual real estate entrepreneurs andpurchased on or after January 1, 1969.
Some taxpayers sued in the Osaka District Court, contesting the application of
the SLHT. After their claim was dismissed by the District Court, they appealed to the
Osaka High Court. One of their claims was that it violated the prohibition ofretroactive legislation to impose the SLHT on land purchased and owned on or afterJanuary 1, 1969 by a statute enacted in 1973.
The High Court dismissed their appeal, holding that although Article 39 of theConstitution banned retroactive criminal legislation, non-retroactivity was merely aninterpretative principle in non-criminal fields. Retroactive legislation was notprohibited, it explained, by the Constitution itself. According to the Court, since theSLHT was introduced to correct the adverse effect of the 1969 legislation, there wasreasonable ground to enact retroactive legislation. Therefore, the tax was notunconstitutional and invalid.
The logic of the decision is very difficult to understand. Although the SLHT
Act imposed a tax on land purchased before its enactment,29 it imposed the tax only on
present and future land holdings. In that sense, it was not retroactive, and the decision
should not have precedential value.
(c) Periodic Tax Cases
In the field of periodically levied taxes like individual and corporate income
taxes, it often happens that amendments are made to the disadvantage of taxpayers
during the tax period and applied from the beginning of the period. There are several
cases in which the constitutionality of such legislation was disputed. In this paper, thefollowing two cases will be introduced.
(i) Local Health Insurance Tax of Hamamatsu City Case
Decision of the Shizuoka District Court of October 27, 1972;
Administrative Cases Reporter, vol.23, no.10-11, p.774

29

Since January 1, 1969.
17

Under the local health insurance system, health care expenses are financed byeither the local health insurance tax or the local health insurance premium. Both the
tax and the premium are imposed and collected for a fiscal year (April 1 to March 31)
on a monthly installment basis (except September and October). Hamamatsu City was
one of the local communities that adopted the local health insurance premium system.
It is the consensus among constitutional law and tax law scholars that for theinterpretation of Article 84 of the Constitution, the term “tax” also includes coerced
burdens like local health insurance premiums. Hamamatsu City amended its National
Health Insurance Ordinance in September 1968. This amendment was to be applied
retroactively from the beginning of the period. Since it substantially increased theamount of premium to be paid by high income residents, some of them brought suit in
the Shizuoka District Court. They claimed that because the increases in the premiums
applied to past months, the amendment was void as unconstitutionally retroactive
legislation.
The District Court elaborately examined why an amendment during the period
was necessary. According to the Court, since the amount of the insurance to be paid toinsured city residents and the standard price of the medicines covered by the health careincreased since January of 1968, it was already predictable in 1967 that the healthinsurance premiums would substantially increase in 1968. A further factor in deciding
the amount of premium for each resident was the amount of his or her local income tax
which usually becomes final only in June. For these reasons, as in previous years, theordinance was amended and the amendment was publicly announced in September.
Based on this amendment, the standards for calculating the amount of the premium for1968 were fixed in October. Then, the amount of the premium to be paid by eachresident was decided in November.
On these findings, the Court held that for the technical reasons given above, it
was unavoidable and predictable that the ordinance would be amended during theperiod and applied to the beginning of the period. Even if this constituted retroactive
legislation, it did not seriously infringe the right to property guaranteed by theConstitution, and did not violate the principle of non-retroactivity of tax legislation.
For these reasons, the Shizuoka District Court dismissed the plaintiffs' claims,
and held that the application of the ordinance amendment to the entire period was both
unavoidable and understandable.

18

(ii) Real Estate Capital Loss Deduction Case
Decision of September 22, 2011, Supreme Court Civil Cases
Reporter, vol.65, no.6, p.275630
2nd Instance Court: Decision of the Tokyo High Court of December
4, 2008, Supreme Court Civil Cases Reporter, vol.65, no.6, p.2891
1st Instance Court: Decision of the Chiba District Court of May 16,
2008, Supreme Court Civil Cases Reporter, vol.65, no.6, p.2869
This case concerns the 2004 amendments to the Income Tax Act. These
revisions were introduced in the legislature in February of 2004, passed in late March,and promulgated immediately. Prior to the amendments, a long-term capital loss fromthe sale or exchange of real estate could be netted against other income. After theamendment, long-term real-estate capital gains were subject to tax at a lower rate than
before, but losses could no longer be deducted from other categories of income. They
could only be deducted from long-term real-estate capital gains income. Crucial to thecase, the amendment applied retroactively to all transactions occurring after January 1,
2004.
The plaintiff had contracted to sell his land on January 30, 2004. He had
owned the land since 1993, but transferred it to his buyer on March 1, 2004. Although
the sale generated a capital loss for him, the tax office director cited the 2004
amendment to refuse to let him deduct the loss against other income. The plaintiff
sued in Chiba District Court to vacate the decision, but the District Court denied his
claim, and the Tokyo High Court affirmed. He appealed to the Supreme Court, but it
affirmed as well. The Supreme Court explained as follows:(A) Article 84 of the Constitution requires the government to specify thepreconditions for taxation clearly by statute. This rule ensures the legal
stability of taxation.
(B) When a statute changes the content of a legally defined set of property
rights, the change can have an effect on legal stability. Whether thechange is constitutional depends on the following considerations,:① the nature of the property right in question;② the extent to which the statute changes that property right;③ the nature of the public interest furthered by the statute;and on whether, considering these factors, the statutory change constitutes a30

As the same opinion on the same issue of the Supreme Court, cf. Decision of the Supreme Courtof September 30, 2011, Hanreijiho, no.2132, p.39.
19

rational limit on the property right in question.
(C) In the present case, the statute was amended during the course of thecalendar year, but made retroactively effective to the beginning of theyear. Whether that retroactive application violates Article 84 of theConstitution turns on considerations (B)① through ③ above.
(D) The legislature passed the amendment in question to stop the steady fallin real estate prices by stopping panic-induced sales.
(F) The effective date of the statute was only 3 months before its passage.
Given these factors, the Court found the retroactive application a rational
exception to the general ban on retroactive tax legislation. Accordingly, it held that theapplication did not violate Article 84 of the Constitution.
One could interpret this decision as paralleling Article 29 of the Constitution.
Article 29(b) limits property rights by reference to the public welfare; this opinion
similarly limits the Article 84 ban on retroactive legislation by reference to policy
considerations. The parallel, however, is problematic. Article 29(b) explicitly statesthat "[p]roperty rights shall be defined by law, in conformity with the public welfare."
Article 84 includes no such reference to the "public welfare."4.

Principle of Legality

Because tax law is mandatory law, it gives the tax office little discretion.
Provided the requisites to tax liability are satisfied, the office may not reduce or
eliminate a taxpayer's liability. Neither may it opt not to collect any liability. Instead,
it must levy and collect the amount of taxes specified by statute.
In Germany, this rule is known as the principle of legality (Legalitätsprinzip).
In Japan, the courts have applied the principle consistently since the period before thewar. The principle does not just reduce the unfairness that might otherwise shape theenforcement of the tax law. It helps prevent variations in taxpayer treatment that mightotherwise render the equity of the tax burden hard to maintain. 31
Accordingly, the government may not reduce a taxpayer's liability, eliminate
his liability, or excuse his non-payment. Neither may it enter into settlements oragreements about the content of the tax liability, or the timing or method of tax
collection (though settlement is possible if a statute clearly specifies the necessary

31

On this subject, cf, Hiroshi Kaneko, Tax Law (20th rev. ed. (2015)), p.81 et seq.
20Such private agreements are illegal, void, and unenforceable. 32
In fact, of course, the tax office and taxpayers sometimes reach agreements thatstrongly resemble settlements. They do so for the convenience of the parties and theefficient enforcement of the tax regime. Formally, however, these are not agreementsthat have a straightforward legal consequence. Rather, the agreements nominally havelegal import only because the discussion between the office and the taxpayer affected
the decision that the office reached about the facts behind the taxpayer's tax liability.
Note the following three permutations to this principle of legality. First, thetax office is bound by precedent. If the case law is advantageous to the taxpayer (if it
reduces or exempts his taxable income, for example), the office must follow theprecedent.33 Second, the tax office is bound by its own general practice. If it broadly
applies interpretations or procedures that are advantageous to taxpayers (and adopted nomeasures limiting those interpretations or procedures), it cannot arbitrarily refuse to
apply them to a given taxpayer. Even without any case law on point, to apply theinterpretations or procedures broadly but then to refuse to apply them to a given
taxpayer would violate the principle of equal treatment.34 Third, the principle oflegality is limited by general principles of good faith and estoppel.35
detail).

5.

The Principle of Due Process in Taxation

To improve tax procedures is one of the most important functions of the rule oflaw in taxation.
(1) In considering the procedures that apply to tax assessment, bear in mind thepeculiar role of the "blue return" system. Blue returns date from the 1949 Shoup
Recommendations. The legislature adopted the recommendations, and introduced theblue returns in 1950.
The Shoup Mission envisioned the blue return system as a way to accustom
small firms to keeping business records and filing returns. To file a blue return,taxpayers must keep books and records that met standards set by the Ministry of
Finance. If they follow these standards, the government then grants them preferential
tax treatments. These preferences include certain procedural rights. The government,
32

Decision of the Fukuoka District Court of April 18,1950, Administrative Cases Reporter, vol.1,
no.4, p.581. Cf, Decision of the Supreme Court of September 2, 1974, Supreme Court Civil Cases
Reporter, vol.28, no.6, P.1033.
33
Hiroshi Kaneko, Tax Law (20th rev. ed. (2015)), p.107.
34
Id. P.91.
35
Id. P.132.
21

for example, may reassess a blue-return taxpayers' liability only after it actually reviews
the taxpayers' books and records. It may reassess that liability only if it explains to thetaxpayer the reasons for the reassessment (Individual Income Tax Act §155②,
Corporate Income Tax Act §121, §130②).
The Supreme Court has interpreted strictly the requirement that the government
explain the reasons for any reassessment. The leading case in question is the decisionof May 31, 1963:36“The law requires that administrative dispositions give the reasons forthe decision. In general, this is to help insure the prudence and rationality ofthe decision, and to suppress its arbitrariness. Additionally, by requiring thatthe government communicate the reasons for the disposition to the party, the law
facilitates the filing an objection. Should an administrative disposition lack
those reasons, the disposition itself is void.
This discussion leaves open the question of how fully a disposition
should detail the government's reasons. The answer depends on the nature of
the disposition, and the import and purpose of the statute providing for the
disposition and the disclosure of the reasons for it. Article 45① of the Income
Tax Act guarantees that income on a return may not be recalculated without
regard to the proper entries in the legally required books. Accordingly, thereasons required by Article 45② are reasons for which the government must
provide evidence with credibility greater than that of the taxpayer's books.
With that evidence, the government must then make clear the actual basis for its
decision.
In the case at hand, ... the taxpayer cannot determine (from the reasons[the government gave]) which of his accounting entries reflected how muchleakage.
He cannot determine the basis for the amounts [asserted by the tax
office]. He cannot determine how the investigators arrived at the profit ratethat they did. He cannot determine why the amounts based on that profit rate
are correct. Given these inadequacies, we cannot find that the reassessment
disposition meets the reason-disclosure requirement given in Art. 45 (2) of the
Income Tax Act.”

36

Supreme Court Civil Cases Reporter, vol.17, no.4, P.617.
22

The Supreme Court decision of April 23, 1985 further provides:37“[S]ometimes the tax office will issue a reassessment disposition
without actually disputing any entries in the taxpayer’s books. Because such areassessment disposition does not contest the taxpayer's entries, the tax officedoes not introduce evidence with credibility greater than the taxpayer's books.
The office must, however, gives reasons for its reassessment disposition
sufficient to prevent arbitrary government action and to facilitate the taxpayer's
petition for review. They should be full enough to enable others to check theprocess by which it arrived at its reassessment disposition.”
However, the law did not require the tax office to disclose its reasons indetermination dispositions involving blue-return taxpayers. Neither did it require theoffice to disclose its reasons in either reassessment dispositions or determination
dispositions involving non-blue-return taxpayers.
Enacted in 1993, the Administrative Procedure Act required administrative
agencies to give reasons when they issued denial dispositions of applications (e.g., an
application for a business permit), or disadvantageous dispositions (Administrative
Procedure Act, Arts. 8, 14). Tax disputes, however, Act Regarding General Rules for
National Taxes (General Rules Act, hereafter) treated separately. Because of the large
number of tax-related dispositions, the General Rules Act did not require reasons in all
such dispositions. Instead, it exempted tax dispositions from the general requirementof stated reasons (General Rules Act, Art. 74-2(a)).
Over time, the demand for due process grew, and in 2011 General Rules Act
was amended to require stated reasons -- both in denials of applications, and in
disadvantageous dispositions (Art. 74-14(a) (parenthetical)). The government must
now give reasons for determination dispositions involving blue return taxpayers, and forboth determination and reassessment determinations involving all other taxpayers.
(2) In Japan, the procedures are not yet fully specified for administrative
investigations (audits, inspections). Even the Administrative Procedure Act lacks suchprovisions. With respect to the field of tax as well, the various tax statutes had merely
provided that the tax office may question taxpayers or inspect books and records asnecessary for reassessments or determinations (e.g., the Income Tax Act, Art. 234, prior
to amendment in 2011). The law did not require prior notice of the time, place, or
37Supreme Court Civil Cases Reporter, vol.39, no.3, P.85.
23

content of the investigations, or the reasons for the investigations. However, the 2011amendment to the General Rules Act now requires prior notice. For a tax investigation,
the tax office must notify the taxpayer of the beginning time and place of theinvestigation. It must detail the purpose of the investigation, the tax items involved,
the expected length of time, and the objects to be investigated.
When the investigation is complete: (i) if reassessment or a determination is
not appropriate, the director of the tax office must notify the taxpayer in writing thatneither a reassessment nor a determination is appropriate (General Rules Act, Art.
74-11(a)); (ii) if reassessment or a determination is indeed appropriate, the official in
charge must explain to the taxpayer the results of the investigation (the reasons for thereassessment or determination, and the amounts involved) (id., Art. 74-11(b)); (iii) when
the official gives this explanation, he must explain that a taxpayer who filed a return
may not file an objection, but may demand a reassessment, and must provide written
statement to this effect (id., Art. 74-11(c)).
Through these changes to the General Rules Act, the systematization andreform of tax procedures has progressed. The guarantees of due process in tax -- even
if not yet entirely adequate -- have greatly increased.
6.

Principle of Judicial Protection of Taxpayer Rights

The guarantee of taxpayer rights in the courts is an essential element of rule oflaw in taxation.38 The Meiji Constitution provided for Administrative Court outside
the scope of the regular courts, and placed jurisdiction over tax litigation with the
Administrative Court. There were three problems. First, it was located only in Tokyo.
Second, it was a sole instance court. Therefore, there was no possibility of appeal. Third,
the majority of judges were former government officials. For the protection of the
taxpayers' rights, it was inadequate.
By contrast, the current Constitution places the jurisdiction over all disputes
with the ordinary courts (headed by the Supreme Court) (Art. 76(a)). It prohibits all
special courts (Art. 76(b)), abolishes the administrative court system, and moves all
litigation involving administrative disputes within the ambit of the general court system.
Reflecting this mandate, the Courts Act (Art. 3) specifies that the general courts
adjudicate all legal disputes. Should a taxpayer receive an illegal tax disposition, hemay sue in an ordinary court, and receive its protection.
Administrative cases, however, often require different procedures from38

cf. Hiroshi Kaneko, Tax Law (20th rev. ed. (2015)), p.941.
24

standard civil disputes. Reflecting this need, the Administrative Case Litigation Act
specifies distinct procedures that apply to these administrative cases -- unless otherstatutes provide to the contrary (id., Art. 1). As one type of administrative dispute, tax
cases are governed by this statute except where the tax statutes or orders specify
otherwise.
The Administrative Case Litigation Act generally abolished the principle ofexhaustion of administrative remedies. Instead, it gives parties the right to choose
whether to sue immediately, or first to pursue administrative options instead (Art. 8(a)).
This rule does not apply to tax disputes, however. Instead, the General Rules Act (Art.
115(a)), the Customs Act (Art. 93), and the Local Tax Act (Art. 19-12) adopt the
principle of exhaustion of administrative remedies: before a taxpayer may contest atax determination in court, he must first pursue the administrative process.
To contest a disposition of a national tax, a taxpayer needed to take two
administrative steps: file an objection with the director, and appeal to the National Tax
Tribunal (organizationally located within the National Tax Agency; General Rules Act,
Art. 115(a)). To contest a disposition of a local tax, he needs to obtain a determination
regarding his objection or a decision of upper rank agency regarding his appeal (Local
Tax Act, Art. 19, Administrative appeal Act, Art. 4-1, 4-4 ).
Two reasons lie behind this use of the exhaustion of administrative remedies
principle in tax cases. First, disputes about the assessment and collection of taxes are
many. In order to prevent tax disputes from overwhelming the courts, it was necessary
to route as many cases as possible to administrative tribunals. Second, tax disputes
require specialized expertise. Because they often involve the interpretation of complex
tax provisions and the determination of difficult facts, they require both specialized andtechnical knowledge. At the very least, the administrative process can accomplish ascreening function: it can provide a close investigation and clarify the points indispute.
Nevertheless, to require taxpayers to pursue two administrative proceedings
before filing suit contravened the goal of providing them with simple and quick
remedies. Accordingly, the June 2014 amendment to the General Rules Act eliminatedthe requirement that taxpayers file objections with the tax office. They may instead
move directly to adjudicative proceedings at the National Tax Tribunal.
Although this Tribunal is organizationally a part of the National Tax Agency, it
is granted independence in the exercise of its powers. It has its headquarters in Tokyo,
but maintains branches in each of the eleven locations where the National Tax Agency
has a Regional Office. Branches (like Osaka Branch) that handle many disputes
25maintain sub-branches as well.
Taxpayers bring their appeals before the branch or sub-branch of the National
Tax Tribunal holding jurisdiction over the tax office with which they have a dispute.
Each case is handled by a panel of three appeals judges. At the time of the initialestablishment of the Tribunal in 1970, the Chief Judge was a former judge of High
Court, the posts of chief judge of the key Branches were given to judges seconded fromthe general courts, or to prosecutors seconded from the national prosecutorial corps.
The other tribunal judges were selected from among employees of the National Tax
Agency. In order to maintain the Tribunal's neutrality and to build taxpayer confidence
in the system, the government has increasingly appointed men and women other thantax agency employees. They have included lawyers, tax practioners, accountants, andscholars, as well as the general judges and prosecutors. Under the current plan, half ofthe tribunal judges (50 of the 99) will come from backgrounds other than the National
Tax Agency by 2025.
The proceedings of the tribunal are generally conducted through written filings.
However, when a taxpayer asks for a chance to speak, the tribunal is obligated to givehim an opportunity to present his case in person. The tribunals do not make use of theadversary system, though I personally believe that taxpayers should be entitled tochoose adversary procedures.
In order to prevent surprise attacks, the office is not allowed to change the basis
for any assessment. Should it become clear in the course of a tribunal proceeding thatthe factual basis for the original disposition was false, for example, the tax office may
not introduce other facts to justify its assessment. This rule is known as the "principleof no change of original issue."Final Remarks
In II. above, some important cases concerning the principle of statute-based
taxation (rule of law) were introduced. Based on this principle, the claims of taxpayers
were sustained in many of these cases. It could be said that the principle ofstatute-based taxation (rule of law) has been established gradually in the case law.
In this as in other matters, the interaction between scholarly opinion and court
decisions has worked for the development of this principle, and both scholarly opinion
and court decisions have helped to improve tax legislation and tax administration.
However, only a part of administrative activity is actually checked by the courts.
Accordingly, the principle of statute-based taxation (rule of law) is raised as an issue in26

courts only for small part of tax legislation and administration. Therefore, the gradualestablishment of the principle in the case law does not mean that the principle isestablished sufficiently in actual legislation and administration.
As mentioned above, the principle of statute-based taxation serves two different
but related values: first, the traditional constitutional value of “no taxation without
representation”; and second, predictability and legal stability (certainty) in taxation. In
other words, the first value is expected to work toward the realization of democracy intaxation, and the second value is expected to protect people from arbitrary taxation.
Both values have been historically important and will continue to be important in the
future, too.
Concerning the second value (maintaining predictability and legal stability intaxation), I would like to point out the importance of the following two problems.
First, both court decisions and academic opinions in Japan take the position thatin principle the provisions of tax law should be rigidly and strictly interpreted. Whenthe provisions of tax law use the same concepts that are used in the statutes concerning
private transactions (Civil Code, Commercial Code, Corporation Act, etc.), in principle
these concepts should be interpreted in the same meaning as in those privatetransactions statutes. This way of interpretation serves to keep predictability and legal
stability in taxation.
Second, the advance ruling system used in the U.S. and some other counties isuseful and convenient to keep predictability and legal stability for taxpayers. Throughthe system, taxpayers can learn the views of tax agencies in advance regarding the tax
effects of the transactions they are planning to do. I proposed in the mid-1960s that
this system be adopted in Japan. Japan delayed in adopting it for various reasons, but
finally adopted it in 2004. The Japanese system is similar to the U.S. system.
Finally, for the further development and establishment of rule of law in taxation,
it is indispensable to emphasize the importance of rule of law. Both tax legislation andtax administration would be gradually improved by an emphasis on the importance ofrule of law in taxation. Therefore, it should be a mission of law scholars to emphasize
the importance of rule of law in taxation. If they continue to do so, it could be
expected that rule of law in taxation would also continue to develop step by step.

27