Japanese Corporate Tax Reform Has Long Term Benefits Say Experts

by Mary Swire, Tax-News.com, Hong Kong

09 April 2003

Japan's planned new corporate tax system is forcing many large companies to slash their profit forecasts, though analysts believe that the long term impact of the reform will be beneficial to business.

The new corporate tax structure will come in to force in April next year, and is based on factors such as shareholder capital rather than pure income.

This has forced firms to reduce their deferred tax assets and earnings for the year that ended in March, though it should reduce their tax bills by about one or two per cent according to reports. Deferred tax assets are used to offset future tax against a smaller liability. However, if tax rates are reduced, this will mean firms declaring smaller deferred assets, and therefore lower earnings.

According to Reuters, Masayoshi Hashimoto of the Daiwa Institute of Research said the impact of the new measure will be slight: "Although deferred tax assets have to be trimmed, companies will enjoy a lower tax rate in the future in return. In the long run, I see no substantial impact from this," said Hashimoto.

This view has been somewhat borne out by recent movements in share prices of firms that produced reduced earnings figures for the year just passed. NTT DoCoMo has risen 5.6% since the firm admitted the new tax regime would likely cut company profits by 27 billion yen ($225.3 million).

Mitsubishi and Matsushita have both announced downwards expectations in profits, though both companies have outperformed the Nikkei since their announcements. This leads analysts to conclude that the new taxation system has already been factored in to the market.

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