Tax Charge Forces Sony Into Net Loss

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

26 May 2011

Sony, the Japanese electronics group, has had to revise its consolidated results forecast for the fiscal year ended March 31, 2011, from that announced in February, largely due to a write-off of deferred tax credits in Japan.

While Sony expects its consolidated sales and operating revenue, as well as its operating income of JPY200bn (USD2.4bn), to be in line with the forecast made in February despite the impact of the Japanese earthquake that occurred in March this year, it will record a non-cash charge of approximately JPY360bn in the fourth quarter of the fiscal year ended March 31, 2011 “to establish a valuation allowance against certain deferred tax assets in Japan”.

Sony confirmed that this is expected to result in a JPY260bn net loss attributable to Sony Corporation’s stockholders. While it pointed out that the valuation allowance is a non-cash charge and does not have any impact on Sony’s consolidated operating income or cash flow, this still represents a substantial decrease from the February forecast.

Sony explained in a statement that it evaluates its deferred tax assets on a tax jurisdiction basis to determine if a valuation allowance is required. In Japan, Sony Corporation files a stand-alone tax filing for local tax purposes and a consolidated national tax filing with its wholly-owned Japanese subsidiaries for national tax purposes.

By March 31, 2011, Sony Corporation and its national tax filing group in Japan will have shown three years of cumulative losses. According to the company's statement, this loss, under US generally accepted accounting principles "is considered significant negative evidence regarding the realizability of deferred tax assets, which is difficult to overcome, particularly given the relatively short tax loss carry forward period of seven years in Japan and the adverse impact of the Earthquake on the near term forecast for entities in Japan."

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