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ECONOMY > External Relations

U.S. tax cuts to affect Japanese companies’ business results, strategies

  • January 20, 2018
  • , Nikkei , p. 15
  • JMH Translation

The tax reforms initiated by U.S. President Donald Trump that have taken effect from January are likely to have a major impact on Japanese companies’ profits and business strategies. An analyst estimates that the tax cuts will boost net profits of Toyota Motor and two other automakers by a total of 800 billion yen in the January-March 2018 quarter.

 

The Nakanishi Research Institute’s Takaki Nakanishi made these estimates based on publicly available data of financial institutions. He predicted that the profits of Toyota Motor will increase temporarily by approximately 290 billion yen, while Honda will boost its profits by approximately 320 billion yen, and Nissan by approximately 200 billion yen.

 

Mitsubishi UFJ Morgan Stanley also revised up its forecast of Honda’s net profit in the current quarter to 300 billion yen.

 

This is due to “tax effect accounting” for adjusting the discrepancy between taxation accounting and business accounting. Thanks to the tax cuts, the automakers will benefit from a decrease in their “deferred tax liability.”

 

This liability is calculated based on tax rates. The effective tax rate in the U.S. used to be around 40%, including the federal corporate tax and state taxes. This has dropped to around 26%, so the deferred tax liability will be cut by around one-third.

 

Other major Japanese companies in the U.S., such as the SoftBank Group and Shin-Etsu Chemical Co. Ltd., are also likely to be affected. Sprint, SoftBank’s U.S. mobile subsidiary, had a deferred tax liability of $14.7 billion as of the end of September 2017. The tax cuts will boost its profits by some 500 billion yen.

 

Some other companies which have paid taxes in advance and booked deferred tax assets will suffer temporarily as a result of the tax cuts. For example, DIC Corp. revised down its net profit for the October-December 2017 quarter by 6 billion yen on account of the realization of tax assets.

 

However, Nakanishi stresses that the tax cuts will have “absolutely no impact on pretax profits” in accounting terms. This is because the realization of deferred tax liability and assets does not affect the profitability of the business itself. The key question for U.S.-based Japanese companies would rather be how they can make strategic use of the benefits of the tax cuts in the mid-term. (Abridged)

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