Reforming the Tax System in Japan

Japan's tax system is, alongside with the US American's, one of the least efficient in the world. Tax burden in Japan stands around 30% (similar to US). That has to be regarded as very low, especially when compared to european countries (Germany 40%, France 45% and scandinavian countries over 50%).

Japan has been trying to reform their tax system for quite some time, but hasn't really delivered so far. This is about to change!

Well known tax reforms entail ex- prime minister Nodas increase of the consumption tax from a staggering low base of 5% (that is even lower than Switzerlands) to a still low rate (by international standards) of 10% in 2015.

The increase of Japan's consumption tax was well covered in the international (financia)l media.

Japan Sales Tax Increase Passed, on Pledge of Early Election (NYT)

Japan Confronts Fiscal Reality: Consumption Tax Hike Agreed (Forbes)

What wasn't (or isn't) very well covered is Japan's reform of the corporate tax system.
Japan has got one of the highest taxes on corporations in the world (roughly 40%).
It was about to decrease the tax to roughly 35% (still high compared to international standards), but due to the 11/3 catastrophe is decreasing corporate taxes in a two step approach (now ca.37%) going to roughly 35% by 2015.

Although the decrease in corporate taxes appears to be small percentage wise, it had a huge (counter intuitive) impact on corporate Japan's income statement in FY2011. Not did income rise, but rather was depressed due to DTA (=deferred tax assets) write downs !

They were not small numbers.

For example:

Sony: roughly $ 3 bln. in DTA write downs.
NTT: roughly $ 1,5 bln.
Sharp: roughly $ 1,3 bln.
NEC: roughly $ 1,2 bln


So headline results for FY 2011 were severly depressed by DTA write-downs (which for sure nobody mentioned). Cash-flow wise this was a non event. But who is looking to cash-flow numbers in a world where all valuation is solely derived from the income statement.