30 March 2016 Japan tax reform law has income tax accounting implications Japan enacted a tax reform law on March 29, 2016, that reduces both Japan's national corporate income tax rate and its local enterprise tax rate for tax years beginning on or after April 1, 2016, as part of a broader effort to encourage economic growth. As a result of these reductions, the combined national and local corporate effective income tax rate1 will decline to 29.97% from 32.11% for tax years beginning on or after April 1, 2016, and to 29.74% for tax years beginning on or after April 1, 2018. The legislation also makes other changes to Japan's corporate income tax laws as discussed below. Entities that are subject to these taxes and report under US GAAP will need to recognize the effects of these tax rate changes on deferred tax balances in the period in which legislation was enacted. The law reduces the national corporate income tax rates to 23.4% from 23.9% for tax years beginning on or after April 1, 2016, and to 23.2% for tax years beginning on or after April 1, 2018. It reduces the local enterprise tax rate to 3.6% from 6% for tax years beginning on or after April 1, 2016. The law also changes the rates for the local corporate special tax and the local inhabitant tax, but those changes offset each other. The law also reduces the annual allowable net operating loss (NOL) deduction, increases the capital and value-added base of the local enterprise tax and adds new transfer pricing documentation requirements that are in line with the Organisation for Economic Co-Operation and Development's Guidance on Transfer Pricing Documentation and Country-by-Country reporting. Under the law, the annual limit on NOL deductions will decline to 60% of taxable income from 65% for large companies, effective for tax years beginning on or after April 1, 2016, and to 55% and 50% for years beginning on or after April 1, 2017 and April 1, 2018 respectively. The law also includes changes to the local enterprise tax base, which consists of the following four components: (1) an income factor (profit or loss for year); (2) a value-added factor (sum of profit or loss for the year, employee compensation, net interest expense and net lease payments); (3) a capital factor (based on capital and capital surplus) and (4) a gross sales factor (limited to certain industries). The law allocates a larger percentage of the local enterprise tax to the value-added and capital components. For more information on the law, which contains other provisions that may affect your company, see Tax Alert 2016-587. Under US GAAP, the accounting effects of income tax law changes are included in financial statements in the interim or annual period that includes the date of enactment, which in this case is March 29, 2016. For interim reporting purposes, the effect of new legislation must be recognized in the interim period in which the legislation is enacted. The tax effect of a change in tax laws or rates on income taxes currently payable or refundable for the current year is recorded after the effective date of the legislation and reflected in the computation of the annual effective tax rate beginning no earlier than the first interim period that includes the enactment date of the new legislation. When the enactment date is not near the beginning or end of a reporting period, a company will need to estimate temporary differences as of the enactment date. The effect of a change in tax laws or rates on deferred tax assets or liabilities should be recognized as a discrete event as of the enactment date and should not be allocated to subsequent interim periods by an adjustment of the estimated annual effective tax rate. The total effect of tax law change on deferred tax balances is recorded as a component of tax expense related to continuing operations for the period in which the new law is enacted, even if the assets and liabilities relate to discontinued operations, a prior business combination or items of accumulated other comprehensive income. The effects of a change in tax laws or rates on taxes currently payable or refundable for a prior year should be recognized as of the enactment date. For financial reporting purposes, Accounting Standards Codification 740, Income Taxes, requires annual disclosure of the effect of adjustments to deferred tax amounts for enacted changes in tax laws or rates and, for interim periods, disclosures of the effect of the changes on the estimated annual effective tax rate. Because the tax rate reduction in Japan is phased in over a period of years, companies may need to schedule the reversal of their temporary differences when they measure deferred taxes beginning on the enactment date to apply the appropriate tax rate in effect during the years in which these temporary differences are expected to reverse. Companies with Japan NOL carryforwards should consider the new deduction limits when computing their current tax liability and assessing the realizability of deferred tax assets recorded for NOL carryforwards. — For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting
Document ID: 2016-0591 | |||||||
