Academic journal article Academy of Accounting and Financial Studies Journal

Potential Financial Effects of the 2015 Corporate Tax Reform of Japan to Electronics Companies with Comparison to South Korea

Academic journal article Academy of Accounting and Financial Studies Journal

Potential Financial Effects of the 2015 Corporate Tax Reform of Japan to Electronics Companies with Comparison to South Korea

Article excerpt

BACKGROUND

Since the great Tohoku earthquake of 2011, the Japanese government's corporate tax reforms have been directed towards the recovery of Japan's economy. Taxation aids are particularly visible on how the government immediately approved a bill in 2011 to reduce the effective tax rate for corporations despite the concurrent approval of the Special Restoration Tax Law requiring the payment of surtaxes. Furthermore, upon the re-election of Shinzo Abe as Prime Minister on December 2012, contained in his Abenomics initiatives is the early termination of the aforementioned corporate surtax. Moreover, the scheduled 35.64 percent effective corporate tax rate was implemented a year ahead by April 1, 2015. Developments and discussions about Japan's corporate taxation reforms during 2014 also leaned towards simplified and industry-neutral taxation rules.

The Japanese Cabinet approved the "Basic Policies for the Economic and Fiscal Management and Reform 2014" or the Honebuto no Houshin on June 24, 2014. It targets to reduce the effective corporate tax rate in the range of 20 to 30 percent over the next years with the first reduction scheduled for the 2015 tax reform. A reduction in corporate tax rate must be coupled with and increased taxable base for the Japanese government to maintain a consistent stream of government revenues. As a result, the Corporate Tax Discussion Group (CTDG) of Japan's Government Tax Commission recommended the abolishment or reduction of the following benefits being enjoyed by eligible corporations: (1) tax incentives (special depreciation, tax credit and etc.); (2) net operating loss ("NOLs") deductions; (3) dividend income non-taxation; (4) depreciation methods; (5) deduction of local tax payment for corporate income tax calculation; (6) preferential tax measures for SMEs; and (7) local tax regime.

Purpose of the study

We analyze how the 2015 tax reforms for Japan impact its electronics-manufacturing companies financially by simulating the specific tax changes on the reported historical financial information of corporations within the industry. Moreover, corporate tax reforms for South Korea are examined and executed for its selected electronics-manufacturing companies. The simulation results are then utilized to ascertain whether amendments intentions occurred for the collected historical data. This aims to guide corporate decision makers as to the appropriate preparation they may do in response to tax changes, and inspire further researches for items, which may not be considered in this study.

Scope and limitation

We attempt to measure potential individual and net collective financial impacts of the 2015 corporate tax reform on Japanese companies by re-computing amended taxable items of historical financial data from 2002 to 2014 for the top 12 actively trade electronics-manufacturing corporations (12EMC). See Appendix 1 for the list of 12EMC's financial performance for 2014.

On the other hand, we also simulate the 2015 corporate tax reform of South Korea to its two actively traded electronics-manufacturing companies (SKEMC): (1) LG Electronics, Inc., and (2) Samsung Electronics Co. Ltd.

REVIEW OF RELATED LITERATURE

Japan's Electronics Industry

According to Japan Electronics and Information Technology Industries Association (JEITA) statistics for 2014, the country's total electronics production amounted to JPY11.80 trillion or six (6) percent of the JPY207.63 trillion global output.

From 2002 to 2007, Japan's electronics industry (JEI) maintained a relatively constant level of production, exports, and imports. However, due to the adverse financial collapse spawned by the 2008 Lehman shock to industries worldwide, JEI's production plummeted from JPY18.58 trillion to JPY13.61 trillion by 2009. In response to the previous, the Japanese government approved an industrial competitiveness enhancement act to establish organizations that will support companies who incurred sizable losses (Ono, 2010). …

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