www.pwc.com/us/tas

Tax Accounting Services NewsAlert Tax Management and Accounting Services December 16, 2011

Key Tax Accounting Considerations of Japanese Corporate Tax Rate Reduction & Tax Base Broadening Provisions Summary The Restoration Funding Bill introduces a 10% surcharge on Japanese corporation tax lasting three years from fiscal years starting between April 1, 2012 and March 31, 2015. The Re-revised Bill introduces a 4.5% reduction in the Japanese corporate income tax rate (and a 0.5% reduction in local tax rates) along with other amendments aimed at broadening the corporate income tax base including changes to the net operating loss ('NOL') rules, effective for fiscal years starting on or after April 1, 2012. Both of these Bills were substantively enacted and enacted on November 30, 2011 which are the required thresholds for accounting for the changes in the financial statements under IFRS and US GAAP, respectively. Multinational companies are advised to assess the potential impact of these changes on their deferred tax assets and liabilities in the period of enactment, as well as the calculation of the annual effective tax rate for accounting periods to which the new rules apply.

Background On November 30, 2011, the House of Councillors passed the following bills, resulting in their being substantively enacted and enacted for IFRS and US GAAP respectively: Special Measures to Secure the Financial Resources to Implement the Restoration from the Tohoku Earthquake (the “Restoration Funding Bill”); and Amendment to the 2011 Tax Reform Bill (the “Re-revised Bill”). Included in the Restoration Funding Bill is the introduction of a 10% Japanese corporation tax surcharge (“Corporation Surtax”) which will apply to the “base” corporation tax (i.e., the amount calculated before certain adjustments and credits) for three years beginning with fiscal years starting between April 1, 2012 and March 31, 2015. Included in the Re-revised Bill are amendments to reduce the Japanese total corporate income tax rate of just over 40% by 4.5% (and reduce local taxes by approximately 0.5%) while also broadening the corporate tax base. The measures to broaden the tax base include the introduction of an 80% cap on current year NOL utilization, an extension of the NOL carry-forward period from seven to nine years for NOLs incurred in fiscal years ending on or after April 1, 2008 and other measures amending the rules on allowable depreciation and bad debt reserves. These amendments will take effect in fiscal years beginning on or after April 1, 2012. This NewsAlert summarizes the potential tax accounting implications of these changes under US GAAP and IFRS. For more detailed information on the proposals, please see the linked PwC WNTS Asia Pacific Tax News Alert of December 12, 2011 on this topic.

Key provisions with Tax Accounting Implications Corporation Surtax The Corporation Surtax of 10% will be calculated by multiplying the Base Corporation Tax liability by 10%. The Base Corporation Tax liability is the tax liability of the company adjusted for i) any applicable special family corporation surtax, ii) income tax credits, iii) foreign tax credits and iv) tax relief on downward corrections. The resultant impact on the overall effective tax rate (“ETR”) will be an increase of approximately 2.5%.

Corporate Tax Rate Reduction The 4.5% reduction in the corporation tax rate (and the approximate 0.5% reduction in local tax rates) will reduce the total current effective Japanese corporate tax rate of 40.69% to 35.64% for corporations in Tokyo. The rate may be slightly less for corporations operating in other areas. The reduction will be effective for fiscal years beginning on or after April 1, 2012.

PwC

Tax Accounting Services NewsAlert

2

Broadening of the Tax Base The two main areas introduced as part of the measures to broaden the Japanese corporate tax base which are likely to have a significant impact on accounting for income taxes are the cap on current year NOL utilization and the extension of the NOL carry-forward period. The NOL restriction will introduce, for the first time, a cap on the amount of a company's NOLs that are available for offset in the period to 80% of the company's taxable income for the fiscal year. However, the impact of this restriction may be offset to some extent by the extension of the time period in which NOLs carried forward can be utilized before they expire, from seven years to nine years, albeit this extension only applies to NOLs incurred in fiscal years ending on or after April 1, 2008. While the carry-forward extension applies to all relevant Japanese companies, the restriction on NOL utilization does not apply to small or medium sized corporations. Both of these changes will be effective for fiscal years beginning on or after April 1, 2012.

Accounting for Tax Law Changes General Considerations Under US GAAP, Accounting Standards Codification ("ASC") 740 requires companies to use the tax law which is in effect at the balance sheet date of the relevant reporting period. Companies, therefore, need to assess the impact of any enacted tax law changes on existing deferred tax balances and include the impact as a discrete item in the interim period in which the changes are enacted. In addition, the estimated annual ETR to be applied to the results of any period should incorporate the impact of any enacted tax law changes, to the extent that the changes are applicable to that period. Under International Accounting Standard ("IAS") 12, companies are also required to use the tax law in effect at the balance sheet date of the relevant reporting period. However, tax law changes only need to have been substantively enacted by the balance sheet date for deferred tax balances to be adjusted or for the impact to be reflected in the annual ETR, if applicable.

Impact for Surtax & Tax Rate reduction For both US GAAP and IFRS, companies will be required to recognize the impact of the Surtax and the rate reduction on existing deferred tax balances as a discrete item in the quarter which includes November 30, 2011. It will be necessary to schedule out the expected reversal of the deferred tax balances in some detail to ensure that the correct overall rate is applied, as the reduced corporate tax rate will apply to all deferred tax assets and liabilities that are expected to reverse after April 1, 2012, whereas, the Surtax will only apply to those items expected to reverse during the 3 year period during which the Surtax applies. For calendar year-end companies, the impact will, therefore, need to be accounted for in the quarter ended December 31, 2011 for both US GAAP and IFRS. Under US GAAP, the tax effect will be reported as part of the tax provision attributable to continuing operations. This is the case, regardless of whether any of the original underlying pre-tax income or expense or deferred tax asset or liability was, or may be, reported within another category, such as other comprehensive income. Under IFRS, companies will need to “backwards

PwC

Tax Accounting Services NewsAlert

3

trace” the deferred tax impact to ensure it is reported in the statement where the deferred tax liability or asset which is being amended was originally reported, i.e., the income statement, other comprehensive income or equity. In terms of the annual estimated ETR applied in calculating the tax expense of the relevant period, this will only need to be adjusted to take into account the Surtax or the tax rate if the changes apply to that period. Therefore, for calendar year-end companies, the first quarter in which the changes will need to be taken into account will be Q1, 2013. Under both US GAAP and IFRS, any impact will be reported in line with the usual allocation rules applicable to current period tax results.

Impact for NOL Changes The annual estimated ETR applied in calculating the current period tax expense may need to be adjusted to take account of the changes in the NOL rules, where relevant, from the first fiscal year starting on or after April 1, 2012. Companies should ensure that the annual estimated ETR used for the periods to which the new rules apply reflects the limitation on the amount of NOL utilization and/ or the extension of the NOL utilization time period. For deferred tax purposes, companies reporting under both US GAAP and IFRS may need to undertake detailed calculations to schedule the expected extent and timing of NOL utilization to assess the impact of the rules on their ability to recognize any related deferred tax assets. In addition, the extended carry-forward period could also impact the company's accounting for uncertain tax positions to the extent that any such positions impact the determination of the losses or vice versa. The same provisions as noted above apply in terms of when and where to report the impact of any changes to the recognition and/ or measurement of existing deferred tax assets or valuation allowances arising as a result of these NOL changes. These provisions may cause particular complications for companies reporting under IFRS as it may not be clear where the original entries to record each impacted deferred tax asset were recorded.

Other Considerations Financial Reporting Disclosures Companies should consider disclosure in their financial statements of the impact of the substantively enacted and enacted changes in tax law. Under US GAAP, the current year’s reconciliation of the effective tax rate should include a reconciling item for the impact of the enacted law changes if their effect is considered “significant”. Significant is defined by Rule 4-08(h) of SEC Regulation S-X as an individual item that is more than 5% of the amount computed by multiplying pre-tax income by the statutory tax rate. A similar requirement exists under IFRS for the impact of substantively enacted changes, although the reference point is whether an item constitutes a major component of the tax expense. In addition, under both US GAAP and IFRS, disclosure may be required of the impact on existing deferred tax assets or liabilities if a change in tax law is enacted (US GAAP) or substantively enacted (IFRS) after the balance sheet date but before the financial statements are signed and released.

PwC

Tax Accounting Services NewsAlert

4

Companies should also consider whether enhanced disclosures over and above the required minimums should be made to assist users of accounts in understanding the implications of the changes. This may be particularly relevant for those Japanese corporations with significant deferred tax balances, in particular with respect to NOLs.

Contacts PwC clients who have questions about this Tax Accounting Services NewsAlert should contact their engagement partner or the primary authors of this NewsAlert who welcome any questions about this topic: Dean Schuckman Partner Global Tax Accounting Services Leader (646) 471 5687 [email protected] Ken Kuykendall Partner U.S. Tax Accounting Services Leader (312) 298-2546 [email protected] Andrew Wiggins Partner Global Tax Accounting Services Knowledge Management Leader (44) (121) 232 2065 [email protected] David Horner Partner Japan Tax Accounting Services Leader +81 (0)3 5251 2230 Email: [email protected] Amanda Flanagan Director Tax Accounting Services (213) 356-6022 [email protected] Juliette Wynne-Jones Director Tax Accounting Services (312) 298-4170 [email protected]

PwC

Tax Accounting Services NewsAlert

5

This document is provided by PricewaterhouseCoopers LLP for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. The information is provided 'as is', with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Solicitation © 2011 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc. com/structure for further details.

PwC

Tax Accounting Services NewsAlert

6