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Politics

Seven billion reasons for Honda, Toyota and Nissan to love Trump

Corporate tax cuts and fixed-asset write-offs to deliver bumper profits

You're welcome. President Donald Trump waves as he arrives to deliver his first State of the Union address on Capitol Hill in Washington on Jan. 31.   © Reuters

TOKYO -- This is our new American moment, U.S. President Donald Trump said in his first State of the Union address on Tuesday. "We slashed the business tax rate from 35% all the way down to 21%, so American companies can compete and win against anyone in the world."

Yet, it is not only American companies that will reap the benefits. The new U.S. tax code that Trump signed into law in January is likely to affect Japanese companies' earnings and business strategies.

For Toyota Motor, this should mean a 290 billion yen ($2.64 billion) increase in net profit, according to a compilation by Takaki Nakanishi, CEO of the Nakanishi Research Institute. Nakanishi also expects the corporate tax cut to add 320 billion yen to Honda Motor's net profit and 200 billion yen to Nissan Motor's.

There is another side to the big tax code change. It will reduce deferred tax liabilities, which will end up boosting future tax burdens for Japanese companies that do business in the U.S.

U.S. corporate tax rates -- federal plus state -- are now at about 26%, down from nearly 40%.

The United States just gift-wrapped billions of dollars worth of increased profits for Toyota, Honda and Nissan. This Toyota vehicle was part of a sales event in Cerritos, California.   © Reuters

But the new tax code has another bargain for automakers, who have seen their deferred tax liabilities swell due to U.S. investment promotion policies.

Businesses have been allowed to depreciate up to 50% of the acquisition costs of fixed assets in the first fiscal year. This has allowed businesses to defer tax payments and, essentially, to recoup the money they had invested.

In the U.S., it is customary for both businesses and individuals to lease new cars rather than outright buy them, although automakers count these deals as sales. This has allowed Japanese automakers to boost sales in the U.S. while writing off, in advance, fixed asset expenses, such as those on leased vehicles.

In this case, deferred tax liabilities are recorded on balance sheets using something called tax effect accounting. As of the end of June, Toyota Motor Credit, Toyota's U.S. finance subsidiary, held deferred tax liabilities worth $8.1 billion.

The big U.S. corporate tax cut is also likely to affect Japanese companies with huge U.S. operations, such as SoftBank Group and Shin-Etsu Chemical. Sprint, SoftBank's telco subsidiary in the U.S., held deferred tax liabilities of $14.7 billion at the end of September. Now by virtue of the big tax cut, its profit is expected to swell by about 500 billion yen.

Meanwhile, tax cuts will negatively affect some Japanese companies that paid taxes in advance and posted deferred tax assets. Late last month, Japanese ink maker DIC lowered its net profit forecast for 2017 by 6 billion yen for this reason.

Nakanishi stresses that the new tax code will have no impact on pretax profit, as the reversal of deferred tax liabilities and assets does not entail moving funds around and thus does not affect the profitability of companies' core business lines. In the medium term, Japanese companies will come under pressure to make the best use of their U.S. units.

The new code also includes changes that could affect Japanese companies' business strategies.

It enhances investment promotion policies, for example. For the next five years, businesses can immediately expense the full cost of fixed assets, excluding land and buildings. A significantly lowered tax burden in the initial phase of investment will make capital investments and acquisitions in the U.S. easier.

And if manufacturing jobs return to the U.S., Japanese plant-related companies would likely get more orders.

How cross-border group transactions are taxed will also change. Royalty and interest payments by U.S. units to overseas subsidiaries will be seen as tax avoidance and punitively taxed under certain conditions. Pharmaceuticals, whose business models are based on intellectual property rights, are expected to take necessary measures.

Financial institutions that lend money raised in Japan to their U.S. units, which then manage the funds, could also be taxed, according to a representative of PwC Consulting.

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