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74 Seiko Epson Corporation
Epson had no dilutive potential common shares, such as convertible debt or warrants, outstanding for the year
ended March 31, 2005. Diluted net income per share was not calculated herein since Epson had no potential
common shares, which have dilutive effect issuable upon conversion of convertible bonds, outstanding for the years
ended March 31, 2006 and 2007.
14. Income taxes
Epson is subject to a number of different income taxes which, in the aggregate, resulted in a statutory income tax
rate in Japan of approximately 40.4% for each of the years ended March 31, 2005, 2006 and 2007.
The significant components of deferred tax assets and liabilities at March 31, 2006 and 2007 were as follows:
Thousands of
Millions of yen U.S. dollars
March 31 March 31,
2006 2007 2007
Deferred tax assets:
Property, plant and equipment and intangible assets ¥ 25,573 ¥32,302 $273,630
Inter-company profits on inventories and write downs 8,219 9,212 78,035
Accrued pension and severance costs 9,378 8,591 72,774
Accrued bonuses 4,038 5,495 46,548
Devaluation of investment securities 5,940 4,914 41,626
Net operating tax loss carry-forwards 22,307 4,871 41,262
Accrued warranty costs 5,663 4,352 36,866
Accrued litigation and related expenses 3,453 3,637 30,809
Others 24,159 21,699 183,812
Gross deferred tax assets 108,730 95,073 805,362
Less: valuation allowance (26,648) (19,231) (162,906)
Total deferred tax assets 82,082 75,842 642,456
Deferred tax liabilities:
Undistributed earnings of overseas subsidiaries and affiliates (25,284) (26,751) (226,607)
Net unrealized gains on other securities (5,908) (5,347) (45,295)
Net unrealized gains on land held by a subsidiary (2,613) (2,613) (22,135)
Reserve for special depreciation for tax purpose (3,383) (2,253) (19,085)
Others (552) (1,529) (12,952)
Gross deferred tax liabilities (37,740) (38,493) (326,074)
Net deferred tax assets ¥44,342 ¥37,349 $316,382
The valuation allowance was established mainly against deferred tax assets on future tax-deductible temporary
differences and operating tax loss carry-forwards as it is more likely than not that these deferred tax assets will not
be realized within the foreseeable future. The net change in the total valuation allowance for the year ended March
31, 2007 was a decrease of ¥7,417 million ($62,829 thousand).
Epson has provided for deferred income taxes on all undistributed earnings of overseas subsidiaries and
affiliates.