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10 Cards in this Set
- Front
- Back
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What is the tax effect? |
It's your EBIT multiplied by your tax rate to compute your after tax operating income |
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Effective vs. marginal tax rate |
Effective tax rate is Taxes Due over taxable income |
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How to account for losses? |
Carry them forward to save future taxes |
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How does capitalizing R&D help firms? |
It helps them pay less taxes |
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Why the effective rate so low for most firms? |
1. reported income is higher than the taxable income, on which taxes are based 2. Tax credits reduce taxes they pay 3. Firms can defer taxes 4. Firms that generate substantial foreign income with lower tax rates do not have to pay domestic taxes until that income is repatriated back home |
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Marginal tax rates for multi-nationals |
1. Use a a weighted average of each country 2. Use rate in country that firm is incorporated 3. Keep income of each country separate and apply a different marginal tax rate for each country. |
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Which tax rate is safer? |
The safer choice is the marginal tax rate: •None of the four reasons noted above can be sustained in perpetuity •As new capital expenditures taper off, the difference between reported and tax income will narrow
•Firms eventually do have to pay their deferred taxes •One can start from the effective tax rate and progressively increase it towards the marginal rate |
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What happens if a firm carries net operating losses forward? |
1. Firms with current negative earnings: raise the tax rate over time: -As the net operating losses decrease, increase tax rates toward the marginal rate 2. Firms with positive earnings, but with a large loss carried forward: -Often, the expected tax savings are estimated by multiplying the tax rate by the net operating loss –This overestimates the tax savings |
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Net Operating Losses? |
–A potential acquirer can claim tax benefits on operating losses fasted than the original firm:•This is a source of “tax synergy” –In some countries, there is a limitation on how far in time operating loss can give a tax benefit•In this case, their value is lower |
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What are the Tax Benefits of R&D Expensing? |
–If we capitalize R&D, there are 2 effects: 1.There are no more R&D expenses: this makes taxes higher 2.There is a new depreciation of the R&D that will reduce taxes: this makes taxes lower |
