Let's define some terms that we will use throughout this section. This section only talks about "corporate income tax" - a tax on company profits. For simplicity, I will refer to it just as "tax".
Tax paid is the tax amount going through the cash flow statement, coming from the company's tax computation. Each jurisdiction has specific rules about what can and cannot be deducted from revenue to arrive at Taxable profit. Most jurisdictions will have particular rules around Tax depreciation, for example, setting out how much can be deducted for each type of asset and over what period. There will often be restrictions on the types of costs that companies can and cannot deduct and specific regulations around interest deductibility. For example, thin capitalisation rules place interest deduction restrictions on highly leveraged companies.
Tax expense is the amount of tax charged through the income statement. Tax expense will generally be equal to Tax paid.
Sometimes, there is a delay in paying tax (for example, when taxes for a given year have to be paid a certain number of months after the year-end). This delay gives rise to a Tax Creditor balance. There is no such timing delay in the fictional jurisdiction that we are modelling.
Deferred Tax is an accounting concept that charts the timing difference between when something is recognised for accounting versus when it's recognised for tax.
Negative Taxable profit is referred to as Tax losses. Tax loss carry forward refers to the ability of companies to roll forward Tax losses and offset them against Taxable profit in the future.
A company which has a low level of equity capital compared to debt capital can be described as "thinly capitalised". A thinly capitalised company is likely to have a high level of debt interest, and therefore lower taxable profits. Many jurisdictions will set out rules around what level of interest can be deducted to limit the reduction of taxable profit due to debt interest deduction. These rules are known as "Thin capitalisation rules", or "thin cap" rules.
Now that we know the basic terms we will use let's look at some specific questions we'll want to ask our tax advisors to help us model corporate income tax.
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