Tax shield and The Treasurers Handbook: Difference between pages

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imported>Doug Williamson
(Clarify valuation method in definition 2.)
 
imported>Kmacharla@treasurers.org
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''Tax and treasury.''
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'''Welcome to the 2015 wiki edition of The Treasurer’s Handbook'''
|-
| colspan="3" style="background: #fff;"|
Welcome to The Treasurer’s Handbook – an invaluable resource for all professionals working in treasury and corporate finance. The Handbook is designed to offer quick and accessible reference material to support treasurers and their colleagues in their responses to unpredictable change. Reflecting contemporary needs and our increasingly digital lifestyles, it is now available in a wiki format.
This online edition of the Handbook includes five key sections covering '''cash management, risk management, corporate finance''' (including articles on markets and funding) and the latest developments for '''treasury professionals''', plus our ever-popular country guides with information on national banking, regulatory and financial systems.
Many thanks to Lloyds Bank and BlackRock for sponsoring content in this online edition of The Treasurer’s Handbook, and to all our expert contributors from universities, financial institutions, professional bodies and the ACT. We are confident that in its new format, the Handbook will remain the essential reference tool for treasurers.
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|}
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1.
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Broadly, the benefit to a taxpayer of the tax deductibility of certain business expenses - including borrowing costs - thus reducing their taxable income and their tax expenses.
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'''Cash management'''
|-
|Sponsored by
|-
| colspan="3" style="background: #000;" |
[[File:Black_rock_logo.png|link=http://www.blackrock.com/cash]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Cash_management_in_Africa|Cash management in Africa]]
|-
| colspan="3" style="background:#f2ebef" |
[[Cash_management_in_Latin_America|Cash management in Latin America]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Cash_management_in_Asia:_extracting_signal_from_noise|Cash management in Asia: extracting signal from noise]]
|-
| colspan="3" style="background:#f2ebef" |
[[Cash_investing_in_a_new_world|Cash investing in a new world]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Payments_and_payment_systems|Payments and payment systems]]
|-
| colspan="3" style="background:#f2ebef" |
[[Cash_in_the_new_post-crisis_world|Cash in the new post-crisis world]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Legal_implications_of_cash_pooling_structures|Legal implications of cash pooling structures]]
|-
| colspan="3" style="background:#f2ebef" |
[[Money_market_fund_reform:_a_light_at_the_end_of_the_tunnel%3F|Money market fund reform: a light at the end of the tunnel?]]
|-
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The term most often refers to borrowing costs - including debt interest - which are normally tax-deductible.
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'''Treasury professional'''
|-
|Sponsored by
|-
| colspan="3" style="background: #fff;" |
[[File:Sponsor_lloyds.png|link=http://www.lloydsbank.com|alt=Sponsored by Lloyds]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Cybercrime_–_A_Threat_And_An_Opportunity|Cybercrime – a threat and an opportunity]]
|-
| colspan="3" style="background:#f2ebef" |
[[Derivatives_documentation|Derivatives documentation]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Developments_in_corporate_and_market_regulation:_implications_for_the_treasurer|Developments in corporate and market regulation: implications for the treasurer]]
|-
| colspan="3" style="background:#f2ebef" |
[[Treasury_performance_management_–_waste_of_time_or_a_necessity%3F|Treasury performance management – waste of time or a necessity?]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Building_a_Debt_IR_function|Building a Debt IR function]]
|-
|}
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This gives rise to tax shield benefits and reduces the after-tax cost of debt for corporate borrowers.
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'''Risk management'''
|-
|Sponsored by
|-
| colspan="3" style="background: #fff;" |
[[File:Sponsor_lloyds.png|link=http://www.lloydsbank.com|alt=Sponsored by Lloyds]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Guide_to_risk_management|Guide to risk management]]
|-
| colspan="3" style="background:#f2ebef" |
[[The_RMB_as_a_global_currency:_progress_and_challenges_ahead|The RMB as a global currency: progress and challenges ahead]]
|-
| colspan="3" style="background:#e9d7e0" |
[[FX_hedging_in_emerging_markets|FX hedging in emerging markets]]
|-
| colspan="3" style="background:#f2ebef" |
[[Understanding_and_mitigating_the_risks_associated_with_international_travel|Understanding and mitigating the risks associated with international travel]]
|-
| colspan="3" style="background:#e9d7e0" |
[[Putting_a_limit_on_losses|Putting a limit on losses]]
|-
|}
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</div>


In cash terms, the annual tax savings for a tax-paying corporate borrower can be quantified as:
<div class="path_row" >
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{| border="1" cellpadding="5" cellspacing="0"  class=""
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| colspan="3" align="center" style="background: #490024; color:#fff; border-bottom: 0px solid #000; font-size:24px;" valign="top" |
'''Corporate finance'''
|-
|colspan="2" |
Sponsored by
|-
| colspan="3" style="background: #fff;" |
[[File:Sponsor_lloyds.png|link=http://www.lloydsbank.com|alt=Sponsored by Lloyds]]
|-
| width="50%" style="background:#e9d7e0" | [[An_introduction_to_loan_finance|An introduction to loan finance]]
| width="50%" style="background:#e9d7e0" | [[Assessing_the_US_private_placement_market_from_a_corporate_perspective|Assessing the US private placement market from a corporate perspective]]
|-
| width="50%" style="background:#f2ebef" | [[An_introduction_to_debt_securities|An introduction to debt securities]]
| width="50%" style="background:#f2ebef" | [[Asian_capital_market_integration:_theory_and_evidence|Asian capital market integration: theory and evidence]]
|-
| width="50%" style="background:#e9d7e0" | [[An_introduction_to_equity_capital|An introduction to equity capital]]
| width="50%" style="background:#e9d7e0" | [[IFRS_–_issues_for_the_treasurer|IFRS – issues for the treasurer]]
|-
| width="50%" style="background:#f2ebef" | [[The_role_of_the_OECD_export_credit_agencies|The role of the OECD export credit agencies]]
| width="50%" style="background:#f2ebef" | [[IFRS_9_hedge_accounting_reforms:_a_closer_reflection_of_risk_management%3F|IFRS 9 hedge accounting reforms: a closer reflection of risk management?]]
|-
| width="50%" style="background:#e9d7e0" | [[Corporate_credit_ratings:_a_quick_guide|Corporate credit ratings: a quick guide]]
| width="50%" style="background:#e9d7e0" | [[The_wave_of_changes_to_IFRS_and_convergence_with_FASB_will_continue_to_present_challenges_for_treasurers|The wave of changes to IFRS and convergence with FASB will continue to present challenges for treasurers]]
|-
| width="50%" style="background:#f2ebef" | [[European_high-yield_market_coming_of_age|European high-yield market coming of age]]
| width="50%" style="background:#f2ebef" | [[Going_Green:_a_guide_to_corporate_green_bonds|Going green: a guide to corporate green bonds]]
|}
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</div>


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'''Country guides'''
|-
| width="33%" style="background:#e9d7e0" | [[Argentina|Argentina]]
| width="33%" style="background:#e9d7e0" | [[Italy|Italy]]
| width="33%" style="background:#e9d7e0" | [[South_Korea|South Korea]]
|-
| width="33%" style="background:#f2ebef" | [[Australia|Australia]]
| width="33%" style="background:#f2ebef" | [[Japan|Japan]]
| width="33%" style="background:#f2ebef" | [[Spain|Spain]]
|-
| width="33%" style="background:#e9d7e0" | [[Brazil|Brazil]]
| width="33%" style="background:#e9d7e0" | [[Mexico|Mexico]]
| width="33%" style="background:#e9d7e0" | [[Switzerland|Switzerland]]
|-
| width="33%" style="background:#f2ebef" | [[Canada|Canada]]
| width="33%" style="background:#f2ebef" | [[Netherlands|Netherlands]]
| width="33%" style="background:#f2ebef" | [[Taiwan|Taiwan]]
|-
| width="33%" style="background:#e9d7e0" | [[China|China]]
| width="33%" style="background:#e9d7e0" | [[Nigeria|Nigeria]]
| width="33%" style="background:#e9d7e0" | [[Thailand|Thailand]]
|-
| width="33%" style="background:#f2ebef" | [[Egypt|Egypt]]
| width="33%" style="background:#f2ebef" | [[Poland|Poland]]
| width="33%" style="background:#f2ebef" | [[Turkey|Turkey]]
|-
| width="33%" style="background:#e9d7e0" | [[France|France]]
| width="33%" style="background:#e9d7e0" | [[Qatar|Qatar]]
| width="33%" style="background:#e9d7e0" | [[United_Arab_Emirates|United Arab Emirates]]
|-
| width="33%" style="background:#f2ebef" | [[Germany|Germany]]
| width="33%" style="background:#f2ebef" | [[Russia|Russia]]
| width="33%" style="background:#f2ebef" | [[United_Kingdom|United Kingdom]]
|-
| width="33%" style="background:#e9d7e0" | [[Hong_Kong|Hong Kong]]
| width="33%" style="background:#e9d7e0" | [[Saudi_Arabia|Saudi Arabia]]
| width="33%" style="background:#e9d7e0" | [[United_States|United States]]
|-
| width="33%" style="background:#f2ebef" | [[India|India]]
| width="33%" style="background:#f2ebef" | [[Singapore|Singapore]]
| width="33%" style="background:#f2ebef" |
|-
| width="33%" style="background:#e9d7e0" | [[Indonesia|Indonesia]]
| width="33%" style="background:#e9d7e0" | [[South_Africa|South Africa]]
| width="33%" style="background:#e9d7e0" |
|}


Annual tax-deductible debt servicing costs paid (D x Kd) x relevant rate of corporation tax (t)
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[[Category:Book_Export]]
<span style="color:#4B0082">'''Example 1'''</span>
 
D = Debt, for example $100m.
 
Kd = Pre-tax % cost of debt, for example 5%.
 
t = Relevant corporate tax rate, for example 28%.
 
 
So the annual tax shield benefit in $m is:
 
= 100 x 0.05
 
= $5m annual interest charge, reducing annual taxable profits by $5m
 
Related annual tax saving:
 
= $5m x 28% tax rate
 
= $1.4m.
 
 
Another perspective on quantifying tax shield benefits is the reduction in after-tax cost of debt.
 
 
<span style="color:#4B0082">'''Example 2'''</span>
 
= 5% x (1 - 0.28)
 
= 3.6%.
 
3.6% in this case compared with the before-tax cost of debt of 5%.
 
 
2.
 
More narrowly, the total present value of all of the expected future related cash flow benefits arising from the use of debt.
 
The total present value of the expected future cash flow benefits from the tax savings can be quantified/estimated by capitalising the annual saving at the pre-tax cost of debt.
 
A simple estimate values the cash flow benefits as a fixed perpetuity, using the perpetuity factor 1 / Kd.
 
 
<span style="color:#4B0082">'''Example 3'''</span>
 
Annual saving = $1.4m
 
Kd = 5%
 
 
Total present value of tax shield:
 
= 1.4 x (1 / 0.05)
 
= $28m.
 
 
It can also be quantified more simply as D x t.
 
 
<span style="color:#4B0082">'''Example 4'''</span>
 
= 100 x 0.28
 
= $28m as before.
 
 
== See also ==
* [[Adjusted present value]]
* [[Corporation Tax]]
* [[Cost of debt]]
* [[Cost of capital]]
* [[Gearing]]
* [[Perpetuity]]
 
[[Category:Accounting,_tax_and_regulation]]
[[Category:Corporate_finance]]

Revision as of 00:39, 22 November 2014

Welcome to the 2015 wiki edition of The Treasurer’s Handbook

Welcome to The Treasurer’s Handbook – an invaluable resource for all professionals working in treasury and corporate finance. The Handbook is designed to offer quick and accessible reference material to support treasurers and their colleagues in their responses to unpredictable change. Reflecting contemporary needs and our increasingly digital lifestyles, it is now available in a wiki format.

This online edition of the Handbook includes five key sections covering cash management, risk management, corporate finance (including articles on markets and funding) and the latest developments for treasury professionals, plus our ever-popular country guides with information on national banking, regulatory and financial systems.

Many thanks to Lloyds Bank and BlackRock for sponsoring content in this online edition of The Treasurer’s Handbook, and to all our expert contributors from universities, financial institutions, professional bodies and the ACT. We are confident that in its new format, the Handbook will remain the essential reference tool for treasurers.

Cash management

Sponsored by

Cash management in Africa

Cash management in Latin America

Cash management in Asia: extracting signal from noise

Cash investing in a new world

Payments and payment systems

Cash in the new post-crisis world

Legal implications of cash pooling structures

Money market fund reform: a light at the end of the tunnel?

Treasury professional

Sponsored by

Sponsored by Lloyds

Cybercrime – a threat and an opportunity

Derivatives documentation

Developments in corporate and market regulation: implications for the treasurer

Treasury performance management – waste of time or a necessity?

Building a Debt IR function

Risk management

Sponsored by

Sponsored by Lloyds

Guide to risk management

The RMB as a global currency: progress and challenges ahead

FX hedging in emerging markets

Understanding and mitigating the risks associated with international travel

Putting a limit on losses

Corporate finance

Sponsored by

Sponsored by Lloyds

An introduction to loan finance Assessing the US private placement market from a corporate perspective
An introduction to debt securities Asian capital market integration: theory and evidence
An introduction to equity capital IFRS – issues for the treasurer
The role of the OECD export credit agencies IFRS 9 hedge accounting reforms: a closer reflection of risk management?
Corporate credit ratings: a quick guide The wave of changes to IFRS and convergence with FASB will continue to present challenges for treasurers
European high-yield market coming of age Going green: a guide to corporate green bonds

Country guides

Argentina Italy South Korea
Australia Japan Spain
Brazil Mexico Switzerland
Canada Netherlands Taiwan
China Nigeria Thailand
Egypt Poland Turkey
France Qatar United Arab Emirates
Germany Russia United Kingdom
Hong Kong Saudi Arabia United States
India Singapore
Indonesia South Africa
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