imported>Doug Williamson |
imported>Doug Williamson |
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| | A simple error of data entry when two digits in a number are reversed (transposed). |
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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.
| | When two adjacent digits are transposed the error will always be divisible by 9. |
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| The term most often refers to borrowing costs - including debt interest - which are normally tax-deductible.
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| | If 3,460 should be 3,640 |
| | the difference is 180 (3,640-3,460=180) |
| | 180/9 = 20. |
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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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| In cash terms, the annual tax savings for a tax-paying corporate borrower can be quantified as:
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| | | Similar errors with non-numerical data. |
| Annual tax-deductible debt servicing costs paid (D x Kd) x relevant rate of corporation tax (t)
| | For example ABC entered wrongly as ACB. |
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| Where:
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| D = Debt, for example $100m.
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| Kd = Pre-tax % cost of debt, for example 5%.
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| t = Relevant corporate tax rate, for example 28%.
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| In this example the annual tax shield benefit in $m is:
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| = ($100m x 0.05 = $5m) x 0.28
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| = <u>$1.4m.</u>
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| Another perspective on quantifying the tax shield benefits is the reduction in the after-tax cost of debt (for example = 5% x (1 - 0.28) = 3.6% in this case) compared with the before-tax cost of debt of 5%.
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| 2.
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| More narrowly, the total present value of all of the expected future related cash flow benefits arising from the use of debt.
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| The total present value of the expected future cash flow benefits from the tax savings can be quantified/estimated by capitalising the annual saving (for example $1.4m) at the pre-tax cost of debt (for example Kd = 5%) as a fixed perpetuity using the perpetuity factor 1/Kd.
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| For example total present value of tax shield = $1.4m x [1/0.05] = <u>$28m</u>.
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| It can also be quantified more simply as D x t.
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| For example = $100m x 0.28 = $28m as before. | |
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| == See also == | | == See also == |
| * [[Adjusted present value]] | | * [[Double counting]] |
| * [[Cost of capital]]
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| [[Category:Taxation]]
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1.
A simple error of data entry when two digits in a number are reversed (transposed).
When two adjacent digits are transposed the error will always be divisible by 9.
For example:
If 3,460 should be 3,640
the difference is 180 (3,640-3,460=180)
180/9 = 20.
2.
Similar errors with non-numerical data.
For example ABC entered wrongly as ACB.
See also
