Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts

Monday 6 February 2012

Corporate Taxes

Back in the 1940s Graham suggested that to ensure that management is honest about earnings, corporations should make income tax statements available to investors upon request.

  • If the company paid taxes on income, then it is genuine income.
  • If the company didn't, there must be a logical reason, such as a tax write-off or the use of some type of tax credit.  

Corporate taxes have become progressively complex over the years, and only the most dedicated investors - and ones with a lot of time to kill - would care to pore over corporate tax statements.

Fortunately, many corporations now include summary tax information in their annual reports to shareholders.

Many investor information services also supply simplified income tax information in their stock reports.

Reporting of earnings on an after-tax basis is standard practice and to most people, the "real bottom line" is the profits after tax.


Comment:
When the company reported an effective tax rate that is lower than the normal, you may wish to know the reasons for this.  Perhaps, the company has a tax write-off or tax credit that year.

Wednesday 10 March 2010

Earnings Made by Tax Rate Changes

Earnings Made by Tax Rate Changes
Wall Street is infatuated with EPS. If a company beats their estimates, the stock price is pushed up higher despite the fact that earnings is so easily manipulated by different accounting methods and hiding and/or delaying expenses.

Taxes also play a big role in the final EPS.

A company with a 40% tax rate one year, paying at 35% the next will create the illusion that growth has exceeded expectations, when in fact, the business did nothing but just get a tax break. The opposite is the same.

A company paying 35% in taxes and then 40% the next year will obviously report lower EPS and the consensus will be that the business is slowing down.

How to Calculate EPS Due to Tax Rate Change

Let’s use Boeing (BA: 67.24 0.00%) as an example.

1. Calculate the tax rate

To calculate the tax rate of a company, find the income tax expense on the income statement and divide by the Earnings Before Income Taxes (EBIT).



Boeing’s tax rate was 33.7%, 33.6% and 22.9% in 2007, 2008 and 2009 respectively.

2. Calculate the difference in tax rates

Just subtract the previous year tax to the next year tax rate.



3. Calculate the gain or loss due to difference in taxes

Use the difference in tax % compared to the last period and multiply it by the income before tax (EBIT) number.

In BA case for 2009, multiply 10.7% and $1,731m to determine how much of EBIT was due to a lower tax rate.



You can see that BA made $185m in EBIT due to taxes compared to $4.16m the year before. In 2007, Boeing’s tax rate increased by 2.7% which is why the % difference is negative and shows a loss due to difference in tax.

4. Divide by Shares Outstanding and Adjust the EPS

Divide the gain or loss due to tax change by the number of diluted shares.



You can now see that in 2009, of the full year diluted EPS, $0.26 was made up due to a reduction in taxes. So while the market may have seen this as a great recovery, the actual EPS was actually $1.58.

Multiply the current PE of 36 to $1.58 and the stock price should be at $56.

The above method can be applied to quarterly results for comparisons and basically any other line item including non-operating and non-recurring expenses.

Let’s wrap things up with a stock valuation summary of Boeing for those that hold the company.

Jae Jun


[www.oldschoolvalue.com]

Friday 25 September 2009

How to manage your taxes in challenging economic times

Friday September 25, 2009
How to manage your taxes in challenging economic times
KPMG CHAT - By NICHOLAS CRIST



IN the current challenging economic environment, management of taxes is increasingly important. Failure to implement effective tax management can result in lost opportunities and the imposition of tax penalties.

Cash tax management

At the micro level there should be effective cash tax management. Tax instalments for corporate taxpayers should be as accurate as possible so that they don’t pay tax unnecessarily to the Inland Revenue Board (IRB), or find themselves exposed to under-estimation penalties.

Variations to instalments can be made automatically in, broadly, the sixth and ninth months of the financial year.

Further, the Income Tax Act gives the discretion to the IRB to consider applications for variations by taxpayers outside of the above months. Where profits are falling, taxpayers should consider seeking this discretionary relief.

Default by debtors

As profits are generally recognised for tax purposes on an accruals basis, businesses may be paying tax on amounts they have yet to receive. A challenge for businesses will be their ability to collect outstanding debts.

The critical issue is whether debts are bad or doubtful of recovery, or whether the debtor is simply a slow payer.

For tax purposes, the distinction is important as provisions for debts which are paid slowly will not qualify for a tax deduction.

Notwithstanding the above, bad or doubtful debts may still qualify for a tax deduction provided a number of conditions are met, and these are reflected in the IRB’s Public Ruling No. 1/2002.

To claim a deduction for a doubtful debt, taxpayers must among other things, be able to demonstrate that each debt has been evaluated separately; a general provision of say X% after Y months will not qualify. There must be evidence to show how the doubtfulness of each debt has been evaluated.

Regard must be paid to the period for which the debt has been outstanding; the financial status of the debtor; the debtor’s credit record and experience of the particular trade or industry.

These requirements must be supported by documentation and this will be key to substantiating a doubtful debt deduction.

Deteriorating inventory

Where business has slowed down, inventory may accumulate and hence the risk of deterioration (and fall in value) increases.

Where for accounting purposes a provision for deterioration in value is made, this will not qualify for a tax deduction. However, subject to various conditions, a specific write-down of inventory may qualify for a tax deduction.

Taxpayers who wish to claim a deduction have to demonstrate that the write-down is accurately calculated and represents a permanent fall in value. Again, keeping detailed records is the key to support a claim for a tax deduction.

Default on contracts

In deteriorating conditions, it may be necessary for businesses to terminate contracts which might require payment of compensation.

To determine the issue of deductibility, the starting point is to consider the nature of the contract being terminated.

Where the contract being terminated is revenue in nature, for example the purchase of inventory, this would suggest, at an initial level, that a tax deduction might be available.

Where, however, the contract is capital in nature, for example the purchase of machinery, a tax deduction for any compensation payable is unlikely to be available.

Defaults on loans

A particular concern is whether borrowers will default on loan obligations.

Where a default arises it may be necessary to work out a compromise between the creditor and the borrower which might involve the borrower being released from part of its financial obligations.

It is necessary to determine whether a release could be subject to income tax.

The Income Tax Act provides that where a tax deduction has been obtained for an amount represented by the release, the release is subject to tax.

A similar result also arises where the amount released relates to the purchase of an asset on which capital allowances have been claimed.

Where, however, the amount released has not been claimed as a tax deduction, the release should not, normally, be subject to income tax.

Retrenchment costs

Businesses that are particularly hard hit may find themselves with little option but to retrench employees. Where the retrenchment exercise is carried out in conjunction with the closure of a business, a tax deduction, based on case law, would not be available.

A different view is, however, likely to be reached where retrenchments are incurred for the purposes of enabling a business to be saved from extinction.

In the current economic environment, effective management of all costs including taxes is vital. From the tax perspective, businesses need to be aware of eligible deductions and ensure that adequate supporting documentation is maintained.

·The writer is executive director, KPMG Tax Services Sdn Bhd.


http://biz.thestar.com.my/news/story.asp?file=/2009/9/25/business/4778387&sec=business