Question

In case of DCF if I want to forecast tax payments the calculation of tax should be based on net profit per income statement rather than the net cash flow.
Can someone throw more light on this? In case of DCF if I want to forecast tax payments the calculation of tax should be based on net profit per income statement rather than the net cash flow.
Can someone throw more light on this? @Finance

Answer 1

Well, it depends where are you modeling, different countries have different kind of taxes, but assuming you only need to compute Tax Income, you should start by understanding what regulators/legislation indicates.
For example assuming you have to do a 33% tax income you should do it over the net Income but sometimes some kind of expenses are not deductible, in that case you have to add them back so you can compute the real net income that is taxable. Also be sure if there is some kind of retention over revenues in your country because this is a key factor in tax calculations, if this is the case then you have to include this effect in your FCF by deducting from the payment computation in the income statement to finally obtain the real payment (cash payment) that goes in your DCF.

It can happen that the income statement computation is $100, but the cash you pay is $80, because in the retention you are paying in advance.

My best advice is that you understand very well how regulators/legislation indicate how to compute such tax, the rest is just modeling.

Answer 2

Hi,
Thanks for clarifying. I understand from your message that tax rules, treatment, etc can vary and have to be adjusted. I also want to make it user friendly for presentation purpose.
So in this case assuming I'm using MS excel for modeling, I would prefer to prepare Income Statement on one sheet and Cash Flow on the other sheet. The tax amount can be derived from the income statement. This will give better clarity for me as well as to others who will be reviewing these. Similarly any changes in income items can be dynamically handled and reflected in the DCF.
Thanks a lot for clarifying.
Sridhar