Part 1 - AL-Tax

Chapter 14AbstractThis chapter examines the tax effects on multinational corporation valuations in Brazil.These effects can be observed from the generated cash flow and in the interest rate adoptedto discount this flow. However, the cost of taxation for foreign investments differs, asBrazil can differentiate the tax rate according to the business segment where the resourcesare applied. Furthermore, in some countries, national tax law provides an investment taxcredit or other tax incentives. This chapter demonstrates the tax effects in Brazil, where adecrease of taxation under a law referred to as ‘juros sobre capital próprio’ (which is similarto the opportunity cost and can be deducted for corporate tax purposes) is possible byinvesting in certain activities such as agribusiness, where royalties can be repatriated tocorporate headquarters by subsidiaries or associated enterprises.This chapter has two sections: The first part presents the main aspects of tax effects invaluing multinational corporations, the second discusses the Brazilian experience and thespecific tax effects.14.1 IntroductionWhen a company decides to make a capital investment in another country, it usuallyrequires estimating future cash flows, along with discounting these cashflowsat an appropriate rate to maximize share price. The result will represent thecost of financing. Likewise, the estimated future goods and services flow (discountedat some appropriated rate) is usually adopted for the corporate valuationprocess. This method is known as discounted cash flow (DCF) (see Pereiro, 2002;Ho and Lee, 2004), and other models, such as APV and the residual profit model,perform similar functions. However, we show that well-applied DCF producesthe same results (Fernandez, 2002).Multinational company value typically includes the total value of each subsidiary,according to the principle of additivity. Therefore, subsidiaries increasetotal company value. Legalities such as tax rules can also impact the potentialcash flow of a company. According to Choi and Meek (2004), ‘tax considerationsstrongly influence decisions on where to invest because taxation is, with the possibleexception of cost of goods sold, the largest expense of most businesses’.Numerous studies have been developed over the last few years about howtax obligations influence corporate performance involving investment overseas.Examples include tax policy and its influence on investments (Desai et al.,2002), the different types of taxation adopted (Aizenman and Jinjarak, 2006), the325