Part 1 - AL-Tax

Chapter 14In some countries, to prevent double taxation of foreign income, the law permitsmultinationals to claim foreign tax credits for income taxes paid to foreigncountries (Desai, et al., 2002). However, multinationals must keep in mind thereported location of their taxable profits to avoid high-tax investment locations.Finally, Poterba and Summers (1984) found that dividend taxes reduce relativevaluation by investors.This study is divided into two parts. The first presents general tax effects andhow they impact multinationals. The second uses Brazil as an example to betterillustrate the pro forma model developed in the first section.14.2 Discounted cash flowAccording to the DCF model, the value of a company (V) is as follows:Vn∞CFn ( 1 in ) ,1n∑where n period, CF n after-tax cash flow of period, i n adequate discountedtax rate “n” and at period “n”.According to the principle of additivity, the value of a company is:Vj∑ V cc1,where V c value of a company in country c.In each country, the total value of the company is as follows:Vcn∞⎡CFn c ⎤ ( 1 in c),⎢1⎣n ⎥⎦∑where c country where discounted cash flow n is generated, and i c n adequatediscounted tax rate and CF c n the cash flow for period n and country c.This formula can be simplified as follows assuming a constant and infiniteflow (perpetuity):VcCFc .icThere are two basic ways to measure DCF. The first is to obtain the equity cashflow, which is the estimated flow of resources in each country (after payments327