Part 1 - AL-Tax

Chapter 14Tax benefits could influence the cash flow (free and equity) and the discountrate (WACC). For the purposes of this study, we adopt the standardized equitycash flow to obtain the multinational company flow in a given country.We use three examples to illustrate how a given country’s tax legislation canreduce tax payments for a firm and consequently increase the value of its generatedwealth. In all situations, the decision process is made according to howmuch the company’s value is increased. For a more illustrative example, we considerBrazilian tax legislation.14.3 Juros sobre capital próprioThe corporate income tax rate in Brazil is 34%. In 1995, a Brazilian law referredto as ‘juros sobre capital próprio’ (Law 9249/95) was enacted. This mechanismallows the corporate income tax to be decreased. It is similar to a capital opportunitycost and is also tax deductible.Before making any decisions to invest in Brazil, it is important to calculate thetax effects carefully, to determine whether there are cash flow increases for stockholders(compared to the traditional tax rules calculation). We obtain theBrazilian corporate income tax as follows:T EBT t,where EBT net operating income before tax and after interest, and t 34%(9% is required for a ‘social contribution’ and 25% is the ‘effective’ corporateincome tax).Adopting the ‘juros sobre capital próprio’ concept, the effective corporateincome tax can be reduced as follows:JSCP i E a ,where i the long-term interest rate (TJLP) established by the government andadopted for public marketable securities, and E a the adjusted net equity (stockholderequity), according to:E a (E I D)where E net equity (stockholder equity), I net income, and D dividends andjuros sobre capital próprio.The relationship between I and D is part of the income that will be retained.According to Brazilian law, it is permissible to reduce only taxable income by329