Part 1 - AL-Tax

For companies engaged in rural activities, the corporate tax to be paid in thefirst year, T r 1, is shown as:T r 1 (EBTDep 1 Dep n) t t ,where n the useful economic life of the asset and Dep n the depreciableasset (or carrying amount).For the following period (T r 2), all assets will be considered depreciated duringthe first year:T r 2 (EBTDep 2 ) t 2 .Thus, for agricultural companies, the tax expense is the total amount of the tax(year 1) until the end of the useful economic life. The difference between agriculturalcompanies and other companies (for the first year) is expressed as:∆T 1 T r 1 T 1 (EBTDep 1 Dep n) t 1 (EBTDep 1 Dep) t 1∆T 1 Dep t 1 Dep n t 1∆T 1 (1 n) Dep t 1where ∆T 1 0.In other words, agricultural companies pay reduced taxes in the first year. However,in the second year, their depreciation expenses cease, resulting in highertaxes owed:∆T 2 T r 2 T 2 EBTDep 2 t 2 (EBTDep 2 Dep) t 2∆T 2 Dep t 2 0.Chapter 14Considering the same tax rate for the period, there is no tax difference after thesecond year as follows (see Demski and Christensen, 2002):n∑k1∆T k 0.However, this tax benefit could be meaningful for multinational companies,given they postpone depreciation payments the first year. Consider the presentcash flow as follows:∆T1∆T∆Tn …( 1i ) ( 1 i ) ( 1i )1 1 2where i the appropriated discount rate for period 1, 2, . . ., n.2 2n n,333