Inflation-related tax distortions in business valuation models: A clarification

Nguyen Kim-Duc and Pham Khanh Nam

The North American Journal of Economics and Finance, 2023, vol. 66, issue C

Abstract: The current corporate income tax (CIT) expense occupies just one line item on the statement of profit or loss and other comprehensive income. However, it is a unique line item following tax rules and not financial reporting rules. The difference between these rules is that it reflects the effective tax rate (ETR), which can differ from the statutory tax rate (STR). With inflation, this ETR-STR difference can be more significant due to the contribution of tax distortions. In this study, we expand on the standard formulas for the ETR by analyzing the effects of inflation-related tax distortions when computed under the following four cases: (i) Historical-cost-based accounting under a nominal tax basis, (ii) Fair-value-based accounting under a nominal tax basis, (iii) Historical-cost-based accounting under a real tax basis, and (iv) Fair-value-based accounting under a real tax basis. Further, we suggest a modified model for business valuation considering these tax distortions and provide a general formula to independently calculate the value of inflation-related tax distortions.

Keywords: Firm valuation; Inflation; Tax distortions; Effective tax rates; Adjusted Present Value (APV) (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 G33 H20 H24 H25 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:66:y:2023:i:c:s106294082300030x

DOI: 10.1016/j.najef.2023.101907

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